Attached files

file filename
EX-3.3 - EXHIBIT 3.3 - Community Bankers Trust Corpdex33.htm
EX-31.1 - EXHIBIT 31.1 - Community Bankers Trust Corpdex311.htm
EX-31.2 - EXHIBIT 31.2 - Community Bankers Trust Corpdex312.htm
EX-21.1 - EXHIBIT 21.1 - Community Bankers Trust Corpdex211.htm
EX-23.1 - EXHBIIT 23.1 - Community Bankers Trust Corpdex231.htm
EX-32.1 - EXHIBIT 32.1 - Community Bankers Trust Corpdex321.htm
EX-23.2 - EXHIBIT 23.2 - Community Bankers Trust Corpdex232.htm
EX-99.1 - EXHIBIT 99.1 - Community Bankers Trust Corpdex991.htm
EX-99.2 - EXHIBIT 99.2 - Community Bankers Trust Corpdex992.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

Commission file number 001-32590

 

 

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   20-2652949

(State or other jurisdiction of

incorporation of organization)

 

(I.R.S. Employer

Identification No.)

4235 Innslake Drive, Suite 200

Glen Allen, Virginia

  23060
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (804) 934-9999

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Units, each consisting of one share of Common
Stock and one Warrant

  NYSE Amex

Common Stock, $0.01 par value

Warrants to Purchase Common Stock

 

NYSE Amex

NYSE Amex

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer  ¨   Accelerated filer  x  
  Non-accelerated filer  ¨   Smaller reporting company  ¨  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.    $73,765,568

On March 1, 2010, there were 21,468,455 shares of the registrant’s common stock, par value $0.01, outstanding, which is the only class of the registrant’s common stock.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be used in conjunction with the registrant’s

2010 Annual Meeting of Stockholders are incorporated into Part III of this Form 10-K.


Table of Contents

TABLE OF CONTENTS

 

         Page
PART I
Item 1.  

Business

   3
Item 1A.  

Risk Factors

   12
Item 1B.  

Unresolved Staff Comments

   20
Item 2.  

Properties

   21
Item 3.  

Legal Proceedings

   22
Item 4.  

(Removed and Reserved)

   22
PART II
Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   23
Item 6.  

Selected Financial Data

   26
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   27
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

   56
Item 8.  

Financial Statements and Supplementary Data

   57
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   175
Item 9A.  

Controls and Procedures

   175
Item 9B.  

Other Information

   177
PART III
Item 10.  

Directors, Executive Officers and Corporate Governance

   178
Item 11.  

Executive Compensation

   178
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   178
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

   178
Item 14.  

Principal Accounting Fees and Services

   178
PART IV
Item 15.  

Exhibits, Financial Statement Schedules

   179

NOTE

In October 2007, Community Bankers Trust Corporation, formerly known as Community Bankers Acquisition Corp., changed its fiscal year end from March 31 to December 31. In accordance with the rules and regulations of the Securities and Exchange Commission, the financial statements included in this Annual Report on Form 10-K reflect our results of operations for the 12 months ended each of December 31, 2009 and December 31, 2008 and the nine months ended December 31, 2007. When used in this report, “fiscal 2007” means the nine month period, or transition period, from April 1, 2007 to December 31, 2007.

Unless otherwise provided in this Annual Report on Form 10-K, references to the “Company,” “CBTC,” “we,” “us” and “our” refer to Community Bankers Trust Corporation.


Table of Contents

PART I

 

ITEM 1. BUSINESS

General

Community Bankers Trust Corporation (the “Company”) is a bank holding company that was incorporated under Delaware law on April 6, 2005. The Company is headquartered in Glen Allen, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 25 full-service offices in Virginia, Maryland and Georgia. The Bank changed its name from Bank of Essex to Essex Bank on April 20, 2009.

The Bank was established in 1926 and is headquartered in Tappahannock, Virginia. The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals and small businesses, including individual and commercial demand and time deposit accounts, commercial and consumer loans, travelers checks, safe deposit box facilities, investment services and fixed rate residential mortgages. Fourteen offices are located in Virginia, primarily from the Chesapeake Bay to just west of Richmond, seven are located in Maryland along the Baltimore-Washington corridor and four are located in the Atlanta, Georgia metropolitan market.

The Company was initially formed as a special purpose acquisition company under the name “Community Bankers Acquisition Corp.” As a “Targeted Acquisition Corporation”SM or “TAC,”SM the Company was formed to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the banking industry. Prior to its acquisition of two bank holding companies in 2008, the Company’s activities were limited to organizational matters, completing its initial public offering and seeking and evaluating possible business combination opportunities. On May 31, 2008, the Company acquired each of TransCommunity Financial Corporation, a Virginia corporation (“TFC”), and BOE Financial Services of Virginia, Inc., a Virginia corporation (“BOE”). The Company changed its corporate name in connection with the acquisitions.

Essex Services, Inc. is a wholly-owned subsidiary of the Bank and was formed to sell title insurance to the Bank’s mortgage loan customers. Essex Services, Inc. also offers insurance products through an ownership interest in Bankers Insurance, LLC and investment products through an affiliation with VBA Investments, LLC.

The Company’s corporate headquarters are located at 4235 Innslake Drive, Suite 200, Glen Allen, Virginia 23060. The telephone number of the corporate headquarters is (804) 934-9999.

Company History

Initial Capitalization

On June 8, 2006, the Company consummated its initial public offering of 7,500,000 units, which commenced trading on NYSE Amex (formerly NYSE Alternext US and the American Stock Exchange) under the symbol “BTC.U”. Each unit consists of one share of common stock and one redeemable common stock purchase warrant. Each warrant entitles the holder to purchase from the Company one share of our common stock at an exercise price of $5.00 per share. The Company’s common stock and warrants started trading separately on NYSE Amex as of September 5, 2006, under the symbols “BTC” and “BTC.WS,” respectively.

Acquisitions of TFC and BOE

On May 31, 2008, the Company acquired TFC in a merger transaction. In connection with this merger, TransCommunity Bank, N.A., a wholly-owned subsidiary of TFC, became a wholly-owned subsidiary of the Company. Under the terms of the merger agreement, each share of TFC’s issued and outstanding common stock was converted into 1.4200 shares of the Company’s common stock.

 

3


Table of Contents

The transaction with TFC was valued at $51.8 million. Total consideration paid to TFC shareholders consisted of 6,544,840 shares of the Company’s common stock issued. The transaction resulted in total assets acquired as of May 31, 2008 of $267.6 million, including $243.3 million of loans, and liabilities assumed were $240.2 million, including $234.1 million of deposits. As a result of the merger, the Company recorded $20 million of goodwill and $5.3 million of core deposit intangibles.

