2018 An nuA l R ePO Rt
B O A R d O f d i R e c t O R s
Front Row: Connie C. Burnette, James E. Burton, IV, (Chairman), Aubrey H. Hall, III, A. Patricia Merryman
Back Row: Dr. 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…………............................... 49
Report of Independent Auditor ..........................................................................................................
50
Shareholder Information ....................................................................................................................
51
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
Dr. 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 my pleasure to report that Pinnacle Bankshares Corporation, the one-bank holding company for First
National Bank, produced record high earnings in 2018, marking our tenth straight year of core net income
improvement. For the year, Pinnacle experienced solid growth of loans, deposits and total assets, while
capitalizing on higher asset yields, continued strong core funding and sound credit quality to enhance our
performance. We are well positioned across the Lynchburg Region for continued growth and performing
at a level that places us among the top community banks in Virginia.
For 2018, Pinnacle generated net income of $4,160,000, representing a $1,412,000 or 51% increase as
compared to 2017, and equating to a .90% return on average assets. Higher net interest income was the
primary driver of the improvement, which was the result of higher yields on interest earning assets and
increased volume of loans and investments. Additionally, non-interest income increased as compared to
the prior year, helping to offset higher non-interest expense associated with growth and increased provision
for loan losses. The Company also benefitted from a lower corporate tax rate due to the Tax Cuts and Jobs
Act of 2017. On a pre-tax basis, net income increased $732,000 or 17%, substantiating improved
profitability from core operations.
Outstanding loans grew $18 million, or 5% in 2018, with the growth being primarily driven by strong
performances from First National Bank’s Dealer and Commercial Divisions. Deposits continued their
upward trend, increasing $23.6 million, or 6%, during the year due to higher checking and savings balances.
A steady stream of new deposit customers acquired from larger national banks and other competition has
helped the Company maintain a low cost of funds, despite increased interest rates. In fact, the number of
demand deposit accounts grew by 1,060, or almost 8% for the year. Total assets as of year-end 2018 were
$470.6 million, an increase of 6% compared to the prior year-end, as the Company moves closer to the
$500 million asset threshold.
Asset quality ratios are among the best in Pinnacle’s history with most all measures considered to be very
strong. As I have stated in the past, we have built a sound and diversified loan portfolio without an excessive
concentration of non-owner occupied
limited
commercial
construction/acquisition & development loan exposure. While we remain optimistic regarding the future
and underlying strength of the economy, our Company is positioned to withstand any future challenges that
may occur.
and very
estate
loans
real
We were pleased to have increased the cash dividend paid to Pinnacle’s shareholders twice during 2018 for
a total of $0.045 or 11.25%. Pinnacle’s stock price as of December 31, 2018 was $27.45, which was down
$2.05 or 6.9% as compared to December 31, 2017. Our stock price decline resulted in a -5% total return
for 2018; however Pinnacle fared better than many banking peers as evidenced by the SNL U.S. Bank Index
total return of -17% for the year. As of February 26, 2019, our stock closing price was $32.00.
4
With improved profitability and a disciplined dividend strategy, Pinnacle has been able to accrete capital at
a rate that appropriately correlates with the Company’s growth, thus improving capital ratios. As of year-
end 2018, the Company’s total risk-based capital ratio was 12.29% as compared to 11.69% as of the prior
year-end. The Company and First National remain well capitalized per all regulatory definitions.
First National’s new Odd Fellows Road Branch in Lynchburg completed its first full year of operation in
2018 and exceeded expectations regarding new deposit accounts and loan growth. Accessibility is
somewhat challenged currently by phase two of the Odd Fellows Road corridor improvement project,
however, we expect the situation to improve later this year with anticipated completion of the bridge
replacement next to our facility in June.
We are excited that First National completed a restructuring of its Investments Division during 2018, which
is now branded as First National Advisors. The restructure included successful recruitment of two
experienced financial advisors and conversion to a more robust investments platform. Additionally, the
Bank’s Mortgage Division also converted to a new loan origination platform and added a new Mortgage
Officer. These two lines of business are now positioned to better serve our client base and increase their
contributions to Pinnacle’s performance.
New for 2018, First National began offering Mobile Wallet, which provides clients the ability to utilize
their First National debit cards through Apple Pay, Samsung Pay or Google Pay apps on their mobile
phones. With Mobile Wallet, card information is stored securely on the mobile device and not shared when
making a purchase, reducing the risk of identity theft or a breach via skimmers. First National also officially
entered the social media space in 2018 with the launching of its Facebook page. The Bank intends to be
more interactive with clients and prospects alike through posting educational and community focused
content. Please check us out at www.facebook.com/FirstNatBk.
Finally, we are pleased to announce that First National achieved an overall ranking of seventh out of the
seventy banks headquartered in Virginia per Banks Street Partners’ “Rank the Banks” report for the twelve
months ending December 31, 2018. The overall ranking is based on performance as measured in the
following categories: net interest margin, noninterest income, total overhead, asset quality and return on
average equity. The overall ranking of seventh is well-deserved and a reflection of the hard work and
dedication of First National’s employees, our most valuable asset. The entire report can be viewed at
www.bankstreetpartners.come under the Reports & Data tab.
In closing, we are very proud of Pinnacle Bankshares Corporation’s achievements in 2018 and feel that we
have positioned First National Bank as the premier community bank in Central Virginia. To hear more
about our Company’s performance and outlook, please join us for the Annual Meeting of Shareholders to
be held at 11:00 a.m., Tuesday, April 9, 2019 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. (Todd) Hall, III
President & Chief Executive Officer
5
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PINNACLE BANKSHARES CORPORATIONAND SUBSIDIARYSelected Consolidated Financial Information(In thousands, except ratios, share and per share data)20182017201620152014Income Statement Data:Net interest income$16,38214,85013,63512,50512,056Provision for loan losses6072608712991Noninterest income4,2023,8553,8963,7313,162Noninterest expense14,92814,12813,04412,06012,008Income tax expense8891,5691,3961,306970Net income4,1602,7483,0042,7402,149Per Share Data:Basic net income$2.711.801.971.801.42Diluted net income2.681.781.961.791.40Cash dividends0.4450.400.380.340.32Book value27.3425.3724.0122.8821.60Weighted-Average Shares Outstanding:Basic1,537,3801,528,1641,524,2711,519,1591,512,661Diluted1,551,5981,544,6281,535,6321,531,4361,530,831Balance Sheet Data:Assets$470,611443,925440,104371,261362,188Loans, net372,482354,829338,423303,199280,449Securities 49,82644,21727,56927,14829,277Cash and cash equivalents15,71712,57548,17416,73929,451Deposits425,278401,685399,743332,403325,204Stockholders’ equity 42,11138,79536,54934,78232,654Performance Ratios:Return on average assets0.90%0.62%0.76%0.74%0.60%Return on average equity10.33%7.25%8.38%8.12%6.59%Dividend payout16.44%22.27%19.34%18.96%22.48%Asset Quality Ratios:Allowance for loan losses to totalloans, net of unearned income andfees0.90%0.83%0.85%0.94%1.08%Net charge-offs to average loans,net of unearned income and fees 0.05%0.05%0.02%0.11%0.15%Capital Ratios:Leverage9.36%9.15%8.94%9.68%9.25%Risk-based:Tier 1 capital11.40%10.88%10.83%11.37%10.96%Total capital12.29%11.69%11.68%12.32%11.98%Average equity to average assets8.73%8.56%9.08%9.17%9.11%Years ended December 31,
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; the
impact of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”); our continued successful implementation of the
Lynchburg Market Plan; the successful restructuring of First National Advisors; demand for loan products; deposit
flows; competition and demand for financial services in our market area; regulatory compliance costs; accounting
principles, policies and guidelines; technological risks and developments and cyber threats, attacks or events; the
successful integration of new members of First National Advisors and the Bank’s Mortgage Division; the successful
integration of new division platforms; 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.
