2017 A n 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
First Row: Vivian S. Brown, Aubrey H. Hall, III (President and CEO), Judith A. Clements
Second Row: Thomas R. Burnett, Jr., Tony J. Bowling, Bryan M. Lemley, Timothy W. Holt
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
3401 Odd Fellows Road
Lynchburg, Virginia 24501
Telephone: (434) 333-6801
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
Thomas R. Burnett, Jr. 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
Timothy W. Holt
Judith A. Clements
Thomas R. Burnett, Jr.
Vivian S. Brown
Tony J. Bowling
Senior Vice President & Chief Credit Officer
Senior Vice President & Chief Human Resources Officer
Senior Vice President & Chief Lending Officer
Senior Vice President & Chief Retail Officer
Senior Vice President & Chief Operating Officer
3
Dear Shareholders:
It is with great pleasure that I write you regarding Pinnacle Bankshares Corporation’s 2017 performance
and our ongoing efforts to position your company for higher levels of success. Last year produced solid
results as Pinnacle generated record high core net income of $3,027,000, representing an increase of
$198,000 or 7% as compared to 2016. While our most visible achievement during the year was the
completion of First National Bank’s new Odd Fellows Road/Lynchburg Headquarters building, of greater
significance was the continued restructuring of our Company’s balance sheet to further capitalize on
opportunities, appropriately mitigate risks and enhance your returns. We continue to be pleased with our
trends, including the ninth straight year of core net income improvement, as well as our prospects for the
future.
Overall, net income for 2017 was $2,748,000, including a $279,000 write-down of net deferred tax assets
as a result of the new Tax Cuts and Jobs Act that was signed into law. Although the devaluation of these
assets negatively impacted 2017’s results, we expect to benefit from the reduction of the corporate tax
rate from 35% to 21% and are excited about the potential positive impact on the economy.
Our financials show modest growth of overall assets for 2017, which ended the year up 1% at $444
million, understating significant work completed to deploy excess cash resulting from the prior year’s
successful deposit gathering activities into sound investments and quality loans. These combined
portfolios grew by over $33 million during the year as we sought to maximize our balance sheet.
Investments increased $16.6 million or 60% as the result of implementing a new portfolio management
strategy intended to increase total return while continuing to appropriately manage risks. Outstanding
loans increased $16.5 million or almost 5% due to strong performance from our Dealer Division and
Retail Branch network. The higher volume of investments and loans helped drive a $1.2 million increase
in net interest income. This volume was critical as overall interest rates have not appreciably increased
due to market conditions and competition, despite the federal funds target and the prime rate increasing
one hundred basis points since December of 2016.
The credit quality of our loan portfolio remains strong as we finished 2017 with a very low level of
nonperforming loans and only a few OREO properties (real estate acquired through foreclosure). Our
credit strength has helped limit our provision for loan losses expense, benefiting the bottom line. Over
the last five years we have built a well-diversified loan portfolio without an excessive concentration of
non-owner occupied commercial real estate loans and very limited construction/acquisition &
development loan exposure.
Non-interest income, net of the gain realized from the sale of a prior branch location, increased $225,000
or 6% for 2017 as compared to 2016. Improvement was experienced across numerous categories to
include fees derived from checkcard activity, income from investments in bank owned life insurance and
loan fees. Non-interest expense increased $1.1 million or 8% during 2017 due primarily to pension
settlement accounting associated with retirements and higher core processing expenses resulting from
increased volume of accounts and transactions. Excluding these items, non-interest expense increased
only 3% as Management continues to strive for greater efficiency and productivity across all areas of
operation.
4
Your Board and Management Team are pleased that Pinnacle has paid a cash dividend for twenty-two
straight quarters and the amount of annual cash dividends increased 5% to $0.40 per share in 2017 as
compared to $0.38 per share in 2016. The trading price of Pinnacle’s stock ended 2017 at $29.50,
representing only a slight increase as compared to the prior year-end. However, I am pleased to report
that the stock traded as high as $30.80 during the year and recently traded as high as $35 per share or
137% of our tangible book value. As always, we remain focused on strategies and initiatives that enhance
performance and your total return.
As mentioned earlier, we completed the Odd Fellows Road/Lynchburg headquarters facility during 2017,
ending the construction phase of our Lynchburg Market Plan. The facility contains our ninth branch
office, which opened in November of 2017, and is located in the center of our region’s urban hub along a
well-traveled corridor undergoing significant improvements. We also renovated our Altavista Main
Office lobby last year, located in our corporate headquarters, bringing the space into the 21st century by
creating a warmer, more inviting environment for our clients. Across First National’s footprint all
facilities now reflect a high level of professionalism and provide consistent, recognizable branding
appropriate for the region’s premiere community bank.
Our market position continues to improve with First National being ranked fifth in deposit market share
for the Lynchburg, VA metropolitan statistical area as June 30, 2017 and one of only two community
banks in the top five. We were pleased to achieve an overall composite ranking of #20 out of 73 banks
headquartered in Virginia per Banks Street Partners’ fourth quarter 2017 “Rank the Banks” report, which
is based on performance across numerous financial metrics. We are also proud that First National
recently received the “Gold” level award for the Best Community Bank per Lynchburg Living magazine’s
“Best of 2018 Edition”, demonstrating our enhanced visibility and presence.
First National certainly understands that keeping pace with ever-changing technology, delivery channels
and digital platforms is key to remaining relevant in today’s financial services environment. For 2018 our
work in this regard continues as we plan to complete an upgrade of our website, making it even easier for
customers to navigate and manage their finances; offer mobile-pay for users of Apple, Samsung and
Droid smart phone devices; introduce Card Valet, an additional security feature for our bankcard users;
further market person-to-person funds transfer capability through “Pop Money”; and launch a social
media presence on Facebook. All these initiatives demonstrate our objective to provide customers with
the best experience available in banking.
In closing, our position across the Lynchburg region has been elevated, our team of professional bankers
is focused and our future is indeed bright. To hear more about Pinnacle Bankshares Corporation’s
performance and outlook please join us for the Annual Meeting of Shareholders to be held at 11:00 a.m.,
Tuesday, April 10, 2018 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
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
2017
2016
2015
2014
2013
$
$
14,850
260
3,855
14,128
1,569
2,748
1.80
1.78
0.40
25.51
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
1,528,164
1,544,628
1,524,271
1,535,632
1,519,159
1,531,436
1,512,661
1,530,831
1,512,545
1,523,105
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,
443,925
354,829
44,217
12,575
401,685
38,795
0.62%
7.25%
22.27%
0.83%
net of unearned income and fees
0.05%
Capital Ratios:
Leverage
Risk-based:
Tier 1 capital
Total capital
Average equity to average assets
9.15%
10.88%
11.69%
8.56%
371,261
303,199
27,148
16,739
332,403
34,782
0.74%
8.12%
18.96%
362,188
280,449
29,277
29,451
325,204
32,654
0.60%
6.59%
22.48%
358,601
274,349
29,125
35,457
322,130
31,942
0.75%
8.96%
12.86%
0.94%
1.08%
1.23%
0.11%
0.15%
0.12%
9.68%
9.25%
8.88%
11.37%
12.32%
9.17%
10.96%
11.98%
9.11%
10.84%
12.03%
8.33%
440,104
338,423
27,569
48,174
399,743
36,549
0.76%
8.38%
19.34%
0.85%
0.02%
8.94%
10.83%
11.68%
9.08%
6
Pinnacle Bankshares Corporation
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 continued successful implementation of 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 nine 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 and the Odd Fellows Road Branch in the
City of Lynchburg, the Forest Branch in Bedford County and the Amherst Branch in the Town of Amherst.