TFC was a financial holding company and the parent company of TransCommunity Bank, N.A. TFC had been formed in March 2001, principally in response to perceived opportunities resulting from the takeover in recent years of a number of Virginia-based banks by national and regional banking institutions. Until June 29, 2007, TFC was the holding company for four separately-chartered banking subsidiaries — Bank of Powhatan, Bank of Goochland, Bank of Louisa and Bank of Rockbridge. On June 29, 2007, these four subsidiaries were consolidated into a new TransCommunity Bank. Each former subsidiary then operated as a division of TransCommunity Bank, but retained its name and local identity in the community that it served. Following the Company’s acquisition of TFC until 2010, the former branches offices of TFC operated as separate divisions under the Bank’s charter, using the names of TFC’s former banking subsidiaries.

In addition, on May 31, 2008, the Company acquired BOE in a merger transaction, in connection with this merger, the Bank, then a wholly-owned subsidiary of BOE, became a wholly-owned subsidiary of the Company. Under the terms of the merger agreement, each share of BOE’s issued and outstanding common stock was converted into 5.7278 shares of the Company’s common stock.

The transaction with BOE was valued at $54.6 million. Total consideration paid to BOE shareholders consisted of 6,957,405 shares of the Company’s common stock issued. This transaction resulted in total assets acquired as of May 31, 2008 of $317.0 million, including $234.7 million of loans, and liabilities assumed were $288.6 million, including $257.4 million of deposits. As a result of the merger, the Company recorded $17.2 million of goodwill and $9.7 million of core deposit intangibles.

BOE was incorporated under Virginia law in 2000 to become the holding company for the Bank.

Both transactions were valued at a combined $106.4 million. The transactions resulted in total assets acquired as of May 31, 2008 of $584.5 million, including $478.0 million of loans, and liabilities assumed were $528.9 million, including $491.5 million of deposits. As a result of the mergers, the Company recorded a total of $37.2 million of goodwill and $15.0 million of core deposit intangibles.

Consolidation of Banking Operations

Immediately following the mergers with TFC and BOE, the Company operated TransCommunity Bank and the Bank as separate banking subsidiaries. Until 2010, TransCommunity Bank’s offices operated under the Bank of Goochland, Bank of Powhatan, Bank of Louisa and Bank of Rockbridge division names.

Effective July 31, 2008, TransCommunity Bank was consolidated into the Bank under the Bank’s state charter. As a result, the Company was a one-bank holding company as of the September 30, 2008 reporting date.

Acquisition of Georgia Operations

On November 21, 2008, the Bank acquired limited assets and assumed all deposit liabilities relating to four former branch offices of The Community Bank (“TCB”), a Georgia state-chartered bank. The transaction was consummated pursuant to a Purchase and Assumption Agreement, dated November 21, 2008, by and among the Federal Deposit Insurance Corporation (“FDIC”), as Receiver for The Community Bank and the Bank.

Pursuant to the terms of the Purchase and Assumption Agreement, the Bank assumed approximately $619 million in deposits, approximately $233.9 million of which were deemed to be core deposits, and paid the FDIC a premium of 1.36% on all deposits, amounting to approximately $3.2 million. All deposits have been fully assumed, and all deposits insured prior to the closing of the transaction maintain their current insurance coverage. Other than loans fully secured by deposit accounts, the Bank did not purchase any loans.

 

4


Table of Contents

Pursuant to the terms of the Purchase and Assumption Agreement, the Bank had 60 days to evaluate and, at its sole option, purchase any of the remaining TCB loans. The Bank purchased 175 loans totaling $21 million on January 9, 2009. In addition, the Bank purchased the former banking premises of TCB. The transaction was accounted for as an asset purchase.

Issuance of Preferred Stock

On December 19, 2008, the Company issued 17,680 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and a related common stock warrant to the United States Department of the Treasury for a total price of $17,680,000. The issuance and receipt of proceeds from the Department of the Treasury were made under its voluntary Capital Purchase Program. The Series A Preferred Stock qualifies as Tier 1 capital.

The Series A Preferred Stock has a liquidation amount per share equal to $1,000. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The common stock warrant permits the Department of the Treasury to purchase 780,000 shares of common stock at an exercise price of $3.40 per share.

Acquisition of Maryland Operations

On January 30, 2009, the Bank acquired substantially all assets and assumed all deposit and certain other liabilities relating to seven former branch offices of Suburban Federal Savings Bank, Crofton, Maryland (“SFSB”). The transaction was consummated pursuant to a Purchase and Assumption Agreement, dated January 30, 2009, by and among the FDIC, as Receiver for SFSB and the Bank.

Pursuant to the terms of the Purchase and Assumption Agreement, the Bank assumed approximately $303 million in deposits, all of which were deemed to be core deposits. The Bank purchased approximately $362 million in loans (based on contract value) and other assets and is providing loan servicing to SFSB’s existing loan customers. The Bank has entered into a shared-loss arrangement with the FDIC with respect to loans and real estate assets acquired. These are referred to as covered assets. All deposits have been fully assumed, and all deposits maintain their current insurance coverage. The Bank bid a negative $45 million for the net assets acquired.

Strategy

As described above, the Company has grown substantially over the past two years through the mergers with TFC and BOE and the Bank’s acquisitions of the operations of TCB and SFSB. The Company acknowledges that the integration of these mergers and acquisitions and centralization of key internal operations has taken longer than it expected. Its significant growth over the past two years has strained the Company’s organizational structure and the effectiveness of risk management programs that are appropriate for the various functions of an organization of its size and complexity. In addition, the Company is concerned about loan portfolio quality, including the current uncertain prospects for the real estate markets and the general economy in its markets.

At this time, the Company’s strategy is to be recognized as the premier provider of financial services, meeting the needs of its markets, building trust and confidence in the relationships with its customers through superior service, competence, accuracy, courtesy and safety and soundness at all times. To that end, the Company has determined to put a renewed focus on its internal growth and efficiencies. For example, the Company is reviewing the ways in which it can ensure profitability, primarily by looking at the manners in which it can control its expenses and grow revenue. In light of current economic conditions, the Company is placing its operational emphasis on efficiency and effectiveness.

The Company is also placing a strong emphasis on the quality, management and diversity of its loan portfolio and on having the oversight and operating systems in place to effectively run an institution of this size and larger. The Company is implementing the appropriate level of risk controls, to be internally consistent in policies and procedures across its franchise, all with a view to be mutually supportive of sales goals, operating efficiencies, reliability and customer service and retention. The Company is committed to creating a consistent culture of risk management by filling key management jobs for an institution of its size and structure and by instituting enterprise wide management of risks by functional area.