The 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
7
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.
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. The 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 and renovations to our loan operations area will be completed in 2019.
A total of one-hundred fifteen 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 LPL Financial LLC 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 record net income of $4,160 for the year ended December 31, 2018, compared to net income of
$2,748 for the year ended December 31, 2017, an increase of 51.38%. This increase was driven by a $1,532, or
10.32% increase in net interest income and a $347, or 9.00% increase in noninterest income. These increases were
partially offset by an $800, or 5.66% increase in noninterest expense and a $347, or 133.46% increase in provision
for loan losses. The increase in net income was also driven by a $680, or 43.34% decrease in income taxes due to
the Tax Act signed into law on December 22, 2017. For 2018, the Company generated income before taxes of $5,049
as compared to 2017 income before taxes of $4,317, an increase of $732, or 16.96%.
Profitability as measured by the Company’s return on average assets (“ROA”) was 0.90% in 2018, compared to
0.62% in 2017. Return on average equity (“ROE”) was 10.33% for 2018, compared to 7.25% for 2017.
In 2019, we expect net income growth due to growth of earning assets as well as the continued success of our
Lynchburg Market Plan. We also expect higher net interest spreads leading to an increase in net interest income.
Furthermore, we expect an increase in noninterest income in 2019 due to an increase in assets and increased volume
from our Investments Division. Finally, we expect an increase in noninterest expense in 2019 due mainly to expected
normal increases in salaries.
Net Interest Income. Net interest income was $16,382 for the year ended December 31, 2018, compared to $14,850
for the year ended December 31, 2017, 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. Growth of outstanding loans and investments has been the catalyst for the net interest income
improvement.
The net interest spread increased to 3.70% for the year ended December 31, 2018 from 3.52% for the year ended
December 31, 2017. Yield on earning assets was 4.27% and cost of funds was 0.57% for the year ended December
31, 2018 as compared to a yield on earning assets of 4.03% and a cost of funds of 0.51% for the year ended December
31, 2017. In 2018, the Company’s yield on earning assets increased due to higher loan and investment yields. The
net interest margin increased to 3.83% for the year ended December 31, 2018 from 3.63% for the year ended
December 31, 2017 due also to the 24 basis point increase in yield on earning assets in 2018.
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Provision for Loan Losses and Asset Quality. The provisions for loan losses for the years ended December 31,
2018 and 2017 were $607 and $260, respectively. The provision for loan losses increased in 2018, but has remained
at a low level since 2013 as the Company continues to have strong asset quality. The provision for loan losses
increased $347 in 2018 due to the 5.05% growth in total loans and the downgrade of two commercial loan
relationships that occurred in the third quarter of 2018. These downgrades are expected to be short-term in nature
with management not anticipating any losses associated with the relationships. Despite these downgrades, loan
quality remained strong due to sound underwriting and credit management processes as total watch list loans
decreased to $4,969 as of December 31, 2018 compared to $5,128 as of December 31, 2017.
Nonperforming assets (including nonaccrual loans, accruing loans more than 90 days past due, and foreclosed assets)
increased to $1,546 or 0.33% of total assets as of December 31, 2018, as compared to $946 or 0.21% of total assets
as of December 31, 2017. Nonperforming loans to total loans increased slightly to 0.24% as of year-end 2018
compared to 0.20% as of year-end 2017. The allowance for loan losses balance was 366.87% of nonperforming
loans as of December 31, 2018 compared to 409.90% as of the end of 2017. The Company expects to maintain the
quality of its loan portfolio in 2019.
Noninterest Income. 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, bank-
owned life insurance income, and commissions and fees from investment, insurance, annuity and other bank
products. Total noninterest income for the year ended December 31, 2018 increased $347, or 9.00%, to $4,202 from
$3,855 in 2017 due mainly to an increase in interchange fees included in service charges on deposit accounts, which
increased by $125, or 7.07% and, commissions and fees, which increased $104 or 21.67% as the Company received
$262 in revenue resulting from its conversion to a new investments’ platform, which was part of a complete
restructuring of the Investments Division. The Division has been expanded to four employees and is now doing
business as First National Advisors. In addition to the Investments Division revenue, the Bank benefitted in 2018
from increased interchange and ATM fees, merchant card processing fees and Enterprise Grant Zone income
received in connection with its new Odd Fellows Road facility.
Noninterest Expense. Total noninterest expense for the year ended December 31, 2018 increased $800, or 5.66%,
to $14,928 from $14,128 in 2017 as salaries and commissions increased by $212, or 2.74%, which included the
earlier referenced Investments Division expansion. Occupancy expense increased $106, or 12.76% and furniture
and equipment increased $179, or 24.52%. These increases were associated with our new Odd Fellows Road facility
that opened in the fourth quarter of 2017. The Company also saw expected increases in 2018 in legal fees, dealer
loan expenses, loan fees paid and core data processing fees due to increased transaction volume associated with our
growth.
Income Tax Expense. In 2018, the Company benefitted from a lower corporate income tax rate as a result of the
Tax Act with its corporate tax rate decreasing from 34% to 21% in 2018. Applicable income taxes on 2018 earnings
amounted to $889, resulting in an effective tax rate of 17.61%, compared to $1,569, and an effective tax rate of
36.34% in 2017, as the Company revalued its net deferred tax assets in 2017 as required by the Tax Act. The resulting
write-down of the net deferred tax assets resulted in an additional $279 expense in net income tax increasing the
overall tax rate in 2017.
Assets
Total assets as of December 31, 2018 were $470,611, up 6.01% from $443,925 as of December 31, 2017. The
principal components of the Company’s assets at the end of the year were $15,717 in cash and cash equivalents,
$49,826 in securities and $372,482 in net loans.
Investment Portfolio. Investment securities as of December 31, 2018 totaled $49,826, an increase of $5,609, or
12.69% from $44,217 as of December 31, 2017. Held-to-maturity investment securities decreased to $1,777 as of
December 31, 2018 from $2,361 as of December 31, 2017, a decrease of $584, or 24.74%. Available-for-sale
investments increased to $48,049 as of December 31, 2018 from $41,856 as of December 31, 2017, an increase of
$6,193, or 14.80%. Investments increased as cash was invested mainly in municipal, agency and mortgage bonds in
2018.
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Loan Portfolio. The Company’s net loans were $372,482 as of December 31, 2018, an increase of $17,653, or
4.98%, from $354,829 as of December 31, 2017. Total loans were $376,066 as of December 31, 2018 compared to
$358,000 as of December 31, 2017. This increase resulted from a $12,305 increase in real estate loans and an $8,772
increase in consumer loans, which was partially offset by a $3,011 decrease in commercial loans during 2018. The
Company’s ratio of net loans to total deposits was 88.38% as of December 31, 2018 compared to 89.07% as of
December 31, 2017 as deposit growth exceeded net loan growth by $5,940.
Bank Premises and Equipment. Bank premises and equipment decreased $270, or 1.69% in 2018 due to expected
depreciation expense exceeding purchases in 2018.