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. The Bank opened its
new Odd Fellows Road branch/Lynchburg headquarters on November 22, 2017. First National Bank’s Altavista
Main Office will remain the Company’s corporate headquarters. Renovations of the Altavista Main Office lobby
were completed in the third quarter of 2017.
A total of one-hundred seven 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
Net Income
The Company had net income of $2,748 for the year ended December 31, 2017, compared to net income of $3,004
for the year ended December 31, 2016, a decrease of 8.52%. This decrease in net income was driven by a $173, or
12.39% increase in income taxes due to a write-down of net deferred tax assets under the Tax Cuts and Jobs Act
signed into law on December 22, 2017. Income tax expense increased $279 due to the new tax law. For 2017, the
Company generated record high core net income of $3,027, exclusive of the $279 tax increase. In comparison,
2016’s core net income was $2,829 excluding a $266 gain derived from the sale of a prior branch facility.
In 2017, the Bank saw a $1,215, or 8.91% increase in net interest income. However, this increase was more than
offset by a $1,084, or 8.31% increase in noninterest expense, a $41 or 1.05% decrease in noninterest income and a
$173, or 198.85% increase in provision for loan losses.
Profitability as measured by the Company’s return on average assets (“ROA”) was 0.62% in 2017, compared to
0.76% in 2016. Return on average equity (“ROE”), was 7.25% for 2017, compared to 8.38% for 2016.
We expect to benefit in 2018 from the new tax law, which lowered the corporate tax rate from 35% to 21%. We
also expect net income growth due to growth of earning assets as well as the continued success of our Lynchburg
Market Plan. The Company is well positioned if interest rates increase in 2018, which would improve our yield on
earnings assets. We expect an increase in noninterest income in 2018 due to the increase in assets that was realized
in the last few years. Finally, we expect an increase in noninterest expense in 2018 due to depreciation on new
facilities and expected normal increases in salaries.
Net Interest Income. Net interest income was $14,850 for the year ended December 31, 2017, compared to
$13,635 for the year ended December 31, 2016, 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.
The net interest spread decreased to 3.52% for the year ended December 31, 2017 from 3.58% for the year ended
December 31, 2016. Yield on earning assets was 4.03% and cost of funds was 0.51% for the year ended December
31, 2017 as compared to a yield on earning assets of 4.10% and a cost of funds of 0.52% for the year ended
December 31, 2016. In 2017, the Company’s yield on earning assets decreased slightly due to higher average
deposits and lower loan yields. The net interest margin decreased to 3.63% for the year ended December 31, 2017
from 3.70% for the year ended December 31, 2016 due also to the 7 basis point drop in yield on earning assets in
2017.
8
Provision for Loan Losses and Asset Quality. The provisions for loan losses for the years ended December 31,
2017 and 2016 were $260 and $87, respectively. The provision for loan losses increased in 2017, but has remained
at a low level since 2013 as the Company continues to have strong asset quality. The provision for loan losses
increased $173 from 2016 to 2017 due to the 4.85% growth in net loans. Loan quality remained strong due to
sound underwriting and credit management processes. Nonperforming assets (including nonaccrual loans, accruing
loans more than 90 days past due, and foreclosed assets) declined to $946 or 0.21% of total assets as of December
31, 2017, as compared to $1,411 or 0.32% of total assets as of December 31, 2016. Nonperforming loans to total
loans decreased to 0.20% as of year-end 2017 compared to 0.23% as of year-end 2016. The allowance balance
was 409.90% of nonperforming loans as of December 31, 2017 compared to 376.85% as of the end of 2016. The
Company expects to maintain the quality of its loan portfolio in 2018.
Noninterest Income. Total noninterest income for the year ended December 31, 2017 decreased $41, or 1.05%, to
$3,855 from $3,896 in 2016 mainly due to a gain of $266 on the sale of property and a gain of $62 on the sale of
securities that occurred in 2016. 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 recognized in 2016 increased $287, or
8.04%. The increase in 2017 is primarily attributable to a $111 or 6.69% increase in service charges on deposit
accounts, a $38 or 8.60% increase in commissions and fees and a $65 or 22.57% increase in service charges on
loan accounts in 2017 when compared to the previous year.
Noninterest Expense. Total noninterest expense for the year ended December 31, 2017 increased $1,084, or
8.31%, to $14,128 from $13,044 in 2016. Noninterest expense increased as salaries and commissions increased by
$636, or 8.95%. The primary driver of this increase was higher defined benefit plan expense, which increased by
$518 to $718 in 2017 due to settlement accounting charges. The defined benefit plan expense is expected to
decrease to $392 in 2018. The salaries and commissions increase also included an employee bonus payment of
$179 in 2017, up from $151 in 2016. Additionally, occupancy expense increased $95, or 12.91%, furniture and
equipment increased $21, or 2.98%, office supplies and printing increased $13, or 7.14%, federal deposit insurance
premiums increased $72, or 30.26% and capital stock tax increased $10, or 4.22%. Other operating expenses
increased $243, or 6.67%, due mainly to increases in core system provider expenses and expenses associated with
indirect automobile lending. These increases were partially offset by decreases in advertising expense and cost of
foreclosures.
Income Tax Expense. Applicable income taxes on 2017 earnings amounted to $1,569, resulting in an effective tax
rate of 36.34% compared to $1,396, and an effective tax rate of 31.73% in 2016 as the Company revalued its net
deferred tax assets as required by the new tax law. The resulting write-down of the net deferred tax assets resulted
in an additional $279 expense in net income tax in 2017.
Assets
Total assets as of December 31, 2017 were $443,925, up 0.87% from $440,104 as of December 31, 2016. The
principal components of the Company’s assets at the end of the year were $12,575 in cash and cash equivalents,
$44,217 in securities and $354,829 in net loans.
Investment Portfolio. Investment securities as of December 31, 2017 totaled $44,217, an increase of $16,648, or
60.39% from $27,569 as of December 31, 2016. Investment securities held-to-maturity decreased to $2,361 as of
December 31, 2017 from $3,727 as of December 31, 2016, a decrease of $1,366, or 36.65%. Available-for sale
investments increased to $41,856 as of December 31, 2017 from $23,842 as of December 31, 2016, an increase of
$18,014, or 75.56%. Investments increased as cash was invested mainly in municipal, agency and mortgage bonds
in 2017.
Loan Portfolio. The Company’s net loans were $354,829 as of December 31, 2017, an increase of $16,406, or
4.85%, from $338,423 as of December 31, 2016. Total loans were $358,000 as of December 31, 2017 compared to
$341,482 as of December 31, 2016. This increase resulted from a $1,175 increase in commercial loans, a $12,566
increase consumer loans, and a $2,777 increase in real estate loan originations during 2017. The Company’s ratio
of net loans to total deposits was 89.07% as of December 31, 2017 compared to 85.39% as of December 31, 2016
as loan growth exceeded deposit growth by $14,464.