From an operational standpoint, the Company also has put in place numerous internal remediation plans that address concerns that have arisen in maintaining the effectiveness of the Company’s risk management programs. Throughout 2009, the Company hired additional key members of management, including a chief administrative officer, a chief credit officer and a general counsel and, in 2010, the Company segregated asset quality responsibilities among a chief lending officer and the chief credit officer. These individuals are actively assisting the Company in reviewing, assessing and implementing, as appropriate, numerous policies and procedures applicable to the Company and its operations.

 

5


Table of Contents

As a result of the importance of its present strategic objective, the Company has currently deferred its long-term strategy to acquire or merge with commercial banks. While management continues to believe that the Company’s balance sheet and, in particular, its capital structure can be utilized to further grow the existing banking institution, management acknowledges that it is not currently equipped, from an operational or management capacity standpoint, to pursue an acquisition strategy at this point. Management acknowledges further that it will continue to evaluate this long-term strategy as it makes significant progress with respect to its immediate needs.

Competition

Within its market areas in Virginia, Georgia and Maryland, the Bank operates in a highly competitive environment, competing for deposits and loans with commercial corporations, savings and loans and other financial institutions, including non-bank competitors, many of which possess substantially greater financial resources than those available to the Bank. Many of these institutions have significantly higher lending limits than the Bank. In addition, there can be no assurance that other financial institutions, with substantially greater resources than the Bank, will not establish operations in its service area. The financial services industry remains highly competitive and is constantly evolving.

The activities in which we engage are highly competitive. Financial institutions such as savings and loan associations, credit unions, consumer finance companies, insurance companies, brokerage companies and other financial institutions with varying degrees of regulatory restrictions compete vigorously for a share of the financial services market. Brokerage and insurance companies continue to become more competitive in the financial services arena and pose an ever increasing challenge to banks. Legislative changes also greatly affect the level of competition that we face. Federal legislation allows credit unions to use their expanded membership capabilities, combined with tax-free status, to compete more fiercely for traditional bank business. The tax-free status granted to credit unions provides them a significant competitive advantage. Many of the largest banks operating in Virginia, Maryland and Georgia, including some of the largest banks in the country, have offices in our market areas. Many of these institutions have capital resources, broader geographic markets, and legal lending limits substantially in excess of those available to us. We face competition from institutions that offer products and services that we do not or cannot currently offer. Some institutions with which we compete offer interest rate levels on loan and deposit products that we are unwilling to offer due to interest rate risk and overall profitability concerns. We expect the level of competition to increase.

Factors such as rates offered on loan and deposit products, types of products offered, and the number and location of branch offices, as well as the reputation of institutions in the market, affect competition for loans and deposits. The Bank emphasizes customer service, establishing long-term relationships with its customers, thereby creating customer loyalty, and providing adequate product lines for individuals and small to medium-sized business customers.

The Company would not be materially or adversely impacted by the loss of a single customer. The Company is not dependent upon a single or a few customers.

Employees

As of December 31, 2009, the Company had approximately 290 full-time employees, including executive officers, loan and other banking officers, branch personnel, operations personnel and other support personnel. None of the Company’s employees is represented by a union or covered under a collective bargaining agreement. Management of the Company considers its employee relations to be excellent.

 

6


Table of Contents

Available Information

The Company files with or furnishes to the Securities and Exchange Commission annual, quarterly and current reports, proxy statements, and various other documents under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may read and copy any materials that the Company files with or furnishes to the SEC at the SEC’s Public Reference Room, which is located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. Also, the SEC maintains an internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file or furnish documents electronically with the SEC.

The Company also makes available free of charge on or through our internet website (www.cbtrustcorp.com) its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports as filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after the Company electronically files such materials with, or furnishes them to, the SEC.

Supervision and Regulation

General

As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Other federal and state laws govern the activities of our bank subsidiary, including the activities in which it may engage, the investments that it makes, the aggregate amount of loans that it may grant to one borrower, and the dividends it may declare and pay to us. Our bank subsidiary is also subject to various consumer and compliance laws. As a state-chartered bank, the Bank is primarily subject to regulation, supervision and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the “SCC”). Our bank subsidiary also is subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation.

The following description briefly discusses certain provisions of federal and state laws and certain regulations and the potential impact of such provisions on the Company and the Bank. These federal and state laws and regulations have been enacted generally for the protection of depositors in national and state banks and not for the protection of stockholders of bank holding companies or banks.

Bank Holding Companies

The Company is registered as a bank holding company under the BHCA and, as a result, is subject to regulation by the Federal Reserve. The Federal Reserve has jurisdiction under the BHCA to approve any bank or nonbank acquisition, merger or consolidation proposed by a bank holding company. The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely related to banking or to managing or controlling banks as to be a proper incident to it. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports regarding its operations and any additional information that the Federal Reserve may require.

Federal law permits bank holding companies from any state to acquire banks and bank holding companies located in any other state. The law allows interstate bank mergers, subject to “opt-in or opt-out” action by individual states. Virginia adopted early “opt-in” legislation that allows interstate bank mergers. These laws also permit interstate branch acquisitions and de novo branching in Virginia by out-of-state banks if reciprocal treatment is accorded Virginia banks in the state of the acquirer.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositor of such depository institutions and to the FDIC insurance fund in the event the depository institution becomes in danger of default or in default. For example, under a policy of the Federal Reserve with respect to bank

 

7


Table of Contents

holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise.

The Federal Deposit Insurance Act (“FDIA”) also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or stockholders in the event that a receiver is appointed to distribute the assets of the the Bank.

The Company was required to register in Virginia with the State Corporation Commission under the financial institution holding company laws of Virginia. Accordingly, the Company is subject to regulation and supervision by the SCC.

Capital Requirements

The Federal Reserve has issued risk-based and leverage capital guidelines applicable to banking organizations that it supervises. Under the risk-based capital requirements, the Company and the Bank are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of “Tier 1 Capital,” which is defined as common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles. The remainder may consist of “Tier 2 Capital,” which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance. In addition, each of the federal banking regulatory agencies has established minimum leverage capital requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5%, subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. In summary, the capital measures used by the federal banking regulators are:

 

   

Total Capital ratio, which is the total of Tier 1 Capital and Tier 2 Capital as a percentage of total risk-weighted assets;

 

   

Tier 1 Capital ratio, which is Tier 1 Capital as a percentage of total risk-weighted assets; and

 

   

Leverage ratio, which is Tier 1 Capital as a percentage of adjusted average total assets.