Liabilities
Total liabilities as of December 31, 2018 were $428,500, up 5.77% from $405,130 as of December 31, 2017.
Deposits. The increase in liabilities in 2018 was due to an increase in total deposits of $23,593, or 5.87%, to $425,278
as of December 31, 2018 from $401,685 as of December 31, 2017. Noninterest-bearing demand deposits increased
$6,472, or 8.38% and represented 19.68% of total deposits as of December 31, 2018, compared to 19.22% as of
December 31, 2017. Savings and NOW accounts increased $19,340, or 8.55% and represented 57.73% of total
deposits as of December 31, 2018, compared to 56.30% as of December 31, 2017. Time deposits decreased $2,219
or 2.26% and represented 22.60% of total deposits as of December 31, 2018, compared to 24.48% as of December
31, 2017. The change in deposits during 2018 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 $415,991 for the year ended December 31, 2018, an increase of $14,135, or 3.52% from
$401,856 of average deposits for the year ended December 31, 2017. 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, 2018 or December 31, 2017.
Stockholders’ Equity
Total stockholders’ equity as of December 31, 2018 was $42,111, including $38,853 in retained earnings. As of
December 31, 2017, stockholders’ equity totaled $38,795, including $35,377 in retained earnings. The increase in
stockholders’ equity resulted mainly from the Company’s net income of $4,160 partially offset by dividends of $684
paid to shareholders. Dividends paid to shareholders were $0.445 per share paid in 2018 as compared to the $0.40
per share paid in 2017.
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. 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. Basel III was fully phased in on January 1, 2019 and now
requires (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.
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The Company’s CET1 and Tier 1 Risk-based Capital Ratio was 11.40% of December 31, 2018. The Total Risk-
based Capital Ratio was 12.29% and the Company’s Tier 1 Leverage Ratio was 9.36% as of December 31, 2018.
For comparison, 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.
The Company’s financial position as of December 31, 2018 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.
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Assets20182017Cash and cash equivalents:Cash and due from banks $15,717$12,575Certificates of deposits250250Securities: Available-for-sale, at fair value48,04941,856Held-to-maturity, at amortized cost1,7772,361Federal Reserve Bank stock, at cost149147Federal Home Loan Bank stock, at cost 399395Loans, net372,482354,829Bank premises and equipment, net15,75116,021Accrued interest receivable1,3331,183Bank owned life insurance10,1019,865Goodwill539539Other real estate owned627224Other assets3,4373,680Total assets$470,611$443,925Liabilities and Stockholders' EquityLiabilities:Deposits: Demand$83,680$77,208 Savings and NOW accounts245,493226,153 Time96,10598,324Total deposits425,278401,685Note payable under line of credit -513Accrued interest payable168141Other liabilities 3,0542,791Total liabilities428,500405,130Commitments, contingencies and other mattersStockholders' equity:Common stock, $3 par value. Authorized 3,000,000 shares, issued and outstanding 1,540,054 shares in 2018 and 1,529,033 shares in 20174,5474,526Capital surplus1,3331,176Retained earnings38,85335,377Accumulated other comprehensive loss, net(2,622)(2,284)Total stockholders' equity42,11138,795Total liabilities and stockholders' equity$470,611$443,925See accompanying notes to consolidated financial statements.(In thousands of dollars, except share data)PINNACLE BANKSHARES CORPORATION AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSDecember 31, 2018 and 2017
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20182017Interest income:Interest and fees on loans$16,876$15,486Interest on securities:U.S. Government agencies717490States and political subdivisions (taxable)8883States and political subdivisions (tax-exempt)254198Other 334252Interest on federal funds sold12Total interest income18,27016,511Interest expense:Interest on deposits:Savings and NOW accounts660594Time 1,1831,065Interest on federal funds purchased452Total interest expense1,8881,661Net interest income16,38214,850Provision for loan losses and unfunded commitments607260Net interest income after provision for loan losses15,77514,590Noninterest income:Service charges on deposit accounts1,8941,769Commissions and fees584480Mortgage loan fees438478Service charges on loan accounts346353Other operating income940775Total noninterest income4,2023,855Noninterest expense:Salaries and employee benefits 7,9527,740Occupancy expense937831Furniture and equipment expense909730Office supplies and printing174195Federal deposit insurance premiums275310Capital stock tax215247Advertising expense183189Other operating expenses4,2833,886Total noninterest expense14,92814,128Income before income tax expense5,0494,317Income tax expense8891,569Net income$4,160$2,748Basic net income per share$2.71$1.80Diluted net income per share $2.68$1.78See accompanying notes to consolidated financial statements.CONSOLIDATED STATEMENTS OF INCOMEPINNACLE BANKSHARES CORPORATION AND SUBSIDIARYYears ended December 31, 2018 and 2017(In thousands of dollars, except per share data)
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20182017Net income$4,160$2,748Other comprehensive income (losses), net of related income taxes: Unrealized losses on availabile-for-sale securities Before tax(319)(165) Income tax (benefit) expense66(10) Changes in plan assets and benefit obligation of defined benefit pension plan Before tax(107)108 Income tax (benefit) expense22(345)Total other comprehensive loss (338)(412)Comprehensive income $3,822$2,336See accompanying notes to consolidated financial statements.PINNACLE BANKSHARES CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2018 and 2017(In thousands of dollars)
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AccumulatedOtherCapitalRetainedComprehensiveSharesPar ValueSurplusEarningsIncome (Loss)TotalBalances, December 31, 20161,522,351$4,506$1,050$32,865$(1,872)$36,549Net income2,7482,748Other comprehensive loss(36)(36)Issuance of restricted stock and related expense 4,474 20 126 146Stock options exercised 2,208 Reclassification of the disproportionate tax effect from accumulated other comprehensive income (loss) to retained earnings376(376)-Cash dividends declared by Bankshares ($0.40 per share)(612)(612)Balances, December 31, 20171,529,033$4,526$1,176$35,377$(2,284)$38,795Net income4,1604,160Other comprehensive loss(338)(338)Issuance of restricted stock and related expense 7,794 21 157 178Stock options exercised 3,227 Cash dividends declared by Bankshares ($0.445 per share)(684)(684)Balances, December 31, 20181,540,054$4,547$1,333$38,853$(2,622)$42,111See accompanying notes to consolidated financial statements.(In thousands of dollars, except share and per share data)Common StockPINNACLE BANKSHARES CORPORATION AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 2018 and 2017
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20182017Cash flows from operating activities: Net income4,160$ 2,748$ Adjustments to reconcile net income to net cash providedby operating activities:Depreciation of bank premises and equipment684518Amortization of unearned fees, net447Net amortization of premiums and discounts on securities 348329Provision for loan losses607260Provision for deferred income taxes(208)(332)Stock based compensation expense178146Increase in cash value of bank owned life insurance(236)(245)Valuation loss on OREO-2Net decrease (increase) in: Accrued interest receivable(150)(129) Other assets5391,087Net increase in: Accrued interest payable276 Other liabilities 15623Net cash provided by operating activities6,1094,460Cash flows from investing activities: Proceeds from maturities of certificates of deposits-245 Purchases of available-for-sale securities(11,319)(24,831) Proceeds from maturities and calls of held-to-maturity securities5701,345 Proceeds from maturities and calls of available-for-sale securities1343,270 Proceeds from paydowns and maturities of available-for-sale mortgage-backed securities4,3393,074 Proceeds from the sale of of OREO181605 Purchase of Federal Reserve Stock(2)(1) Purchase of Federal Home Loan Bank Stock(4)(62) Purchase of BOLI-(3,000) Net increase in loans made to customers(18,264)(16,713) Additions to OREO(584)(189) Purchases of bank premises and equipment (414)(4,844) Net cash used in investing activities(25,363)(41,101)Cash flows from financing activities: Net increase in demand, savings and NOW deposits25,8124,251 Net decrease in time deposits(2,219)(2,309) Repayment of line of credit(513)(288) Cash dividends paid(684)(612)Net cash provided by financing activities22,3961,042Net increase (decrease) in cash and cash equivalents3,142(35,599)Cash and cash equivalents, beginning of year12,57548,174Cash and cash equivalents, end of year15,717$ 12,575$ Supplemental disclosure of cash flows information Cash paid during the year for:Income taxes940$ 1,600$ Interest1,8611,655Supplemental schedule of noncash investing and financing activities:Transfer from loans to foreclosed assets584$ 188$ Loans charged against the allowance for loan losses454570Unrealized losses on available-for-sale securities(319)(165)Defined benefit plan adjustment per ASC topic Compensation-Retirement Benefits (107)108See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWSYears ended December 31, 2018 and 2017(In thousands of dollars)PINNACLE BANKSHARES CORPORATION AND SUBSIDIARY