9
Bank Premises and Equipment. Bank premises and equipment increased $4,326, or 36.99% in 2017 mainly due
to the completion of our new Odd Fellows Road facility and renovations to our Altavista Main facility lobby.
Liabilities
Total liabilities as of December 31, 2017 were $405,130, up 0.39% from $403,555 as of December 31, 2016.
Deposits. The increase in liabilities in 2017 was due to an increase in total deposits of $1,942, or 0.49%, to
$401,685 as of December 31, 2017 from $399,743 as of December 31, 2016. Noninterest-bearing demand deposits
decreased $6,903, or 8.21% and represented 19.22% of total deposits as of December 31, 2017, compared to
21.04% as of December 31, 2016. Savings and NOW accounts increased $11,154, or 5.19% and represented
56.30% of total deposits as of December 31, 2017, compared to 53.78% as of December 31, 2016. Time deposits
decreased $2,309 or 2.29% and represented 24.48% of total deposits as of December 31, 2017, compared to
25.17% as of December 31, 2016. The change in deposits during 2017 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.
Average deposits were $401,856 for the year ended December 31, 2017, an increase of $45,476, or 12.76% from
$356,380 of average deposits for the year ended December 31, 2016. 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, 2017 and December 31, 2016.
Stockholders’ Equity
Total stockholders’ equity as of December 31, 2017 was $38,795, including $35,377 in retained earnings. As of
December 31, 2016, stockholders’ equity totaled $36,549, including $32,865 in retained earnings. The increase in
stockholders’ equity resulted mainly from the Company’s net income of $2,748 partially offset by dividends of
$612 paid to shareholders. Dividends paid to shareholders were $0.40 per share paid in 2017 as compared to the
$0.38 per share paid in 2016.
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
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 was first applied on January 1, 2016, at 0.625% of risk weighted assets, increasing each year
until fully implemented at 2.50% on January 1, 2019. When fully phased in on January 1, 2019, Basel III will
require (i) a minimum ratio of CET1 capital to risk weighted assets of at least 4.50%, plus a 2.50% capital
conservation buffer, (ii) a minimum ratio of Tier 1 capital to risk weighted assets of at least 6.00%, plus the capital
conservation buffer, (iii) a minimum ratio of total capital to risk weighted assets of at least 8.00%, plus the 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.
10
The Company’s CET1 and Tier 1 Risk-based Capital Ratio was 10.88% of December 31, 2017. The Total Risk-
based Capital Ratio was 11.69% and the Company’s Tier 1 Leverage Ratio was 9.15% as of December 31, 2017.
For comparison, 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 8.96% as of
December 31, 2016.
The Company’s financial position as of December 31, 2017 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.
11
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2017 and 2016
(In thousands of dollars, except share data)
(Audited)
Assets
2017
2016
Cash and cash equivalents:
Cash and due from banks
Certificates of deposits
Securities:
Available-for-sale, at fair value
Held-to-maturity, at amortized cost
Federal Reserve Bank stock, at cost
Federal Home Loan Bank stock, at cost
Loans, net
Bank premises and equipment, net
Accrued interest receivable
Bank owned life insurance
Goodwill
Other real estate owned
Other assets
Total assets
Liabilities:
Liabilities and Stockholders' Equity
Deposits:
Demand
Savings and NOW accounts
Time
Total deposits
Note payable under line of credit
Accrued interest payable
Other liabilities
Total liabilities
Commitments, contingencies and other matters
Stockholders' equity:
Common stock, $3 par value. Authorized 3,000,000 shares,
issued and outstanding 1,529,033 shares in 2017 and
1,522,351 shares in 2016
Capital surplus
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders' equity
$
$
$
12,575
250
$
41,856
2,361
147
395
354,829
16,021
1,183
9,865
539
224
3,680
443,925
$
$
77,208
226,153
98,324
401,685
513
141
2,791
405,130
4,526
1,176
35,377
(2,284)
38,795
Total liabilities and stockholders' equity
$
443,925
$
12
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
403,555
4,506
1,050
32,865
(1,872)
36,549
440,104
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2017 and 2016
(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
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
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
Net income
Basic net income per share
Diluted net income per share
See accompanying notes to consolidated financial statements.
13
2017
2016
$
15,486 $
14,602
490
83
198
252
2
261
68
92
129
1
16,511
15,153
594
1,065
2
1,661
14,850
260
14,590
1,769
480
478
353
775
3,855
7,740
831
730
195
310
247
189
3,886
14,128
4,317
1,569
$
$
$
2,748 $
1.80
1.78
$
$
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
3,004
1.97
1.96
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2017 and 2016
(In thousands of dollars)
(Audited)
Net income
Other comprehensive income (losses), net of related income taxes:
Unrealized losses 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) expense
Total other comprehensive loss
Comprehensive income
See accompanying notes to consolidated financial statements.
2017
2016
2,748 $
3,004
(165)
(10)
108
(345)
(412)
2,336 $
(515)
175
(452)
153
(639)
2,365
$
$
14
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2017 and 2016
(In thousands of dollars, except share and per share data)
(Audited)
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
Net income
Other comprehensive loss
Issuance of restricted stock and related expense
Stock options exercised
Reclassification of the disproportionate tax effect from
accumulated other comprehensive income (loss) to retained earnings
Cash dividends declared by
Bankshares ($0.40 per share)
Balances, December 31, 2017
Common Stock
Shares
Par Value
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
1,520,221
$
4,508
$
1,065
$
30,442 $
(1,233) $
8,912
1,410
(8,192)
23
(25)
131
(146)
(639)
3,004
(581)
1,522,351
$
4,506
$
1,050
$
32,865 $
(1,872) $
4,474
2,208
20
126
2,748
376
(612)
(36)
(376)
Total
34,782
3,004
(639)
154
(171)
(581)
36,549
2,748
(36)
146
-
(612)
1,529,033
$
4,526
$
1,176
$
35,377 $
(2,284) $
38,795
15
PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2017 and 2016
(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
2017
2016
$
2,748
$
3,004
518
-
47
329
260
(332)
146
(245)
2
(129)
1,087
6
23
416
(266)
64
116
87
(150)
154
(161)
55
(92)
307
14
(440)
Net cash provided by operating activities
4,460
3,108
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
Purchase of BOLI
Net increase in loans made to customers
Additions to foreclosed assets
Disposals of bank premises and equipment
Purchases of bank premises and equipment
245
(24,831)
-
1,345
3,270
3,074
605
(1)
(62)
(3,000)
(16,713)
(189)
-
(4,844)
490
(17,916)
6,292
1,305
8,531
736
1,683
(2)
(8)
-
(35,759)
(248)
929
(4,004)
Net cash used in investing activities
(41,101)
(37,971)
Cash flows from financing activities:
Net increase in demand, savings and NOW deposits
Net decrease in time deposits
Borrowing (repayments) of note payable to Federal Home Loan Bank
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
4,251
(2,309)
0
(288)
(612)
1,042
(35,599)
48,174
68,784
(1,444)
0
(290)
(581)
66,298
31,435
16,739
Cash and cash equivalents, end of year
$
12,575
$
48,174
Supplemental disclosure of cash flows information
Cash paid during the year for:
Income taxes
Interest
Supplemental schedule of noncash investing and
financing activities:
$
1,600
1,655
$
1,715
1,518
Transfer from loans to foreclosed assets
Loans charged against the allowance for loan losses
Unrealized losses on available-for-sale securities
Defined benefit plan adjustment per ASC topic Compensation-Retirement Benefits
$
188
570
(165)
108
$
436
405
(515)
(452)
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, 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,
2017 and 2016. 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, 2017 and 2016, 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
17
loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security
and it is not likely that the Company will be required to sell the security but we do not expect to
recover the entire amortized cost basis of the security, only the portion of the impairment loss
representing credit losses would be recognized in earnings. The credit loss on a security is measured
as the difference between the amortized cost basis and the present value of the cash flows expected to
be collected. Projected cash flows are discounted by the original or current effective interest rate
depending on the nature of the security being measured for potential OTTI. The remaining
impairment related to all other factors, the difference between the present value of the cash flows
expected to be collected and fair value, is recognized as a charge to other comprehensive income
(“OCI”). Impairment losses related to all other factors are presented as separate categories within
OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the
debt security prospectively based on the amount and timing of future estimated cash flows. The
accretion of the amount recorded in OCI increases the carrying value of the investment and does not
affect earnings. If there is an indication of additional credit losses the security is re-evaluated
according to the procedures described above.