Under these regulations, a bank will be:

 

   

“Well Capitalized” if it has a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure;

 

   

“Adequately Capitalized” if it has a Total Capital ratio of 8% or greater, a Tier 1 Capital ratio of 4% or greater, and a leverage ratio of 4% or greater — or 3% in certain circumstances — and is not well capitalized;

 

   

“Undercapitalized” if it has a Total Capital ratio of less than 8% or greater, a Tier 1 Capital ratio of less than 4% — or 3% in certain circumstances;

 

   

“Significantly Undercapitalized” if it has a Total Capital ratio of less than 6%, a Tier 1 Capital ratio of less than 3%, or a leverage ratio of less than 3%; or

 

   

“Critically Undercapitalized” if its tangible equity is equal to or less than 2% of average quarterly tangible assets.

The risk-based capital standards of the Federal Reserve explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy.

The FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the FDIC. These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. The Bank presently maintains sufficient capital to remain in compliance with these capital requirements.

 

8


Table of Contents

The Company is a legal entity separate and distinct from the Bank. The majority of the Company’s revenues are from dividends paid to the Company by the Bank. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. In addition, both the Company and the Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. During the year ended December 31, 2009, the Bank paid $859,000 in dividends to the Company. The Company paid $4.235 million in dividends to its preferred and common shareholders in 2009.

The FDIC has the general authority to limit the dividends paid by insured banks if the payment is deemed an unsafe and unsound practice. The FDIC has indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice.

Deposit Insurance Coverage Limits

Prior to the enactment of EESA, the FDIC standard maximum depositor insurance coverage limit was $100,000, excluding certain retirement accounts qualifying for a maximum coverage limit of $250,000. Pursuant to EESA, the FDIC standard maximum coverage limit had been temporarily increased to $250,000 through December 31, 2009. This temporary increase has been further extended to December 31, 2013, by the Helping Families Save Their Homes Act of 2009.

Deposit Insurance Assessments

The Bank’s deposits are insured up to applicable limits by the FDIC. Accordingly, the Bank is subject to deposit insurance premium assessments by the FDIC. Under current law, the FDIC is required to maintain the Deposit Insurance Fund (“DIF”) reserve ratio within the range of 1.15% to 1.50% of estimated insured deposits. Because the DIF reserve ratio fell and was expected to remain below 1.15%, the FDIA required the FDIC to establish and implement a restoration plan to restore the DIF reserve ratio to at least 1.15% within eight years, absent extraordinary circumstances. Consequently, and depending upon an institution’s risk category, for the first quarter of 2009 annualized deposit insurance assessments ranged from $.12 to $.50 for each $100 of assessable deposits, as compared with $.05 to $.43 throughout 2008. Moreover, under a new risk-based assessment system implemented in the second quarter of 2009, annualized deposit insurance assessments range from $.07 to $.775 for each $100 of assessable deposits based on the institution’s risk category. On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, not to exceed 10 basis points times the institution’s assessment base as of June 30, 2009. This special assessment was collected on September 30, 2009. On November 12, 2009, the FDIC amended its assessment regulations to require insured depository institutions to prepay, on December 30, 2009, their estimated quarterly assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. The amount of the Bank’s FDIC assessment prepayment was $8.7 million, which we paid on December 30, 2009.

Temporary Liquidity Guarantee Program

On October 14, 2008, the FDIC enacted the Temporary Liquidity Guarantee Program (“TLGP”) to strengthen confidence and encourage liquidity in the banking system. Pursuant to the TLGP, the FDIC guaranteed certain senior unsecured debt issued by participating financial institutions issued on or after October 14, 2008 and before June 30, 2009, and provided full FDIC deposit insurance coverage for non-interest bearing transaction accounts at participating FDIC-insured institutions through December 31, 2009 (“Transaction Account Guarantee Program”). All FDIC-insured institutions were covered under the program until December 5, 2008 at no cost. After December 5, 2008, the cost for institutions electing to participate was a 10-basis-point surcharge applied to balances covered by the noninterest-bearing deposit transaction account guarantee and 75 basis points of the eligible senior unsecured debt guaranteed under the program. The Bank elected to participate in both the unlimited coverage for noninterest-bearing transaction accounts and the debt guarantee program.

On June 3, 2009, the FDIC amended the TLGP to provide a limited extension of the debt guarantee program. Effective October 1, 2009, the FDIC also extended the full FDIC deposit insurance coverage for noninterest-bearing transaction accounts at participating FDIC-insured institutions through June 30, 2010. As part of the extension, insured institutions electing to continue participation will pay an increased assessment ranging from 15-25 basis points depending on the institution’s risk category. The Bank elected to continue its participation in the Transaction Account Guarantee Program.

 

9


Table of Contents

The Gramm-Leach-Bliley Act of 1999

The Gramm-Leach-Bliley Act of 1999 (the “Act”) was enacted in November 1999. The Act draws lines between the types of activities that are permitted for banking organizations that are financial in nature and those that are not permitted because they are commercial in nature. The Act imposes Community Reinvestment Act requirements on financial service organizations that seek to qualify for the expanded powers to engage in broader financial activities and affiliations with financial companies that the Act permits.

The Act created a new form of financial organization called a financial holding company that may own and control banks, insurance companies and securities firms. A financial holding company is authorized to engage in any activity that is financial in nature or incidental to an activity that is financial in nature or is a complementary activity. These activities include insurance, securities transactions and traditional banking related activities. The Act establishes a consultative and cooperative procedure between the Federal Reserve and the Secretary of the Treasury for the designation of new activities that are financial in nature within the scope of the activities permitted by the Act for a financial holding company. A financial holding company must satisfy special criteria to qualify for the expanded financial powers authorized by the Act. Among those criteria are requirements that all of the depository institutions owned by the financial holding company be rated as well-capitalized and well-managed and that all of its insured depository institutions have received a satisfactory ratio for Community Reinvestment Act compliance during their last examination. A bank holding company that does not qualify as a financial holding company under the Act is generally limited in the types of activities in which it may engage to those that the Federal Reserve has recognized as permissible for bank holding companies prior to the date of enactment of the Act. The Act also authorizes a state bank to have a financial subsidiary that engages as a principal in the same activities that are permitted for a financial subsidiary of a national bank if the state bank meets eligibility criteria and special conditions for maintaining the financial subsidiary.

The Act repealed the prohibition in the Glass-Steagall Act on bank affiliations with companies that are engaged primarily in securities underwriting activities. The Act authorizes a financial holding company to engage in a wide range of securities activities, including underwriting, broker/dealer activities and investment company and investment advisory activities. The Company currently is not a financial holding company under the Act.