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 (“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. Bankshares 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,
2018 and 2017. 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, 2018 and 2017,
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
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to sell the security before recovering its cost basis, the entire impairment loss would be recognized in
earnings as an OTTI. If the Company does not intend to sell the security and it is not likely that the
Company will be required to sell the security but we do not expect to recover the entire amortized cost
basis of the security, only the portion of the impairment loss representing credit losses would be
recognized in earnings. The credit loss on a security is measured as the difference between the
amortized cost basis and the present value of the cash flows expected to be collected. Projected cash
flows are discounted by the original or current effective interest rate depending on the nature of the
security being measured for potential OTTI. The remaining impairment related to all other factors, the
difference between the present value of the cash flows expected to be collected and fair value, is
recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other
factors are presented as separate categories within OCI. For investment securities held to maturity, this
amount is accreted over the remaining life of the debt security prospectively based on the amount and
timing of future estimated cash flows. The accretion of the amount recorded in OCI increases the
carrying value of the investment and does not affect earnings. If there is an indication of additional
credit losses the security is re-evaluated according to the procedures described above.
(d) Restricted Equity Investments
As a member of the Federal Reserve Bank (“FRB”) and the Federal Home Loan Bank of Atlanta
(“FHLB”), the Company is required to maintain certain minimum investments in the common stock of
the FRB and 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, 2018, the Company’s available borrowing limit with the FHLB was approximately
$114,906. The Company had $0 in borrowings from the FHLB outstanding at December 31, 2018 and
2017. The Company also has a $5,000 line of credit commitment of which $5,000 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 $0 outstanding as of December 31, 2018 and $513 outstanding as of December 31,
2017.
(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.
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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 usually continues to aggressively pursue collection. The Company considers a
number of factors to determine the need for and timing of charge-offs including the following: whenever
any commercial loan becomes past due for 120 days for any scheduled principal or interest payment and
collection is considered unlikely; whenever foreclosure on real estate collateral or liquidation of other
collateral does not result in full payment of the obligation and the deficiency or some portion thereof is
deemed uncollectible, the uncollectible portion shall be charged-off; whenever any installment loan
becomes past due for 120 days and collection is considered unlikely; whenever any repossessed vehicle
remains unsold for 60 days after repossession; whenever a bankruptcy notice is received on any
installment loan and review of the facts results in an assessment that all or most of the balance will not
be collected, the loan will be placed in non-accrual status; whenever a bankruptcy notice is received on
a small, unsecured, revolving installment account; and whenever any other small, unsecured, revolving
installment account becomes past due for 180 days.
Loans are generally placed in non-accrual status when the collection of principal and interest is 90 days
or more past due, unless the obligation relates to a consumer or residential real estate loan or is both
well-secured and in the process of collection. All interest accrued but not collected for loans that are
placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Generally,
loans are returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured, which usually requires a minimum of six
months of sustained repayment performance.
Impaired loans are required to be presented in the financial statements at net realizable value of the
expected future cash flows or at the fair value of the loan’s collateral. Homogeneous loans such as real
estate mortgage loans, individual consumer loans and home equity loans are evaluated collectively for
impairment. Management, considering current information and events regarding the borrower’s ability
to repay their obligations, considers a loan to be impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment
losses are included in the allowance for loan losses through a charge to the provision for loan losses.
Cash receipts on impaired loans receivable are applied first to reduce interest on such loans to the extent
of interest contractually due and any remaining amounts are applied to principal.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at
the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled
debt restructuring is considered to be a collateral dependent loan, the loan is reported at the fair value of
the collateral less cost to sell. For troubled debt restructurings that subsequently default, the Company
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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 2018, 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 factors that are both Company-specific and that affect the
financial services industry-wide, 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
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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 $183 in 2018
compared to $189 in 2017.
(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 5,675 shares of restricted stock granted in 2018 compared to 4,700 shares
of restricted stock granted in 2017. There were 24,125 stock options outstanding as of December 31,
2018 compared to 32,500 stock options outstanding as of December 31, 2017. 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 contracts to issue
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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:
(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. As of December 31, 2018, all
available-for-sale securities fell 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.
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Net incomeSharesPer shareYear ended December 31, 2018(numerator)(denominator)amountBasic net income per share$ 4,160 1,537,380 $2.71 Effect of dilutive stock options— 14,218 Diluted net income per share$ 4,160 1,551,598 $2.68 Net incomeSharesPer shareYear ended December 31, 2017(numerator)(denominator)amountBasic net income per share$ 2,748 1,528,164 $1.80 Effect of dilutive stock options— 16,464 Diluted net income per share$ 2,748 1,544,628 $1.78
(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. In January 2018, FASB issued ASU 2018-03, Technical Corrections and Improvements to
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities to clarify certain aspects of the guidance issued in ASU 2016-01. 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. In July 2019, FASB issued ASU 2018-
11, Leases (Topic 842): Targeted Improvements to provide entities with additional guidance related to
the transition method selected, as well as on separating components of a contract to the original
information issued in ASU 2016-02. 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 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. In November 2018, FASB issued ASU 2018-19, Codification
Improvements to Topic 326, Financial Instruments – Credit Losses to clarify that operating lease
receivables are within the scope of ASC 842 rather than ASC Topic 326. ASU 2016-13 is effective for
private companies for fiscal years beginning after December 15, 2020. Early application of this ASU is
23
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 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 does not expect the adoption of this guidance to be material
to the 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
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 does not expect the adoption of this guidance to be material to the 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.
24
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
2017-11 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
other comprehensive income (“AOCI”) to retained earnings resulting from the Tax Act. As a result, the
Company reclassified $376 from AOCI to retained earnings as of and for the year ended December 31,
2017.