(d) Restricted Equity Investments
As a member of the Federal Reserve Bank (“FRB”) and the Federal Home Loan Bank of Atlanta
(“FHLB”), the Company is required to maintain certain minimum investments in the common stock of
the FRB and 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) Borrowings
As of December 31, 2017, the Company’s available borrowing limit with the FHLB was
approximately $107,463. The Company had $0 in borrowings from the FHLB outstanding at
December 31, 2017 and 2016. The Company also has a $5,000 line of credit commitment of which
$4,487 is currently available The line of credit is secured by the authorized capital stock of the Bank
with a correspondent bank. The line of credit had $513 outstanding as of December 31, 2017 and
$801 outstanding as of December 31, 2016 with a 4.50% interest rate that matures on June 30, 2019.
(f)
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned income and fees on loans, and
an allowance for loan losses. Income is recognized over the terms of the loans using methods that
approximate the level yield method. The allowance for loan losses is a cumulative valuation allowance
consisting of an annual provision for loan losses, plus any amounts recovered on loans previously
charged off, minus loans charged off. The provision for loan losses charged to operations is the
amount necessary in management’s judgment to maintain the allowance for loan losses at a level it
believes adequate to absorb probable losses inherent in the loan portfolio. Management determines the
adequacy of the allowance based upon reviews of individual credits, recent loss experience,
delinquencies, current economic conditions, the risk characteristics of the various categories of loans
and other pertinent factors. Management uses historical loss data by loan type as well as current
economic factors in its calculation of allowance for loan loss.
18
Management also uses qualitative factors such as changes in lending policies and procedures, changes
in national and local economies, changes in the nature and volume of the loan portfolio, changes in
experience of lenders and the loan department, changes in volume and severity of past due and
classified loans, changes in quality of the Company’s loan review system, the existence and effect of
concentrations of credit and external factors such as competition and regulation in its allowance for
loan loss calculation. Each qualitative factor is evaluated and applied to each type of loan in the
Company’s portfolio and a percentage of each loan is reserved as allowance. A percentage of each
loan type is also reserved according to the loan type’s historical loss data. Larger percentages of
allowance are taken as the risk for a loan is determined to be greater. Loans are charged against the
allowance for loan losses when management believes the principal is uncollectible.
While management uses available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic conditions or the
Company’s recent loss experience. It is reasonably possible that management’s estimate of loan losses
and the related allowance may change materially in the near term. However, the amount of change
that is reasonably possible cannot be estimated. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company’s allowance for loan losses. Such
agencies may require the Company to recognize additions to the allowance for loan losses based on
their judgments about information available to them at the time of their examinations.
Loans are charged against the allowance when, in management’s opinion, they are deemed doubtful,
although the Company continues to aggressively pursue collection. The Company considers a number
of factors to determine the need for and timing of charge-offs including the following: whenever any
commercial loan becomes past due for 120 days for any scheduled principal or interest payment and
collection is considered unlikely; whenever foreclosure on real estate collateral or liquidation of other
collateral does not result in full payment of the obligation and the deficiency or some portion thereof is
deemed uncollectible, the uncollectible portion shall be charged-off; whenever any installment loan
becomes past due for 120 days and collection is considered unlikely; whenever any repossessed
vehicle remains unsold for 60 days after repossession; whenever a bankruptcy notice is received on
any installment loan and review of the facts results in an assessment that all or most of the balance will
not be collected, the loan will be placed in non-accrual status; whenever a bankruptcy notice is
received on a small, unsecured, revolving installment account; and whenever any other small,
unsecured, revolving installment account becomes past due for 180 days.
Loans are generally placed in non-accrual status when the collection of principal and interest is 90
days or more past due, unless the obligation relates to a consumer or residential real estate loan or is
both well-secured and in the process of collection. All interest accrued but not collected for loans that
are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.
Generally, loans are returned to accrual status when all the principal and interest amounts contractually
due are brought current and future payments are reasonably assured, which usually requires a
minimum of six months of sustained repayment performance.
Impaired loans are required to be presented in the financial statements at net realizable value of the
expected future cash flows or at the fair value of the loan’s collateral. Homogeneous loans such as real
estate mortgage loans, individual consumer loans and home equity loans are evaluated collectively for
impairment. Management, considering current information and events regarding the borrower’s ability
to repay their obligations, considers a loan to be impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment
losses are included in the allowance for loan losses through a charge to the provision for loan losses.
Cash receipts on impaired loans receivable are applied first to reduce interest on such loans to the
extent of interest contractually due and any remaining amounts are applied to principal.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at
the present value of estimated future cash flows using the loan’s effective rate at inception. If a
troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported at the
fair value of the collateral less cost to sell. For troubled debt restructurings that subsequently default,
19
the Company determines the amount of reserve in accordance with the accounting policy for the
allowance for loan losses.
(g) 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.
(h) 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.
(i) Bank Owned Life Insurance
The Company has purchased life insurance policies on certain key officers. 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.
(j) 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 2017, 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.
(k) 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.
(l)
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
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.
(m) 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
20
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.
Accounting Standards Codification (“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.
(n) Advertising
The Company recognizes advertising expenses as incurred. Advertising expenses totaled $189 in 2017
compared to $195 in 2016.
(o)
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.
(p) 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 4,700 shares of restricted stock granted in 2017 compared to 8,500 shares
of restricted stock granted in 2016. There were 32,500 stock options outstanding as of December 31,
2017 compared to 37,000 stock options outstanding as of December 31, 2016. Future levels of
compensation cost recognized related to share-based compensation awards may be impacted by new
awards and/or modification, repurchases and cancellations of existing awards after the adoption of this
standard.
(q) 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
21
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, 2017
Basic net income per share
Effect of dilutive stock options
Diluted net income per share
Year ended December 31, 2016
Basic net income per share
Effect of dilutive stock options
Diluted net income per share
$
$
$
$
Net income
(numerator)
Shares
(denominator)
Per share
amount
2,748
—
2,748
1,528,164 $
16,464
1,544,628 $
1.80
1.78
Net income
(numerator)
Shares
(denominator)
Per share
amount
3,004
—
3,004
1,524,271 $
11,361
1,535,632 $
1.97
1.96
(r) 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.