Under the Act, federal banking regulators were required to adopt rules limiting the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Pursuant to these rules, financial institutions must provide: initial notices to customers about their privacy policies, including a description of the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; annual notices of their privacy policies to current customers; and a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties. These privacy provisions will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

USA Patriot Act of 2001

In October 2001, the USA Patriot Act was enacted to facilitate information sharing among entities within the government and financial institutions to combat terrorist activities and to expose money laundering. The USA Patriot Act is considered a significant piece of banking law with regard to disclosure of information related to certain customer transactions. Financial institutions are permitted to share information with one another, after notifying the United States Department of the Treasury, in order to better identify and report to the federal government activities that may involve terrorist activities or money laundering. Under the USA Patriot Act, financial institutions are obligated to establish anti-money laundering programs, including the development of a customer identification program and to review all customers against any list of the government that contains the names of known or suspected terrorists. The USA Patriot Act does not have a material or adverse impact on the Bank’s products or services but compliance with this act creates a cost of compliance and a reporting obligation.

Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”) and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. CRA requires the adoption of a statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with CRA and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s CRA rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries.

The Gramm-Leach-Bliley Act and federal bank regulators have made various changes to CRA. Among other changes, CRA agreements with private parties must be disclosed and annual reports must be made to a bank’s primary federal regulator. A financial holding company or any of its subsidiaries will not be permitted to engage in new activities authorized under the Gramm-Leach-Bliley Act if any bank subsidiary received less than a “satisfactory” rating in its latest CRA examination. The Company believes that it is currently in compliance with CRA.

 

10


Table of Contents

Fair Lending; Consumer Laws

In addition to CRA, other federal and state laws regulate various lending and consumer aspects of the banking business. Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice, have become concerned that prospective borrowers experience discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against depository institutions alleging discrimination against borrowers. Many of these suits have been settled, in some cases for material sums, short of a full trial.

Recently, these governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a discriminatory effect, unless the practice could be justified as a business necessity.

Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various disclosure requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.

Governmental Policies

The Federal Reserve regulates money, credit and interest rates in order to influence general economic conditions. These policies influence overall growth and distribution of bank loans, investments and deposits. These policies also affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

Emergency Economic Stabilization Act

On October 3, 2008, in response to the financial crisis affecting the banking system and financial markets, the Emergency Economic Stabilization Act (“EESA”) was signed into law by President Bush and established the Troubled Asset Relief Program (“TARP”). As part of TARP, the Department of the Treasury established the Capital Purchase Program (“CPP”) to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments. Its purpose was to stabilize and providing liquidity to the U.S. financial markets. There have been numerous actions by the Federal Reserve, Congress, the Department of the Treasury, the FDIC, the SEC and others to further the economic and banking industry stabilization efforts under EESA. There may be further legislative and regulatory measures implemented under EESA affecting the Company.

American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law on February 17, 2009 by President Obama. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, like the Company, that are in addition to those previously announced by the Department of the Treasury, until the institution has repaid the Department of the Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to its consultation with the recipient’s appropriate regulatory agency.

 

11


Table of Contents

Future Regulatory Uncertainty

Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, the Company cannot forecast how federal and state regulation of financial institutions may change in the future and impact its operations. Although Congress and the state legislature in recent years has sought to reduce the regulatory burden on financial institutions with respect to the approval of specific transactions, the Company fully expects that the financial institution industry will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.

 

ITEM 1A.    RISK FACTORS

Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the market value of our common stock. The risk factors applicable to us are the following:

Our future success is dependent on our ability to compete effectively in the highly competitive banking and financial services industry.

We face vigorous competition from other commercial banks, savings and loan associations, savings banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other types of financial institutions for deposits, loans and other financial services in our market area. A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. Many of our nonbank competitors are not subject to the same extensive regulations that govern us. As a result, these nonbank competitors have advantages over us in providing certain services. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.

Difficult market conditions continue to adversely affect our industry.

Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of real-estate related loans and resulted in significant write-downs of asset values by financial institutions. These write-downs spread to other securities and loans and have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. In this environment, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business and results of operations. Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.

We may be adversely affected by economic conditions in our market area.

The general economic conditions in the markets in which we operate are a key component to our success. We are headquartered in central Virginia, and our market area includes regions in Virginia, Georgia and Maryland. Because our lending and deposit-gathering activities are concentrated in this market, we will be affected by the general economic conditions in these areas. Changes in the economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing. A significant decline in general economic

 

12


Table of Contents

conditions caused by inflation, recession, unemployment or other factors, would impact these local economic conditions and the demand for banking products and services generally, and could negatively affect our financial condition and performance.

If our allowance for loan losses becomes inadequate, our results of operations may be adversely affected.

An essential element of our business is to make loans. We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses in our loan portfolio. Through a periodic review and analysis of the loan portfolio, management determines the adequacy of the allowance for loan losses by considering such factors as general and industry-specific market conditions, credit quality of the loan portfolio, the collateral supporting the loans and financial performance of our loan customers relative to their financial obligations to us. The amount of future losses is impacted by changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control. Actual losses may exceed our current estimates. Rapidly growing loan portfolios are, by their nature, unseasoned. Estimating loan loss allowances for an unseasoned portfolio is more difficult than with seasoned portfolios, and may be more susceptible to changes in estimates and to losses exceeding estimates. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in our loan portfolio, we cannot fully predict such losses or assert that our loan loss allowance will be adequate in the future. Future loan losses that are greater than current estimates could have a material impact on our future financial performance.

Banking regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize additional loan charge-offs, based on credit judgments different than those of our management. Any increase in the amount of our allowance or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.

Our concentration in loans secured by real estate may increase our future credit losses, which would negatively affect our financial results.

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Approximately 91% of our loans are secured by real estate, both residential and commercial, substantially all of which are located in our market area. A major change in the region’s real estate market, resulting in a deterioration in real estate values, or in the local or national economy, including changes caused by raising interest rates, could adversely affect our customers’ ability to pay these loans, which in turn could adversely impact us. Risk of loan defaults and foreclosures are inherent in the banking industry, and we try to limit our exposure to this risk by carefully underwriting and monitoring our extensions of credit. We cannot fully eliminate credit risk, and as a result credit losses may occur in the future.

Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.

Our nonperforming assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect to continue to incur additional losses relating to an increase in nonperforming loans. We do not record interest income on non-accrual loans, thereby adversely affecting our income and increasing loan administration costs. When we receive collateral through foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral less estimated selling costs, which may result in a loss. An increase in the level of nonperforming assets also increases our risk profile and may impact the capital levels our regulators believe is appropriate in light of such risks. We utilize various techniques such as loan sales, workouts and restructurings to manage our problem assets. Decreases in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our business, results of operations and financial condition.

In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to performance of their other responsibilities. Such resolution may also require the assistance of third parties, and thus the expense associated with it. There can be no assurance that we will avoid further increases in nonperforming loans in the future.

 

13


Table of Contents

We may incur losses if we are unable to successfully manage interest rate risk.