In May 2018, the FASB issued ASU 2018-06, Codification Improvements to Topic 942, Financial
Services-Depository and Lending to supersede the guidance in Subtopic 942-740, Financial Services—
Depository and Lending—Income Taxes, that is related to Circular 202 because that guidance has been
rescinded by the OCC and no longer is relevant. The changes were effective when issued. The adoption
of this ASU does not appear to be material to the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718):
Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic
718 to include all share-based payment transactions for acquiring goods and services from non-
employees. The new guidance is effective for private companies for fiscal years beginning after
December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted, but no earlier than an entity’s adoption of Topic 606. The Company does
not expect the adoption of this guidance to be material to the consolidated financial statements.
25
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments
in this ASU modify the disclosure requirements on fair value measurement in Topic 820, Fair Value
Measurement, based on the ideas in the Concepts Statements, including the consideration of costs and
benefits. The amendments in this ASU are effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon
issuance of this ASU. The Company is in the process of evaluating the impact of adopting this ASU.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use
Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract." This ASU amends the Intangibles—Goodwill
and Other Topic of the Accounting Standards Codification to align the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU
will be effective for the Company for fiscal years beginning after December 15, 2020. Early adoption
is permitted. The Company does not expect the adoption of this guidance to be material to the
consolidated financial statements.
(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 $5,051 and $4,427 for the weeks
including December 31, 2018 and 2017, respectively.
(3) Securities
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities as of
December 31, 2018 and 2017 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
2018
Gross
Gross
Amortized
unrealized
unrealized
costs
gains
losses
$
$
8,351
11,915
28,611
48,877
6
77
10
93
(130)
(233)
(558)
(921)
2018
Gross
Gross
Amortized
unrealized
unrealized
Held-to-Maturity
Obligations of states and political subdivisions
costs
1,777
$
gains
26
losses
—
Fair
values
8,227
11,759
28,063
48,049
Fair
values
1,803
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)
Fair
values
4,970
12,044
24,842
41,856
26
Held-to-Maturity
Obligations of states and political subdivisions
costs
2,361
$
gains
52
losses
—
2017
Gross
Gross
Amortized
unrealized
unrealized
Fair
values
2,413
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, 2018:
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:
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 2018, the securities included 11 bonds that had continuous losses for
less than 12 months and 53 bonds that had continuous losses for more than 12 months. 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 There were no net realized gains or losses on securities sold in 2018 or 2017.
The amortized costs and fair values of available-for-sale and held-to-maturity securities as of December 31,
2018, 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
TotalGrossGrossGrossGrossFairunrealizedFairunrealizedFairunrealizedDescription of SecuritiesvaluelossesvaluelossesvaluelossesU.S. Treasury securities and obligations ofU.S. Government corporations and agencies$ 2,982 6 4,645 124 7,627 130 Obligations of states and political subdivisions— — 8,168 233 8,168 233 Mortgage-backed securities-government 7,085 25 18,904 533 25,989 558 Total temporarilyimpaired securities$ 10,067 31 31,717 890 41,784 921 More than 12 monthsLess than 12 monthsTotalGrossGrossGrossGrossFairunrealizedFairunrealizedFairunrealizedDescription of SecuritiesvaluelossesvaluelossesvaluelossesU.S. Treasury securities and obligations ofU.S. Government corporations and agencies$ 1,482 13 1,922 78 3,404 91 Obligations of states and political subdivisions 6,084 83 2,130 74 8,214 157 Mortgage-backed securities-government 16,883 187 7,770 216 24,653 403 Total temporarilyimpaired securities$ 24,449 283 11,822 368 36,271 651 More than 12 monthsLess than 12 months
Securities with amortized costs of approximately $8,593 and $7,694 (fair values of $8,475 and $7,700,
respectively) as of December 31, 2018 and 2017, 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, 2018 and 2017 follows:
In the normal course of business, the Bank has made loans to executive officers and directors. As of
December 31, 2018 and 2017, loans to executive officers and directors totaled $281 and $359, respectively.
During 2018, new loans made to executive officers and directors totaled $60 and advances totaled $16. There
were no loans to companies in which executive officers and directors have an interest per Regulation O as of
December 31, 2018 and 2017. 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 $378,081 as of December 31, 2018 and $356,748
as of December 31, 2017.
The following table presents information on the Company’s allowance for loan losses and recorded investment
in loans:
28
AmortizedFairAmortizedFaircostsvaluescostsvaluesDue in one year or less$ 2,546 2,546 773 781 Due after one year through five years 5,197 5,086 1,004 1,022 Due after five years through ten years 7,396 7,317 — — Due after ten years 5,127 5,037 — — 20,266 19,986 1,777 1,803 Mortgage-backed securities 28,611 28,063 — — Totals$ 48,877 48,049 1,777 1,803 2018Available-for-SaleHeld-to-Maturity20182017Real estate loans:Residential-mortgage$ 122,760 121,255 Residential-construction 7,156 5,861 Commercial 97,027 87,522 Loans to individuals for household, family and otherconsumer expenditures 91,259 82,487 Commercial and industrial loans 57,864 60,875 Total loans, gross 376,066 358,000 Less unearned income and fees(212) (208) Loans, net of unearned income and fees 375,854 357,792 Less allowance for loan losses(3,372) (2,963) Loans, net$ 372,482 354,829
Allowance for Loan Losses and Recorded Investment in Loans
For the Year Ended December 31, 2018
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
$505
(112)
-
125
$518
751
-
2
282
1,035
750
(342)
248
178
834
957
-
13
15
985
2,963
(454)
263
600
3,372
-
-
80
-
80
$518
1,035
754
985
3,292
Commercial
Commercial Real Estate Consumer Residential
Total
$57,864
97,027
91,259
129,916
376,066
-
-
94
1,092
1,186
Ending balance: collectively evaluated for
impairment
$57,864
97,027
91,165
128,824
374,880
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
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
-
-
-
-
-
751
750
957
2,963
$505
29
Loans:
Total loans ending balance
Ending balance: individually
evaluated for impairment
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
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, 2018
Credit Exposure
Pass
Special Mention
Substandard
Doubtful
Total
Credit Exposure
Pass
Special Mention
Substandard
Doubtful
Total
Commercial
Commercial Real Estate Consumer
91,087
-
172
-
91,259
$57,254
395
215
-
$57,864
95,365
1,263
399
-
97,027
As of December 31, 2017
Commercial
Commercial Real Estate Consumer
82,192
-
295
-
82,487
$59,615
1,256
4
-
$60,875
85,363
900
1,259
-
87,522
30
Residential
Total
128,231
622
1,063
-
129,916
371,937
2,280
1,849
-
376,066
Residential
Total
125,908
-
1,208
-
127,116
353,078
2,156
2,766
-
358,000
The following table represents an age analysis of the Company’s past due loans:
Age Analysis of Past Due Loans
As of December 31, 2018
30-59
Days
60-89
Days
Past Due Past Due
Greater
Than
90 Days
Total
Past
Due
Total
Current Loans
Commercial
Commercial real estate
Consumer
Residential
Total
$21
25
208
246
$500
-
10
16
42
68
-
-
94
825
919
21
35
318
57,864
57,843
97,027
96,992
91,259
90,941
1,113 128,803 129,916
1,487 374,579 376,066
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
Commercial
Commercial real estate
Consumer
Residential
Total
Total
Past
Due
Total
Current Loans
60,875
60,875
87,522
87,444
82,487
82,406
878 126,238 127,116
1,037 356,963 358,000
-
78
81
Recorded
Investment
90 Days
and
Accruing
-
-
80
-
-
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, 2018
Unpaid
Recorded
Principal
Related
Average
Recorded
Interest
Income
Investment
Balance
Allowance
Investment
Recognized
$ -
-
14
1,092
-
-
94
$1,092
$1,186
-
-
14
1,092
-
-
94
1,092
1,186
31
-
-
-
-
-
-
80
-
80
-
39
7
1,139
-
39
74
1,139
1,252
-
-
-
-
-
-
6
-
6
With no related allowance recorded:
Commercial
Commercial real estate
Consumer
Residential
Total:
Commercial
Commercial real estate
Consumer
Residential
Total
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
-
$1,186
$1,264
-
78
-
1,186
-
78
-
1,186
1,264
-
-
-
-
-
-
-
-
-
-
85
-
1,105
-
85
-
1,105
1,190
-
-
-
22
-
-
-
22
22
With no related allowance recorded:
Commercial
Commercial real estate
Consumer
Residential
Total:
Commercial
Commercial real estate
Consumer
Residential
Total
The following presents information on the Company’s nonaccrual loans:
Loans in Nonaccrual Status
As of December 31, 2018 and 2017
Commercial
Commercial real estate
Consumer
Residential
Total
2018
$ -
-
14
825
$ 839
2017
-
78
-
645
723
The Company had three restructured loans totaling $439 as of December 31, 2018 and had five restructured
loans totaling $719 as of December 31, 2017. All of these restructured loans constituted troubled debt
restructurings as of December 31, 2018 and 2017.