(s) 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.
(t) Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures, establishes a framework for using fair
value. It defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants as of the measurement date.
In accordance with Fair Value Measurements and Disclosures, the Company groups its financial
assets and financial liabilities in three levels, based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine fair value. The most significant
instruments that the Company measures at fair value are available-for-sale securities. All available-
for-sale securities fall into Level 2 fair value hierarchy. Valuation methodologies for the fair value
hierarchy are as follows:
Level 1 – Valuations are based on quoted prices for identical assets and liabilities traded in active
exchange markets, such as the New York Stock Exchange.
Level 2 – Valuations for assets and liabilities are obtained from readily available pricing sources via
independent providers for market transactions involving similar assets or liabilities, model-based
valuation techniques, or other observable inputs.
Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies,
including option pricing models, discounted cash flow models and similar techniques, and are not
based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate
certain assumptions and projections in determining fair value assigned to such assets and liabilities.
22
(u) Current Accounting Developments
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“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 does not expect the adoption of this guidance to be material to
the 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 does not expect the adoption of this guidance to be
material to the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments,” 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
23
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 ASU 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
does not expect the adoption of this guidance to be material to the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715),
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
Cost.” This ASU was issued to improve the presentation of net periodic pension or benefit costs for
employers that offer their employees defined benefit pension plans, postretirement benefit plans, or
other types of benefits accounted for under Topic 715. The amendments prescribe where the amount of
net benefit cost should be presented in an employer’s income statement and require entities to disclose
by line item the amount of net benefit cost that is included in the income statement or capitalized in
assets. ASU 2017-07 is effective for public business entities that are SEC filers for annual periods
beginning after December 15, 2017, and interim periods within those annual periods, for public entities
that are not SEC filers for annual periods beginning after December 15, 2018 and for all other entities
for annual periods beginning after December 15, 2019 with early adoption permitted. Retrospective
application is required for the change in income statement presentation, while the change in capitalized
benefit cost is to be applied prospectively. The Company is evaluating the provisions of ASU 2017-07
but believes that its adoption will not have a material impact on the Company’s consolidated financial
statements.
In March 2017, the FASB issued ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other
Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities.” The update
shortens the amortization period for certain callable debt securities held at a premium. Specifically, the
update requires the premium to be amortized to the earliest call date. The update does not require an
accounting change for securities held at a discount; the discount continues to be amortized to maturity.
The amendments of this ASU are effective for public business entities that are SEC filers for annual
24
periods beginning after December 15, 2018, and interim periods within those annual periods, for
public entities that are not SEC filers for annual periods beginning after December 15, 2019 and for all
other entities for annual periods beginning after December 15, 2020 with early adoption permitted. An
entity should apply the amendments in this update on a modified retrospective basis through a
cumulative-effect adjustment directly to retained earnings as of the beginning of the period of
adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change
in accounting principle. The Company is evaluating the provisions of ASU 2017-08 but believes that
its adoption will not have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, which is an update to Topic 718, “Compensation - Stock
Compensation.” The update provides guidance on determining which changes to the terms and
conditions of share-based payment awards, including stock options, require an entity to apply
modification accounting under Topic 718. The new standard is effective for all entities for fiscal years
beginning after December 15, 2017, including interim periods within those fiscal years. The
amendments of this ASU should be applied prospectively to an award modified on or after the
adoption date. The Company is evaluating the provisions of ASU 2017-09 but believes that its
adoption will not have a material impact on the Company’s consolidated financial statements.
In July 2017, FASB issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities
from Equity (Topic 480); Derivatives and Hedging (Topic 815 ): (Part I) Accounting for Certain
Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” Companies that provide
earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when
triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted
downward because of the down round feature) and will also recognize the effect of the trigger within
equity. Amendments in this ASU simplifies the accounting for certain financial instruments with down
round features, a provision in an equity-linked financial instrument (or embedded feature) that
provides a downward adjustment of the current exercise price based on the price of future equity
offerings. For public business entities, the amendments of this ASU are effective for fiscal years
beginning after December 15, 2018, and interim periods within those fiscal years. For all other
entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim
periods within fiscal years beginning after December 15, 2020. The Company is evaluating the
provisions of ASU 2017-11 but believes that its adoption will not have a material impact on the
Company’s consolidated financial statements.
In September 2017, FASB issued ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from
Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to
SEC Paragraphs Pursuant to the Staff Announcements at July 20, 2017 EITF Meeting and Rescission
of Prior SEC Staff Announcements and Observe Comments.” The SEC Observer said that the SEC
staff would not object if entities that are considered public business entities only because their
financial statements or financial information is required to be included in another entity’s SEC filing
use the effective dates for private companies when they adopt ASC 606, Revenue from Contracts with
Customers, and ASC 842, Leases. The Update also supersedes certain SEC paragraphs in the
Codification related to previous SEC staff announcements and moves other paragraphs, upon adoption
of ASC 606 or ASC 842. ASU 2017-13 is effective for public business entities that are SEC filers for
annual periods beginning after December 15, 2017, and interim periods within those annual periods,
and for all other entities for annual periods beginning after December 15, 2018 and interim periods
within annual periods beginning after December 15, 2019. The Company is evaluating the provisions
of ASU 2017-13 but believes that its adoption will not have a material impact on the Company’s
consolidated financial statements.
The Company early adopted ASU 2018-02, “Income Statement - Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”
(“ASU 2018-02”), which was issued by FASB in February 2018. ASU 2018-02 provides for the
reclassification of the effect of re-measuring deferred tax balances related to items within accumulated
25
other comprehensive income (“AOCI”) to retained earnings resulting from the Tax Cuts and Jobs Act
of 2017. As a result, the Company reclassified $376 from AOCI to retained earnings as of and for the
year ended December 31, 2017.
(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 $4,427 and $3,556 for the weeks
including December 31, 2017 and 2016, respectively.
(3) Securities
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities as of
December 31, 2017 and 2016 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
2017
Gross
Gross
Amortized
unrealized
unrealized
costs
gains
losses
$
$
5,058
12,071
25,236
42,365
3
130
9
142
(91)
(157)
(403)
(651)
2017
Gross
Gross
Amortized
unrealized
unrealized
Held-to-Maturity
Obligations of states and political subdivisions
costs
2,361
$
gains
52
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
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)
Held-to-Maturity
Obligations of states and political subdivisions
costs
3,727
$
gains
68
losses
—
2016
Gross
Gross
Amortized
unrealized
unrealized
Fair
values
4,970
12,044
24,842
41,856
Fair
values
2,413
Fair
values
7,259
4,754
11,829
23,842
Fair
values
3,795
26
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, 2017:
Less than 12 months
More than 12 months
Total
Description of Securities
U.S. Treasury securities and obligations of
Gross
unrealized
losses
Fair
value
U.S. Government corporations and agencies $
Obligations of states and political subdivisions
Mortgage-backed securities-government
1,482
6,084
16,883
13
83
187
Fair
value
1,922
2,130
7,770
Gross
unrealized
losses
Gross
Fair
value
Gross
unrealized
losses
78
74
216
3,404
8,214
24,653
91
157
403
Total temporarily
impaired
securities
$ 24,449
283
11,822
368
36,271
651
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:
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 $
Mortgage-backed securities-government
4,908
3,562
82
160
4,908
3,562
Total temporarily
impaired
securities
$
10,718
240
10,718
82
160
240
19,188
482
19,188
482
There were no securities that have been in a continuous unrealized loss position for over 12 months as of
December 31, 2016.