Our future profitability will substantially depend upon our ability to maintain or increase the spread between the interest rates earned on investments and loans and interest rates paid on deposits and other interest-bearing liabilities. Changes in interest rates will affect our operating performance and financial condition. The shape of the yield curve can also impact net interest income. Changing rates will impact how fast our mortgage loans and mortgage backed securities will have the principal repaid. Rate changes can also impact the behavior of our depositors, especially depositors in non-maturity deposits such as demand, interest checking, savings and money market accounts. While we attempt to minimize our exposure to interest rate risk, we are unable to eliminate it as it is an inherent part of our business. Our net interest spread will depend on many factors that are partly or entirely outside our control, including competition, federal economic, monetary and fiscal policies, and industry-specific conditions and economic conditions generally.

The failure of our Board and management to implement and maintain effective risk management programs may adversely affect our operations.

As a banking organization, we are exposed to a variety of risks across our operations. We define risk generally as the danger of not achieving our financial, operating, or strategic goals as planned. As a result, to ensure our long-term corporate success, we must effectively identify and analyze risks and then manage or mitigate them through appropriate control measures. We have developed a plan to establish and maintain effective risk management programs to address oversight, control, and supervision of management, major operations and activities across our functional areas. We believe that this plan enables us to recognize and analyze risks early on and to take the appropriate action.

It is important to note that our organization has grown substantially over the past two years. In May 2008, we merged with each of BOE, the then holding company for the Bank, and TFC, the holding company for TransCommunity Bank, N.A., and, in July 2008, TransCommunity Bank merged into the Bank. In November 2008, the Bank acquired certain assets and assumed all deposit liabilities of TCB and, in January 2009, the Bank acquired certain assets and assumed all deposit liabilities of SFSB. This significant growth has put considerable strain on our organizational structure and the effectiveness of risk management programs that are appropriate for the various functions of an organization of our size and complexity. Furthermore, this growth has strained our control structure, including the structure that supports the effective application of policies and the execution of procedures within the operation of financial reporting controls.

We have put in place internal remediation plans that address concerns that have arisen in maintaining the effectiveness of our risk management programs. While our Board and management are working diligently to ensure that our organization implements and maintains effective risk management programs, any failure to do so may adversely affect our operations. As a result, we may not be able to achieve our financial, operational and strategic goals.

Current levels of market volatility are unprecedented.

The capital and credit markets have been experiencing volatility and disruption for more than 24 months. Recently, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result,

 

14


Table of Contents

defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.

We may be adversely impacted by changes in the condition of financial markets.

We are directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. Market risk is inherent in the financial instruments associated with our operations and activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives. Just a few of the market conditions that may shift from time to time, thereby exposing us to market risk, include fluctuations in interest and currency exchange rates, equity and futures prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of issuers. Accordingly, depending on the instruments or activities impacted, market risks can have adverse effects on our results of operations and our overall financial condition.

We have identified material weaknesses and significant deficiencies in our internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. As set forth in this Form 10-K, management’s assessment of the effectiveness of our internal control over financial reporting cited two material weaknesses, one with respect to the financial reporting process for the Company’s periodic reports and one with respect to the determination of specific reserves on impaired loans. Specifically, our financial and accounting department has lacked sufficient resources and expertise to address properly the issues that it must address on a quarterly basis and that our policies and procedures have not provided for timely review of financial-related matters and related accounting entries. In addition, we do not currently produce and maintain adequate documentation to support the impairment value assigned to potentially troubled loans.

Our financial and accounting department is currently understaffed for the responsibilities that it has had in recent fiscal quarters. We did not have either a controller or a financial reporting manager until January 2010. In addition, our financial and accounting department has had to evaluate numerous non-routine accounting issues in addition to focusing on our day-to-day fiscal operations and periodic filings with the Commission.

To address the issues described above, we continue to take appropriate remediation steps. We continue to evaluate our financial accounting staff levels and expertise and implement appropriate oversight and review procedures. Additional information on these and other actions is disclosed in Item 9A below.

 

15


Table of Contents

Despite efforts to strengthen our internal and disclosure controls, we may identify additional other internal or disclosure control deficiencies in the future. Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could, among other things, result in losses from fraud or error, harm our reputation or cause investors to lose confidence in our reported financial information, all of which could have a material adverse effect on our results of operation and financial condition.

We may be required to write down goodwill and other intangible assets, causing our financial condition and results to be negatively affected.

When we acquire a business, a portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired determines the amount of the purchase price that is allocated to goodwill acquired. At December 31, 2009, our goodwill and other identifiable intangible assets were approximately $22.8 million. Under current accounting standards, if we determine that goodwill or intangible assets are impaired, we would be required to write down the value of these assets. We will conduct an annual review to determine whether goodwill and other identifiable intangible assets are impaired. As of May 31, 2009, the one-year anniversary date of our mergers with TransCommunity Financial and BOE Financial, we recorded a goodwill impairment charge of $24.0 million. We recognized an additional goodwill impairment charge of $7.4 million as of December 31, 2009.

We cannot provide assurance whether we will be required to take an impairment charge in the future. Any impairment charge would have a negative effect on its shareholders’ equity and financial results and may cause a decline in our stock price.

Banking regulators have broad enforcement power, but regulations are meant to protect depositors, and not investors.

We are subject to supervision by several governmental regulatory agencies, including the Federal Reserve Bank of Richmond and the Bureau of Financial Institutions of the Commonwealth of Virginia. Bank regulations, and the interpretation and application of them by regulators, are beyond our control, may change rapidly and unpredictably and can be expected to influence earnings and growth. In addition, these regulations may limit our growth and the return to investors by restricting activities such as the payment of dividends, mergers with, or acquisitions by, other institutions, investments, loans and interest rates, interest rates paid on deposits and the opening of new branch offices. Although these regulations impose costs on us, they are intended to protect depositors, and should not be assumed to protect the interest of shareholders. The regulations to which we are subject may not always be in the best interest of investors.

Acquisition opportunities may present challenges.

We continually evaluate opportunities to acquire other businesses. However, we may not have the opportunity to make suitable acquisitions on favorable terms in the future, which could negatively impact the growth of our business. We expect that other banking and financial companies, many of which have significantly greater resources, will compete with us to acquire compatible businesses. This competition could increase prices for acquisitions that we would likely pursue, and our competitors may have greater resources than we do. Also, acquisitions of regulated businesses such as banks are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests.

Any future acquisitions may result in unforeseen difficulties, which could require significant time and attention from our management that would otherwise be directed at developing our existing business. In addition, we could discover undisclosed liabilities resulting from any acquisitions for which we may become responsible. Further, the benefits that we anticipate from these acquisitions may not develop.

 

16


Table of Contents

A loss of our senior officers could impair our relationship with our customers and adversely affect our business.