The Company offers a variety of modifications to borrowers. The modification categories offered can
generally be described in the following categories.
Rate Modification is a modification in which the interest rate is changed.
Term Modification is a modification in which the maturity date, timing of payments or frequency of payments
is changed.
Interest Only Modification is a modification in which the loan is converted to interest only payments for a
period of time.
Payment Modification is a modification in which the dollar amount of the payment is changed, other than an
interest only modification described above.
Combination Modification is any other type of modification, including the restructuring of two or more loan
terms through the use of multiple categories above.
32
There were no additional commitments to extend credit related to these troubled debt restructurings that were
outstanding as of December 31, 2018 or December 31, 2017.
The following tables present troubled debt restructurings as of December 31, 2018 and 2017:
December 31, 2018
Accrual
Non-Accrual
Status
Status
Total
Troubled Debt
Restructuring
Commercial
Commercial real estate
Consumer
Residential
Total
$ -
-
-
267
$267
-
-
-
172
172
-
-
-
439
439
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
For 2018, there was no new troubled debt restructures. 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 $201. No troubled debt restructures experienced payment defaults in 2018 or 2017.
(5) Bank Premises and Equipment
Bank premises and equipment, net were comprised of the following as of December 31, 2018 and 2017:
33
20182017Land improvements$ 710 698 Buildings 15,174 14,945 Equipment, furniture and fixtures 6,511 6,309 Construction in progress - 29 22,395 21,981 Less accumulated depreciation(9,195) (8,511) 13,200 13,470 Land 2,551 2,551 Bank premises and equipment, net$ 15,751 16,021
(6) Deposits
A summary of deposits as of December 31, 2018 and 2017 follows:
At December 31, 2018, the scheduled maturity of time deposits is as follows: $42,569 in 2019; $18,163 in
2020; $10,461 in 2021, $6,871 in 2022 and $18,041 in 2023.
In the normal course of business, the Bank has received deposits from executive officers and directors. As of
December 31, 2018 and 2017, deposits from executive officers and directors were approximately $1,875 and
$1,635, 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 $370,056 as of December 31, 2018 and $357,633 as of December 31, 2017.
(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 $392 and $718 in 2018 and 2017, respectively. The
change in benefit obligation, change in plan assets and funded status of the pension plan as of December 31,
2018 and 2017 and pertinent assumptions are as follows:
34
20182017Noninterest-bearing demand deposits$ 83,680 77,208 Interest-bearing:Savings and money market accounts 166,020 148,665 NOW accounts 79,473 77,488 Time deposits – under $250,000 85,506 92,242 Time deposits – $250,000 and over 10,599 6,082 Total interest-bearing deposits 341,598 324,477 Total deposits$ 425,278 401,685
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 $497.
The Company selects the expected long-term rate-of-return-on-assets assumption in consultation with its
investment advisors and actuary. This rate is intended to reflect the average rate of return expected to be earned
on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed especially
with respect to real rates of return (net of inflation) for the major asset classes held or anticipated to be held by
the trust, and for the trust itself. Undue weight is not given to recent experience, which may not continue over
the measurement period, and higher significance is placed on current forecasts of future long-term economic
conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for
this purpose, the plan is assumed to continue in force and not terminate during the period during which assets
are invested. However, consideration is given to the potential impact of current and future investment policy,
cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from
plan assets (to the extent such expenses are not explicitly estimated within periodic cost).
35
Change in Benefit Obligation20182017Benefit obligation at beginning of year$ 9,184 8,949 Service cost 586 486 Interest cost 313 328 Actuarial income (loss)(761) 970 Benefits paid(724) (1,584) Settlement loss— 34 Benefit obligation at end of year$ 8,598 9,183 Change in Plan AssetsFair value of plan assets at beginning of year 8,388 8,764 Actual return on plan assets(362) 1,208 Employer contribution— — Benefits paid(723) (1,584) Projected fair value of plan assets at end of year$ 7,303 8,388 Funded Status at the End of the Year(1,295) (795) Amounts Recognized in the Balance Sheet(Other liabilities) Other Assets, accrued pension(1,295) (795) Amounts Recognized in Accumulated Other ComprehensiveIncome Net of Tax EffectUnrecognized actuarial loss(2,489) (2,382) Income tax effect 523 502 Benefit obligation included in accumulated other comprehensive income$(1,966) (1,880) Funded StatusBenefit obligation(8,598) (9,184) Fair value of assets 7,303 8,388 Unrecognized net actuarial loss 2,489 2,382 Prepaid benefit cost included in the balance sheet$ 1,194 1,586 20182017Discount rate4.25%3.50%Expected long-term return on plan assets7.25%7.25%Rate of compensation increase3.00%3.00%Weighted Average Assumptions as of December 31, 2018 and 2017 :Pension Benefits
The components of net pension benefit cost under the plan for the years ended December 31, 2018 and 2017
is summarized as follows:
Projected Benefit Payments
The projected benefit payments under the plan are summarized as follows for the years ending December 31:
2019
2020
2021
2022
2023
2024-2028
$ 44
346
1,515
247
921
2,621
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 42% fixed income and 58% 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, 2018 and 2017.
36
20182017Service cost$ 586 486 Interest cost 313 328 Expected return on plan assets(591) (582) Net loss due to settlement - 388 Recognized net actuarial loss 85 98 Net pension benefit cost$ 393 718 Gross (gain) loss recognized in other comprehensive income 107 (108) Total Recognized in Net Pension Benefit Cost and Other Comprehensive Income$ 500 610 Pension Benefits
The following table presents the fair value of the assets, by asset category, as of December 31, 2018 and 2017.
Mutual funds-fixed income $
Mutual funds-equity
Total assets at fair value
$
3,067
4,236
7,303
3,271
5,117
8,388
2018
2017
The following table sets forth by level, within the fair value hierarchy, the assets carried at fair value as of
December 31, 2018 and 2017.
Contributions
The Company expects to contribute $0 to its pension plan in 2019.
The Company also has a 401(k) plan under which the Company matches employee contributions to the plan.