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 2017, the securities included 32 bonds that had
continuous losses for less than 12 months and 20 bonds that had continuous losses for more than 12 months.
For 2016, the securities include 30 bonds that have continuous losses for less than 12 months and no bonds
that have continuous losses for more than 12 months. There were no net realized gains or losses on
securities sold in 2017 and $62 in gross realized gains on securities sold in 2016.
The amortized costs and fair values of available-for-sale and held-to-maturity securities as of December 31,
2017, 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.
27
2017
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
$
—
6,734
10,395
—
6,657
10,357
571
1,790
—
571
1,842
—
Mortgage-backed securities
25,236
24,842
—
—
Totals
$
42,365
41,856
2,361
2,413
17,129
17,014
2,361
2,413
Securities with amortized costs of approximately $7,694 and $10,266 (fair values of $7,700 and $10,344,
respectively) as of December 31, 2017 and 2016, respectively, were pledged as collateral for public deposits,
loans and to the FRB for overdraft protection.
(4) Loans, Allowance for Loan Losses and Credit Quality
A summary of loans as of December 31, 2017 and 2016 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
$
2017
2016
121,255
5,861
87,522
82,487
60,875
358,000
(208)
357,792
(2,963)
354,829
113,883
6,904
91,074
69,921
59,700
341,482
(161)
341,321
(2,898)
338,423
In the normal course of business, the Bank has made loans to executive officers and directors. As of
December 31, 2017 and 2016, loans to executive officers and directors totaled $359 and $393, respectively.
During 2017, new loans made to executive officers and directors totaled $0 and advances totaled $29. There
were no loans to companies in which executive officers and directors have an interest as of December 31,
2017 and 2016. 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 $356,748 as of December 31, 2017 and
$341,365 as of December 31, 2016.
The following table presents information on the Company’s allowance for loan losses and recorded
investment in loans:
28
Allowance for Loan Losses and Recorded Investment in Loans
For the Year Ended December 31, 2017
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
Loans:
Total loans ending balance
Ending balance: individually
evaluated for impairment
Commercial
Commercial Real Estate Consumer Residential
Total
$415
(57)
13
134
$505
$778
(8)
6
(25)
$751
$652
(399)
261
236
$750
$1,053
(106)
101
(91)
$957
$2,898
(570)
381
254
$2,963
$-
$-
$-
$-
$-
$505
751
750
957
2,963
Commercial
Commercial Real Estate Consumer Residential
Total
$60,875
87,522
82,487
127,116
358,000
$-
78
-
1,186
1,264
Ending balance: collectively evaluated for
impairment
$60,875
87,444
82,487
125,930
356,736
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
29
778
652
1,053
2,898
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
The Company utilizes a risk rating matrix to assign a risk grade to each of its loans. A description of the
general characteristics of the risk grades is as follows:
Pass – These loans have minimal and acceptable credit risk.
Special Mention – These loans have potential weaknesses that deserve management’s close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the
repayment prospects for the loan at some future date.
Substandard – These loans are inadequately protected by the net worth or paying capacity of the
obligor or collateral pledged, if any. Loans classified as substandard must have a well-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, 2017
Credit Exposure
Pass
Special Mention
Substandard
Doubtful
Total
Credit Exposure
Pass
Special Mention
Substandard
Doubtful
Total
Commercial
Commercial Real Estate Consumer
$82,192
-
295
-
82,487
$59,615
1,256
4
-
$60,875
$85,363
900
1,259
-
87,522
As of December 31, 2016
Commercial
Commercial Real Estate Consumer
$69,722
-
199
-
69,921
$88,916
851
1,307
-
91,074
$59,600
82
18
-
$59,700
Residential
$125,908
-
1,208
-
127,116
Residential
$119,930
-
857
-
120,787
Total
$353,078
2,156
2,766
-
358,000
Total
$338,168
933
2,381
-
341,482
30
The following table represents an age analysis of the Company’s past due loans:
Age Analysis of Past Due Loans
As of December 31, 2017
30-59
Days
60-89
Days
Past Due Past Due
-
-
-
198
198
$-
-
81
35
$116
Greater
Than
90 Days
-
78
-
645
723
Total
Past
Due
Total
Current Loans
60,875
60,875
-
87,522
87,444
78
81
82,487
82,406
878 126,238 127,116
1,037 356,963 358,000
Commercial
Commercial real estate
Consumer
Residential
Total
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
328
90,746
91,074
69,921
69,824
97
870 119,917 120,787
1,295 340,187 341,482
Commercial
Commercial real estate
Consumer
Residential
Total
Recorded
Investment
90 Days
and
Accruing
-
-
-
-
-
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, 2017
Unpaid
Recorded
Principal
Related
Average
Recorded
Interest
Income
Investment
Balance
Allowance
Investment
Recognized
$ -
78
-
1,186
-
78
-
-
78
-
1,186
-
78
-
-
-
-
-
-
-
-
-
85
-
1,105
-
85
-
-
-
-
22
-
-
-
With no related allowance recorded:
Commercial
Commercial real estate
Consumer
Residential
Total:
Commercial
Commercial real estate
Consumer
Residential
22
Total $1,264 1,264 - 1,190 22
$1,186
1,105
1,186
-
31
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
-
The following presents information on the Company’s nonaccrual loans:
Loans in Nonaccrual Status
As of December 31, 2017 and 2016
Commercial
Commercial real estate
Consumer
Residential
Total
2017
$-
2016
$-
78
-
645
$723
92
-
677
$769
The Company had five restructured loans totaling $719 as of December 31, 2017 and had four restructured
loans totaling $533 as of December 31, 2016. All of these restructured loans constituted troubled debt
restructurings as of December 31, 2017 and 2016.
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, 2017 or December 31, 2016.
32
The following tables present troubled debt restructurings as of December 31, 2017 and 2016:
December 31, 2017
Accrual
Non-Accrual
Status
Status
Total
Troubled Debt
Restructuring
Commercial
Commercial real estate
Consumer
Residential
Total
$ -
-
-
541
$541
-
-
-
178
178
-
-
-
719
719
December 31, 2016
Accrual
Non-Accrual
Status
Status
Total
Troubled Debt
Restructuring
Commercial
Commercial real estate
Consumer
Residential
Total
$ -
-
-
347
$ 347
-
-
-
186
186
-
-
-
533
533
For 2017, there was one new troubled debt restructure that was considered a combination modification that
had a pre-modification balance of $201 and a post modification balance of $201. For 2016, there were no
new troubled debt restructures. No troubled debt restructures experienced payment defaults in 2017 or 2016.
(5) Bank Premises and Equipment
Bank premises and equipment, net were comprised of the following as of December 31, 2017 and 2016:
2017
2016
Land improvements
Buildings
Equipment, furniture and fixtures
Construction in progress
Less accumulated depreciation
$
Land
Bank premises and equipment, net $
698
14,945
6,309
29
21,981
(8,511)
13,470
2,551
16,021
(6) Deposits
A summary of deposits as of December 31, 2017 and 2016 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
$
33
2017
77,208
$
148,665
77,488
92,242
6,082
324,477
401,685
622
9,748
5,808
959
17,137
(7,993)
9,144
2,551
11,695
2016
84,111
139,333
75,666
94,901
5,732
315,632
399,743
At December 31, 2017, the scheduled maturity of time deposits is as follows: $44,300 in 2018; $17,530 in
2019; $16,594 in 2020, $12,049 in 2021 and $7,851 in 2022.