Many community banks attract customers based on the personal relationships that the banks’ officers and customers establish with each other and the confidence that the customers have in the officers. We depend on the performance of our senior officers. These officers have many years of experience in the banking industry and have numerous contacts in our market area. The loss of the services of any of our senior officers, or the failure of any of them to perform management functions in the manner anticipated by our board of directors, could have a material adverse effect on our business. Our success will be dependent upon the board’s ability to attract and retain quality personnel, including these individuals.

Our ability to pay dividends is limited and we may be unable to pay future dividends.

Following the payment of our cash dividend in February 2010, we determined to suspend the payment of our quarterly dividend to holders of common stock. While we believe that our capital and liquidity levels remain above the averages of our peers, we incurred a net loss to common stockholders for the 2009 year and remain concerned over asset quality and the uncertainty of the real estate markets and general economy in the central Virginia region. Due to these factors, we have determined that it is currently prudent to retain capital until such time as we experience a return to consistent quarterly profitability.

Furthermore, our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient capital in our organization. The ability of our bank subsidiary to pay dividends to us is limited by the Bank’s obligations to maintain sufficient capital, earnings and liquidity and by other general restrictions on their dividends under federal and state bank regulatory requirements.

In addition, as a bank holding company, our ability to declare and pay dividends is subject to the guidelines of the Board of Governors of the Federal Reserve System regarding capital adequacy and dividends. The Federal Reserve guidelines generally require us to review the effects of the cash payment of dividends on common stock and other Tier 1 capital instruments (i.e., perpetual preferred stock and trust preferred debt) on our financial condition. These guidelines also require that we review our net income for the current and past four quarters, and the level of dividends on common stock and other Tier 1 capital instruments for those periods, as well as our projected rate of earnings retention.

Under the Federal Reserve’s policy, the board of directors of a bank holding company should also consider different factors to ensure that its dividend level is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could affect its ability to pay while still maintaining a strong financial position. As a general matter, the Federal

 

17


Table of Contents

Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer, or significantly reduce the bank holding company’s dividends if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with the its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. If we do not satisfy these regulatory requirements or the Federal Reserve’s policies, we will be unable to pay dividends on our common stock.

We also are subject to certain limitations on our ability to pay dividends as a result of our issuance of preferred stock to the U.S. Treasury pursuant to the Capital Purchase Program. The preferred stock is in a superior ownership position compared to our common stock. Dividends must be paid to the preferred stock holder before they can be paid to our common stockholders. In addition, prior to December 19, 2011, unless we have redeemed the preferred stock or the U.S. Treasury has transferred the preferred stock to a third party, the consent of the Treasury will be required for us to increase our common stock dividend or repurchase our common stock or other equity or capital securities, other than in certain circumstances.

If the dividends on the preferred stock have not been paid for an aggregate of six quarterly dividend periods or more, whether or not consecutive, our authorized number of directors will be automatically increased by two and the holders of the preferred stock will have the right to elect those directors at our next annual meeting or at a special meeting called for that purpose. These two directors will be elected annually and will serve until all accrued and unpaid dividends for all past dividend periods have been declared and paid in full. These restrictions could limit our ability to pay dividends on our common stock.

The FDIC has increased deposit insurance premiums to restore and maintain the federal deposit insurance fund, which has increased our costs and could adversely affect our business.

FDIC insurance premiums increased substantially in 2009, and we expect to pay significantly higher FDIC premiums in the future as compared to premiums paid in 2008 and prior years. As recent bank failures continued to deplete its deposit insurance fund, the FDIC adopted a revised risk-based deposit insurance assessment schedule in February 2009, which raised deposit insurance premiums. The FDIC also levied a special assessment in May 2009 and issued a rule in November 2009 requiring institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011. The deposit insurance fund may suffer additional losses in the future due to bank failures. There can be no assurance that there will not be additional significant deposit insurance premium increases in order to restore the insurance fund’s reserve ratio.

Our participation in the U.S. Department of the Treasury’s Capital Purchase Program imposes restrictions on us that limit our ability to perform certain equity transactions, including the payment of dividends and common stock purchases.

On December 19, 2008, we issued and sold $17.7 million in preferred stock and a warrant to purchase our common stock to the Department of the Treasury as part of its Capital Purchase Program. The preferred shares will pay a cumulative dividend rate of five percent per annum for the first five years and will reset to a rate of nine percent per annum after year five. The dividends, and potential increase in dividends if we do not redeem the preferred stock, may significantly impact our operating results, liquidity, and capital position.

The preferred shares are non-voting, other than class voting rights on matters that could adversely affect the shares. The preferred shares will be callable at par after December 19, 2011. Prior to that time, unless we have redeemed all of the preferred stock or the Department of the Treasury has transferred all of the preferred stock to a third party, we are limited in the payment of dividends on our common stock to the current quarterly dividend of $0.04 per share without prior regulatory approval. In addition, our participation limits our ability to repurchase shares of our common stock, with certain exceptions, which include repurchases of shares to offset share dilution from equity-based compensation.

 

18


Table of Contents

We are subject to executive compensation restrictions because of our participation in the Treasury’s Capital Purchase Program.

As a participant in the Capital Purchase Program, we are subject to the Department of the Treasury’s standards for executive compensation and governance for the period during which the Department of the Treasury holds the preferred stock that we issued under this program. These standards generally apply to the chief executive officer, chief financial officer, plus the next three most highly compensated executive officers and can also apply to a number of our other employees.

The standards include requirements to recover certain bonus payments if they were based on materially inaccurate financial statements or performance metric criteria, prohibitions on making certain golden parachute payments, prohibitions on paying or accruing certain bonus payments, except as otherwise permitted by the rules, prohibitions on maintaining any plan for senior executive officers that encourages such officers to take unnecessary and excessive risks that threaten our value, prohibitions on maintaining any employee compensation plan that encourages the manipulation of reported earnings to enhance the compensation of any employee and prohibitions on providing certain tax gross-ups. These restrictions and standards could limit our ability to recruit and retain executive officers.

In addition, while we believe that we have taken and continue to take the steps necessary to comply with the standards described above, we cannot make any assurance that the Department of the Treasury or our other regulators will agree that we have in every instance. As a result, we cannot make any assurances as to any penalties that the regulatory agencies may assess if we are deemed to have violated any of the standards above. Such penalties may include civil and criminal penalties and restitution of certain payments that we have made.

The impact on us of recently enacted legislation, in particular the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 and their implementing regulations, and actions by the FDIC, cannot be predicted at this time.