In 2018 and 2017, the Company matched 100% of the first 1% of salary deferral and 50% of the next 5% of
salary deferral to the 401(k) plan. The amount expensed for the 401(k) plan was $166 during the year ended
December 31, 2018 and $156 during the year ended December 31, 2017.
(8)
Income Taxes
Income tax expense attributable to income before income tax expense for the years ended December 31, 2018
and 2017 is summarized as follows:
Reported income tax expense for the years ended December 31, 2018 and 2017 differed from the amounts
computed by applying the U.S. Federal income tax rate of 21% for 2018 and 34% for 2017 to income before
income tax expense as a result of the following:
37
Level 1Level 2Level 3TotalMutual funds-fixed income$3,067--3,067Mutual funds-equity4,236--4,236Total assets at fair value$7,303--7,303Assets at Fair Value as of December 31, 2018Level 1Level 2Level 3TotalMutual funds-fixed income$3,271--3,271Mutual funds-equity5,117--5,117Total assets at fair value$8,388--8,388Assets at Fair Value as of December 31, 201720182017Current$ 1,098 1,901 Deferred(209) (332) Total income tax expense$ 889 1,569 20182017Computed at statutory Federal tax rate$ 1,060 1,468 Increase (reduction) in income tax expenseresulting from:Tax-exempt interest(78) (108) Disallowance of interest expense 3 4 Change in tax law- 279 Other, net(96) (74) Reported income tax expense$ 889 1,569
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, 2018 and 2017 are as follows:
The Bank has determined that a valuation allowance for the gross deferred tax assets is not necessary as of
December 31, 2018 and 2017, 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, 2018 and 2017. 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 2015 and thereafter are subject to future
examination by tax authorities.
(9) Financial Instruments with Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business
to meet the financing needs of its customers. These financial instruments include mortgage sale lock
commitments, commitments to extend credit and standby letters of credit. These instruments may involve, to
varying degrees, credit risk in excess of the amount recognized in the balance sheets. The contract amounts of
these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
Credit risk is defined as the possibility of sustaining a loss because the other parties to a financial instrument
fail to perform in accordance with the terms of the contract. The Company’s maximum exposure to credit loss
under commitments to extend credit and standby letters of credit is represented by the contractual amount of
these instruments. The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
The Company requires collateral to support financial instruments when it is deemed necessary. The Bank
evaluates such customers’ creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management’s credit evaluation of the counterparty. Collateral may include
deposits held in financial institutions, U.S. Treasury securities, other marketable securities, real estate,
accounts receivable, inventory, and property, plant and equipment.
Financial instruments whose contract amounts represent credit risk:
38
20182017Deferred tax assets:Loans, principally due to allowance for loan losses$ 647 506 Defined benefit plan valuation adjustments 523 502 Net unrealized losses on available-for-sale securities 174 108 Other 135 160 Total gross deferred tax assets 1,479 1,276 Deferred tax liabilities:Bank premises and equipment, due to differencesin depreciation(368) (380) Accrued pension, due to actual pension contributions in excess of accrual for financial reporting purposes(251) (333) Other(113) (113) Total gross deferred tax liabilities(732) (826) Net deferred tax asset (liability), included in other assets$ 747 450 20182017Commitments to extend credit$ 72,899 74,320 Standby letters of credit$ 4,373 4,804 Contract amounts atDecember 31,
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, 2018 the Company had $2,592 in outstanding
mortgage rate lock commitments and $1,252 in outstanding mortgage rate lock commitments as of December
31, 2017.
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, 2018 will expire within one year.
Management does not anticipate any material losses as a result of these transactions. The credit risk involved
in issuing letters of credit is essentially the same as that involved in extending loans to customers.
(10) Leases
The Company leases premises and equipment under various operating lease agreements. Generally, operating
leases provide for one or more renewal options on the same basis as current rental terms. Certain leases require
increased rentals under cost-of-living escalation clauses. The following are future minimum lease payments
as required under the agreements:
Year
2019
2020
2021
2022
2023
Thereafter
Total
Payments
$168
172
164
164
164
796
$1,628
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.
39
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, 2018 and 2017, dividends from the subsidiary Bank totaled $1,461 and
$1,111, 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, 2018, retained net profits of the Bank that were
free of such restriction approximated $8,034.
Bankshares and the Bank are subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on
Bankshares’ consolidated financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Bankshares and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Bankshares and the Bank’s capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and other factors.
Beginning January 1, 2015, banks became subject to new Basel III Capital Rules. As a result, certain items in
the risk-based capital calculation have changed. In addition, a new ratio, Common Equity Tier 1or “CET 1”
Risk-Based Capital Ratio, is now measured and monitored. For Bankshares and the Bank and given its capital
structure, the Common Equity Tier 1 Risk-Based Capital Ratio and the Tier 1 Risk-Based Capital Ratio are
identical. Bankshares and the Bank's actual regulatory capital amounts and ratios as of December 31, 2018 and
December 31, 2017 are listed on the following page:
Regulatory Capital Ratios as of December 31, 2018
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)
Regulatory Capital Ratios as of December 31, 2017
Total Risk-Based Capital Ratio (to Risk Weighted Assets)
CET 1 Risk Based Capital Ratio (to Risk Weighted Assets)
Tier 1 Risk-Based Capital Ratio (to Risk Weighted Assets)
Tier 1 Leverage Capital Ratio (to Average Assets)
Bankshares
Consolidated
Ratio
12.29%
11.40%
11.40%
9.36%
Amount
$47,651
$44,192
$44,192
$44,192
Bank
Amount
$46,551
$43,092
$43,092
$43,092
Ratio
12.04%
11.14%
11.14%
9.15%
Bankshares
Consolidated
Bank
Amount
$43,582
$40,540
$40,540
$40,540
Ratio
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%
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. Basel III was fully phased in on
January 1, 2019 and now requires (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
40
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, 2018, 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.
(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, 2018 and 2017, 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
41
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. As of
December 31, 2018, 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 was classified as Level 2 securities at December 31, 2018. As of December 31, 2018,
the Company carried no Level 3 securities for which fair value would be determined using unobservable
inputs.
Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a
loan is considered impaired and a specific allowance for loan losses is established for that loan. Loans
for which it is probable that payment of interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with ASC Topic 360,
“Impairment of a Loan.” The fair value of impaired loans is estimated using one of several methods,
including collateral value, market value of a similar debt, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans at which fair value of the expected
repayments or collateral exceed the recorded investments in such loans. As of December 31, 2018,
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, 2018 and December
31, 2017, 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, 2018
42
and December 31, 2017, 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, 2018
Assets/Liabilities
Measured at Fair
Value
Total
Carrying
Amount in
The
Consolidated
Balance
Sheet
$48,049
$48,049
$1,186
$1,186
$627
$627
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
$-
$-
$-
Description
Available-for-
sale securities
Impaired loans
(nonrecurring)
Other Real
Estate Owned
(nonrecurring)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$48,049
$-
$-
$-
$1,186
$627
Fair Value Measurements on December 31, 2017
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)
$41,856
$41,856
$1,264
$1,264
$224
$224
$-
$-
$-
$41,856
$-
$-
$-
$1,264
$224
Description
Available-for-
sale securities
Impaired loans
(nonrecurring)
Other Real
Estate Owned
(nonrecurring)
43
The following table sets forth a summary of changes in the fair value of the Company’s nonrecurring
Level 3 assets for the year ended December 31, 2018:
There were no transfers between Level 1, Level 2 and Level 3 investments during the year ended
December 31, 2018.