In the normal course of business, the Bank has received deposits from executive officers and directors. As of
December 31, 2017 and 2016, deposits from executive officers and directors were approximately $1,635 and
$1,998, 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 $357,633 as of December 31, 2017 and $352,379 as of December 31, 2016.
(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 $718 and $199 in 2017 and 2016, respectively. The
change in benefit obligation, change in plan assets and funded status of the pension plan as of December 31,
2017 and 2016 and pertinent assumptions are as follows:
Change in Benefit Obligation
2017
2016
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial income (loss)
Benefits paid
Settlement loss
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
8,949
486
328
970
(1,584)
34
9,183
8,764
1,208
—
(1,584)
8,388
(795)
7,892
412
327
464
(146)
—
8,949
8,358
551
—
(146)
8,763
(186)
(Other liabilities) Other Assets, accrued pension
Amounts Recognized in Accumulated Other Comprehensive
(795)
(186)
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
$
(2,382)
502
(1,880)
(9,184)
8,388
2,382
1,586
(2,490)
847
(1,643)
(8,949)
8,763
2,490
2,304
Weighted Average Assumptions as of December 31, 2017 and
2016 :
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
Pension Benefits
2017
2016
3.50%
7.25%
3.00%
4.00%
7.50%
3.00%
34
2016
Pension Benefits 2017
452
Gross (gain) loss
Prior service cost
Amortization of prior service cost
Net obligation at transition
Amortization of net obligation at transition
Total recognized in other comprehensive income
(108)
-
-
-
-
(108)
-
-
-
-
452
$
$
Total Recognized in Net Periodic Benefit Cost and
Other Comprehensive Income
$
610
652
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 $392.
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, 2017 and 2016
is summarized as follows:
Pension Benefits
2017
2016
Service cost
Interest cost
Expected return on plan assets
Net loss due to settlement
Recognized net actuarial loss
$
Net pension benefit cost
$
486
328
(582)
388
98
718
412
327
(612)
-
73
200
Projected Benefit Payments
The projected benefit payments under the plan are summarized as follows for the years ending December 31:
2018
2019
2020
2021
2022
2023-2027
$ 468
45
349
1,513
253
3,138
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, 2017 and 2016.
The following table presents the fair value of the assets, by asset category, as of December 31, 2017 and
2016.
Mutual funds-fixed income $
Mutual funds-equity
Total assets at fair value
$
3,271
5,117
8,388
3,433
5,330
8,763
2017
2016
The following table sets forth by level, within the fair value hierarchy, the assets carried at fair value as of
December 31, 2017 and 2016.
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, 2017
Level 1
3,271
5,117
8,388
Level 3
-
-
-
Level 2
-
-
-
3,271
5,117
8,388
Total
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
Contributions
The Company expects to contribute $0 to its pension plan in 2018.
The Company also has a 401(k) plan under which the Company matches employee contributions to the plan.
In 2017 and 2016, the Company matched 100% of the first 1% of salary deferral and 50% of the next 5% of
36
salary deferral to the 401(k) plan. The amount expensed for the 401(k) plan was $156 during the year ended
December 31, 2017 and $143 during the year ended December 31, 2016.
(8)
Income Taxes
Income tax expense attributable to income before income tax expense for the years ended December 31,
2017 and 2016 is summarized as follows:
Current
Deferred
Total income tax expense
2017
1,901
(332)
1,569
$
$
2016
1,546
(150)
1,396
Reported income tax expense for the years ended December 31, 2017 and 2016 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
Change in tax law
Other, net
2017
2016
$
1,468
1,496
(108)
4
279
(74)
(68)
3
—
(35)
Reported income tax expense
$
1,569
1,396
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, 2017 and 2016 are as follows:
2017
2016
$
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 $
506
502
—
108
160
1,276
(380)
(333)
—
(113)
(826)
450
659
847
—
118
223
1,847
(502)
(784)
—
(183)
(1,469)
378
The Bank has determined that a valuation allowance for the gross deferred tax assets is not necessary as of
December 31, 2017 and 2016, 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, 2017 and 2016. The Company does not have an accrual for uncertain tax positions as
deductions taken and benefits accrued are based on widely understood administrative practices and
procedures and are based on clear and unambiguous tax law. Tax returns for all years 2014 and thereafter
are subject to future examination by tax authorities.
37
(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,
2017
74,320
4,804
2016
67,898
6,595
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, 2017 the Company had $1,252 in
outstanding mortgage rate lock commitments and $2,647 in outstanding mortgage rate lock commitments as
of December 31, 2016.
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, 2017 will expire within one year.
Management does not anticipate any material losses as a result of these transactions. The credit risk involved
in issuing letters of credit is essentially the same as that involved in extending loans to customers.
(10) Leases
The Company leases premises and equipment under various operating lease agreements. Generally,
operating leases provide for one or more renewal options on the same basis as current rental terms. Certain
leases require increased rentals under cost-of-living escalation clauses. The following are future minimum
lease payments as required under the agreements:
38
Year
2018
2019
2020
2021
2022
Thereafter
Total
Payments
$167
167
172
164
164
960
$1,794
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, 2017 and 2016, dividends from the subsidiary Bank totaled $1,111 and
$1,017, respectively.
Substantially all of Bankshares’ retained earnings consist of undistributed earnings of its subsidiary Bank,
which are restricted by various regulations administered by federal banking regulatory agencies. Under
applicable federal laws, the Comptroller of the Currency restricts, without prior approval, the total dividend
payments of the Bank in any calendar year to the net profits of that year, as defined, combined with the
retained net profits for the two preceding years. As of December 31, 2017, retained net profits of the Bank
that were free of such restriction approximated $6,781.
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
39
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, 2017 and December 31, 2016 are listed on the following page:
Regulatory Capital Ratios as of December 31, 2017
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 Ratio
$43,582
$40,540
$40,540
$40,540
11.69%
10.88%
10.88%
9.15%
Amount
$43,069
$40,027
$40,027
$40,027
Ratio
11.59%
10.77%
10.77%
9.06%
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 Ratio
$40,690
$37,719
$37,719
$37,719
11.67%
10.81%
10.81%
8.96%
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, 2017, 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.
(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.
40
(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, 2017 and 2016, and as such, the related fair values have not
been estimated.
Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company’s entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the Company’s financial
instruments, fair value estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial instruments and other factors.
These estimates are subjective in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without
attempting to estimate the value of anticipated funding needs and the value of assets and liabilities that
are not considered financial instruments. Significant assets that are not considered financial assets
include deferred tax assets and premises and equipment and other real estate owned. In addition, the
tax ramifications related to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the estimates.
(g) Fair Value Methodologies
The following is a description of valuation methodologies used for assets and liabilities recorded at fair
value.
Available-for-Sale Securities
Available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is
based upon quoted prices, if available, and would in such case be included as a Level 1 asset. The
Company currently carries no Level 1 securities. If quoted prices are not available, valuations are
obtained from readily available pricing sources from independent providers for market transactions
involving similar assets or liabilities. The Company’s principal market for these securities is the
secondary institutional markets, and valuations are based on observable market data in those markets.