The following table sets forth a summary of changes in the fair value of the Company’s nonrecurring
Level 3 assets for the year ended December 31, 2017:
There were no transfers between Level 1, Level 2 and Level 3 investments during the year ended
December 31, 2017.
44
ImpairedOther RealLoansEstate OwnedBalance, beginning of the year1,264$ 224Purchases, sales, issuances,and settlements (net)(78) 403Balance, end of year1,186$ 627Level 3 AssetsYear Ended December 31, 2018 ImpairedOther RealLoansEstate OwnedBalance, beginning of the year1,116$ 642Purchases, sales, issuances,and settlements (net)148 (418) Balance, end of year1,264$ 224Level 3 AssetsYear Ended December 31, 2017
(14) Parent Company Financial Information
Condensed financial information of Bankshares (“Parent”) is presented below:
45
20182017Cash due from subsidiary$304Investment in subsidiary, at equity41,00938,283Other assets1,1131,062Total assets$42,15239,349Notes payable$-513Other liabilities4141Total liabilities$41554Stockholders' equity Common stock of $3 par value, authorized 3,000,000shares; issued and outstanding 1,540,054 sharesin 2018 and 1,529,033 in 2017$4,5474,526Capital surplus1,3331,176Retained earnings38,85335,377Accumulated other comprehensive loss, net(2,622)(2,284)Total stockholders' equity$42,11138,795Total liabilities and stockholders' equity$42,15239,349Liabilities and stockholders' equityAssetsDecember 31,Condensed Balance Sheets20182017Income:Dividends from subsidiary$1,4611,111Equity in undistributed net income of subsidiary2,8861,787Total Income4,3472,898Expenses:Other expenses237227Income before income tax benefit4,1102,671Applicable income tax benefit5077Net income$4,1602,748Condensed Statements of IncomeYears ended December 31,
(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, 2018, options for 12,250 shares were exercisable at an exercise price of $9.00 per share and
options for 11,875 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, 2018, there were 102,768 shares available for grant under
the 2014 Plan.
On May 1, 2018, 5,675 shares of restricted stock were granted to employees pursuant to 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, 2019, 3,297 shares of restricted stock were granted to the Company’s Directors in lieu of cash
for 2018 director fees. 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.
46
20182017Cash flows from operating activities:Net income$4,1602,748Adjustments to reconcile net income to net cash provided byoperating activities:Equity in undistributed net income of subsidiary(2,886)(1,787)Increase in other assets(51)(75)Net cash provided by operating activities1,223886Cash flows from financing activitiesCash dividends paid(684)(612)Repayment of line of credit(513)(288)Net cash used in financing activities(1,197)(900)Net increase (decrease) in cash from subsidiary26(14)Cash due from subsidiary, beginning of year418Cash due from subsidiary, end of year$304Years ended December 31, Condensed Statements of Cash Flows
At December 31, 2018, no options for shares were exercisable under the 2014 Plan.
The Company expensed $0 in 2018 and 2017 in compensation expense as a direct result of the issuance of the
24,125 incentive stock options with tandem stock appreciation rights in previous years and recognized $1 in
compensation expense related to 4,375 unvested stock options in 2018 and $9 in 2017. 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 $149 in 2018 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, 4,700 shares of restricted stock to employees in 2017 and
5,675 shares of restricted stock to employees in 2018 and will expense $119 in 2019, $72 in 2020 and $19 in
2021 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, 2016
Forfeited
Exercised
Granted
Balance as of December 31, 2017
Forfeited
Exercised
Granted
Balance as of December 31, 2018
37,000
0
4,500
0
32,500
0
8,375
0
24,125
$12.71
-
13.77
-
12.61
-
13.50
-
$12.30
The following table summarizes information about stock options outstanding as of December 31, 2018:
47
Weighted-AverageRemainingWeighted-Weighted-NumberContractualAverageNumberAverageExerciseOutstandingLifeExerciseExercisable atExercisePriceat 12/31/18(in years)Price12/31/2018Price9.00$ 12,250 2.49.00$ 12,250 9.00$ 15.7011,875 5.115.70 11,875 15.70 Options OutstandingOptions Exercisable
The following table summarizes information about stock options outstanding at December 31, 2017:
The aggregate intrinsic value of options outstanding was $366, of options exercisable was $366, and of options
unvested and expected to vest was $0 as of December 31, 2018. 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 total intrinsic value (market value on date of exercise less exercise price) of
options exercised was $136 for the year ended December 31, 2018 and $61 for the year ended December 31,
2017.
(16) Subsequent Events
The Company has evaluated subsequent events for potential recognition and/or disclosure in the December 31,
2018 consolidated financial statements through March 1, 2019, the date the consolidated financial statements
were available to be issued.
48
Weighted-AverageRemainingWeighted-Weighted-NumberContractualAverageNumberAverageExerciseOutstandingLifeExerciseExercisable atExercisePriceat 12/31/17(in years)Price12/31/2017Price9.00$ 15,000 3.49.00$ 15,000 9.00$ 15.7017,500 6.115.70 13,125 15.70 Options OutstandingOptions Exercisable
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, 2018. 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, 2018, the Company’s internal control over financial
reporting was effective based on those criteria.
This annual report does not include an attestation report of the Company's independent auditor regarding internal
control over financial reporting.
49
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, 2018 and 2017,
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, 2018 and 2017, 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
February 26, 2019
50
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 December 31, 2013 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
250
200
150
100
l
e
u
a
V
x
e
d
n
I
50
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Index
Pinnacle Bankshares Corporation
NASDAQ Market Index
S&P 500
SNL U.S. Bank Index
12/31/13
100.00
100.00
100.00
100.00
12/31/14
120.04
114.75
113.69
111.79
12/31/15
135.41
122.74
115.26
113.69
12/31/16
202.28
133.62
129.05
143.65
12/31/17
209.52
173.22
157.22
169.64
12/31/18
197.90
168.30
150.33
140.98
51
Annual Meeting
Shareholder Information
The 2019 Annual Meeting of Shareholders will be held on April 9, 2019, 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
2018
Low
Dividends
High
2017
Low
Dividends
First Quarter
$34.50
$28.35
$0.11
$29.66
$28.00
$0.10
Second Quarter
$30.55
$27.50
$0.11
$28.99
$27.95
$0.10
Third Quarter
$33.00
$29.59
$0.11
$28.65
$27.12
$0.10
Fourth Quarter
$31.20
$26.60
$0.125
$30.80
$27.10
$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 2018 and 2017 and is not expected to have a material impact during 2019.
As of February 26, 2019, there were approximately 268 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
52
B R A n c h l O c A t i O n s
Main Branch
622 Broad Street
Altavista, VA 24517
Odd Fellows Road Branch
3401 Odd Fellows Road
Lynchburg, VA 24501
Airport Branch
14580 Wards Road
Lynchburg, VA 24502
Amherst Branch
130 S. Main Street
Amherst, VA 24521
Forest Branch
14417 Forest Road
Forest, VA 24551
Old Forest Road Branch
3321 Old Forest Road
Lynchburg, VA 24501
Rustburg Branch
1033 Village Highway
Rustburg, VA 24588
Timberlake Branch
20865 Timberlake Road
Lynchburg, VA 24502
Vista Branch
1303 N. Main Street
Altavista, VA 24517
622 Broad Street
Post Office Box 29
Altavista, Virginia 24517
(434) 369-3000