These would be classified as Level 2 assets. The Company’s entire available-for-sale securities
portfolio is classified as Level 2 securities. The Company currently carries no Level 3 securities for
which fair value would be determined using unobservable inputs.
41
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, 2017,
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, 2017 and
December 31, 2016, 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, 2017 and December 31, 2016, 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.
The following tables present information about certain assets and liabilities measured at fair value:
Fair Value Measurements on December 31, 2017
Assets/Liabilities
Measured at Fair
Value
Total
Carrying
Amount in
The
Consolidated
Balance
Sheet
$41,856
$41,856
$1,264
$1,264
$224
$224
42
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
$-
$-
$-
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$41,856
$-
$-
$-
$1,264
$224
Description
Available-for-
sale securities
Impaired loans
(nonrecurring)
Other Real
Estate Owned
(nonrecurring)
Fair Value Measurements on December 31, 2016
Assets/Liabilities
Measured at Fair
Value
Total
Carrying
Amount in
The
Consolidated
Balance
Sheet
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
$23,842
$23,842
$1,116
$1,116
$642
$642
$-
$-
$-
$23,842
$-
$-
$-
$1,116
$642
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, 2017:
Level 3 Assets
Year Ended December 31, 2017
Impaired
Loans
$
1,116
Other Real
Estate Owned
642
$
148
1,264
(418)
224
Balance, beginning of the year
Purchases, sales, issuances,
and settlements (net)
Balance, end of year
There were no transfers between Level 1, Level 2 and Level 3 investments during the year ended
December 31, 2017.
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:
Balance, beginning of the year
Purchases, sales, issuances,
and settlements (net)
Balance, end of year
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
There were no transfers between Level 1, Level 2 and Level 3 investments during the year ended
December 31, 2016.
43
(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 1,529,033 shares
in 2017 and 1,522,351 in 2016
Capital surplus
Retained earnings
Accumulated other comprehensive loss, net
$
$
$
$
$
Total stockholders' equity
$
Total liabilities and stockholders' equity $
December 31,
2017
2016
4
38,283
1,062
39,349
513
41
554
4,526
1,176
35,377
(2,284)
38,795
39,349
18
36,386
987
37,391
801
41
842
4,506
1,050
32,865
(1,872)
36,549
37,391
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,
2017
2016
$
$
1,111
1,787
2,898
227
2,671
77
2,748
1,017
2,096
3,113
166
2,947
57
3,004
44
Condensed Statements of Cash Flows
Years ended December 31,
2017
2016
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
$
2,748
3,004
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 in other liabilities
Net cash used in financing activities
Net decrease in cash due from subsidiary
Cash due from subsidiary, beginning of year
Cash due from subsidiary, end of year
$
(1,787)
(75)
886
(612)
(288)
-
(900)
(14)
18
4
(2,096)
(58)
850
(581)
(290)
17
(854)
(4)
22
18
(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, 2017, options for 15,000 shares were exercisable at an exercise price of $9.00 per share
and options for 13,125 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
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, 2017, there were 111,024 shares available for grant under
the 2014 Plan.
On May 1, 2017, 4,700 shares of restricted stock were granted to employees pursuant to 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 9, 2018, 3,831 shares of restricted stock were granted to the Company’s Directors in lieu of cash
for 2017 director fees. 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, 2017, no options for shares were exercisable under the 2014 Plan.
45
The Company expensed $0 in 2017 and 2016 in compensation expense as a direct result of the issuance of
the 32,500 incentive stock options with tandem stock appreciation rights in previous years and recognized $9
in compensation expense related to 4,375 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 $137 in 2017 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, 8,500
shares of restricted stock to employees in 2016 and 4,700 shares of restricted stock to employees in 2017
and will expense $111 in 2018, $62 in 2019 and $15 in 2020 on such restricted stock.
Stock option activity during the years ended December 31, 2017 and 2016 is as follows:
Number Weighted
Average
Exercise
Price
of
Shares
Balance as of December 31, 2015
Forfeited
Exercised
Granted
Balance as of December 31, 2016
Forfeited
Exercised
Granted
Balance as of December 31, 2017
42,875
1,000
5,000
0
37,000
0
4,500
0
32,500
$12.60
15.70
11.01
-
12.71
-
13.77
-
$12.61
The following table summarizes information about stock options outstanding as of December 31, 2017:
Number
Outstanding
at 12/31/17
Average
Remaining Weighted-
Contractual
Life
(in years)
Average
Exercise
Price
Number
Exercisable at
12/31/2017
Weighted-
Average
Exercise
Price
15,000
17,500
3.4
6.1
$
9.00
15.70
15,000
13,125
$
9.00
15.70
Exercise
Price
$
9.00
15.70
46
The following table summarizes information about stock options outstanding at December 31, 2016:
Options Outstanding
Weighted-
Average
Remaining Weighted-
Average
Contractual
Exercise
Life
Price
(in years)
Number
Outstanding
at 12/31/16
Options Exercisable
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 aggregate intrinsic value of options outstanding was $410, of options exercisable was $341, and of
options unvested and expected to vest was $69 as of December 31, 2017. 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 total intrinsic value (market value on date of exercise less exercise
price) of options exercised was $61 for the year ended December 31, 2017 and $41 for the year ended
December 31, 2016.
(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. No repurchases were made in 2017.
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, 2017 consolidated financial statements through March 1, 2018, 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, 2017. 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, 2017, 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, 2017 and 2016, 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, 2017 and 2016, 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 1, 2018
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, 2012 in Pinnacle Bankshares Corporation Common Stock and in each of the indices.
Pinnacle Bankshares Corporation
Total Return Performance
Pinnacle Bankshares Corporation
NASDAQ Composite Index
S&P 500 Index
SNL U.S. Bank Index
e
u
l
a
V
x
e
d
n
I
400
350
300
250
200
150
100
50
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Index
Pinnacle Bankshares Corporation
NASDAQ Market Index
S&P 500
SNL U.S. Bank Index
12/31/12
100.00
100.00
100.00
100.00
12/31/13
184.99
140.12
132.39
137.30
12/31/14
222.07
160.78
150.51
153.48
12/31/15
250.50
171.97
152.59
156.10
12/31/16
374.20
187.22
170.84
197.23
12/31/17
387.60
242.71
208.14
232.91
50
Annual Meeting
Shareholder Information
The 2018 Annual Meeting of Shareholders will be held on April 10, 2018, 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
2017
Low Dividends
High
2016
Low
Dividends
First Quarter
$29.66
$28.00
$0.10
$20.00
$18.30
$0.09
Second Quarter
$28.99
$27.95
$0.10
$20.75
$18.60
$0.09
Third Quarter
$28.65
$27.12
$0.10
$20.44
$18.85
$0.10
Fourth Quarter
$30.80
$27.10
$0.10
$28.88
$19.90
$0.10
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 2017 and 2016 and is not expected to have a material impact
during 2018.
As of March 1, 2018, there were approximately 279 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
52
Our New
Odd Fellows Road Branch
Lynchburg, Virginia
Opened in November 2017
622 Broad Street • Post Office Box 29 • Altavista, Virginia 24517 • (434) 369-3000