The federal government has enacted legislation and other regulations in an effort to stabilize the U.S. financial system. The Emergency Economic Stabilization Act of 2008 (the “EESA”) provided the Department of the Treasury with the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The Department of the Treasury subsequently announced a program under the EESA pursuant to which it would make senior preferred stock investments in participating financial institutions. The Federal Deposit Insurance Corporation announced the development of a guarantee program under the systemic risk exception to the Federal Deposit Act pursuant to which the FDIC would offer a guarantee of certain financial institution indebtedness in exchange for an insurance premium to be paid to the FDIC by issuing financial institutions. More recently, the American Recovery and Reinvestment Act of 2009 (the “ARRA”) amends certain provisions of the EESA and contains a wide array of provisions aimed at stimulating the U.S. economy.

The programs established or to be established under the EESA, the ARRA and other troubled asset relief programs may have adverse effects upon us. We may face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. Also, participation in specific programs may subject us to additional restrictions. Similarly, programs established by the FDIC under the systemic risk exception, whether we participate or not, may have an adverse effect on us. The Bank is participating in the FDIC temporary liquidity guarantee program, and such program likely will require the payment of additional insurance premiums to the FDIC. We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The effects of participating or not participating in any such programs, and the extent of our participation in such programs cannot reliably be determined at this time.

Our businesses and earnings are impacted by governmental, fiscal and monetary policy.

We are affected by domestic monetary policy. For example, the Federal Reserve Board regulates the supply of money and credit in the United States and its policies determine in large part our cost of funds for lending, investing and capital raising activities and the return we earn on those loans and investments, both of which affect our net interest margin. The actions of the Federal Reserve Board also can materially affect the value of financial instruments we hold, such as loans and debt securities, and its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States. Changes in fiscal or monetary policy are beyond our control and hard to predict.

 

19


Table of Contents

Our profitability and the value of any equity investment in us may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.

We are subject to extensive supervision by several governmental regulatory agencies at the federal and state levels. Recently enacted, proposed and future banking and other legislation and regulations have had, and will continue to have, or may have a significant impact on the financial services industry. These regulations, which are generally intended to protect depositors and not our shareholders, and the interpretation and application of them by federal and state regulators, are beyond our control, may change rapidly and unpredictably, and can be expected to influence our earnings and growth. Our success depends on our continued ability to maintain compliance with these regulations. Many of these regulations increase our costs and thus place other financial institutions that may not be subject to similar regulation in stronger, more favorable competitive positions.

If we need additional capital in the future to continue our growth, we may not be able to obtain it on terms that are favorable. This could negatively affect our performance and the value of our common stock.

We anticipate that we will be able to support our growth through the generation of additional deposits at existing and new branch locations, as well as expanded loan and other investment opportunities. However, we may need to raise additional capital in the future to support our continued growth and to maintain desired capital levels. Our ability to raise capital through the sale of additional equity securities or the placement of financial instruments that qualify as regulatory capital will depend primarily upon our financial condition and the condition of financial markets at that time. We may not be able to obtain additional capital in the amounts or on terms satisfactory to us. Our growth may be constrained if we are unable to raise additional capital as needed.

The trading volume in our common stock is less than that of other larger financial services companies.

Although our common stock is listed for trading on NYSE Amex (formerly known as NYSE Alternext US), the trading volume in our common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

On September 30, 2009, the Company received a comment letter from the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”) with respect to the disclosures in certain of its periodic reports, including its Annual Report on Form 10-K for the year ended December 31, 2008 and its Quarterly Report on Form 10-Q for each of the periods ended March 31, 2009 and June 30, 2009. The most significant comments relate to the Staff’s request that the Company amend these filings to include financial statements and related information with respect to each of the Company’s predecessors (TFC and BOE), as the Company was a special purpose acquisition company with nominal results prior to the acquisition of each of these entities on May 31, 2008. The Staff’s comments also include requested revisions to these filings to enhance disclosure relating to certain accounting items related to the acquisitions of the predecessor entities, goodwill and intangible assets, fair value measurements, FDIC-covered assets and asset quality. On December 1, 2009, the Company responded by letter to these comments. In its responses, the Company acknowledged that it would amend its filings to include the additional and enhanced disclosures that the Staff had requested, and the Company explained the conclusions that it had made with respect to the accounting guidance relevant to certain of these disclosures.

On January 18, 2010, the Company received a follow-up comment letter from the Staff with respect to the Company’s responses to the Staff’s initial comment letter and with respect to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2009. In addition to clarifications to the Company’s responses, the

 

20


Table of Contents

Staff’s comments included requested revisions to the Quarterly Report on Form 10-Q for the period ended September 30, 2009 to enhance disclosure relating to the SFSB acquisition, the timing of goodwill assessments, FDIC-covered assets and asset quality. On March 26, 2010, the Company responded by letter to these comments. In its responses, the Company acknowledged that it would amend its filings to include the additional and enhanced disclosures that the Staff had requested, and the letter included as appendixes all four of the amended filings that the Company proposes to make, with the additional and enhanced disclosures, in response to all of the Staff’s comments.

The Company will officially transmit the amended filings described above once the Staff and the Company have had the opportunity to resolve all of the Staff’s comments. The Staff has advised the Company that it will also review this Form 10-K. The Company believes that the disclosure in this Form 10-K reflects the additional and enhanced disclosures that the Staff has requested in the prior filings.

 

ITEM 2. PROPERTIES

The Company operates the following offices:

Corporate Headquarters:

Innslake — 4235 Innslake Drive, Glen Allen, VA 23060

Virginia Markets:

Main Office — 1325 Tappahannock Boulevard, Tappahannock, VA 22560

Burgess — 14598 Northumberland Highway, Burgess, VA 22432

Callao — 654 Northumberland Highway, Callao, VA 22435

Centerville — 100 Broad Street Road, Manakin-Sabot, VA 23103

Courthouse — 1949 Sandy Hook Road, Goochland, VA 23063

Flat Rock — 2320 Anderson Highway, Powhatan, VA 23139

King William — 4935 Richmond-Tappahannock Highway, Manquin, VA 23106

Louisa — 217 East Main Street, Louisa, VA 23093

Mechanicsville — 6315 Mechanicsville Turnpike, Mechanicsville, VA 23111

Prince Street — 323 Prince Street, Tappahannock, VA 22560

Rockbridge — 744 North Lee Highway, Lexington, VA 24450

Virginia Center — 9951 Brook Road, Glen Allen, VA 23060

West Point — 16th and Main Street, West Point, VA 23181

Winterfield — 3740 Winterfield Road, Midlothian, VA 23113

Georgia Market:

Covington — 10105 Highway 142, Covington, GA 30014

Grayson — 2001 Grayson Highway, Grayson, GA 30017

Loganville — 4581 Atlanta Highway, Loganville, GA 30052

Snellville — 2238 Main Street East, Snellville, GA 30078

Maryland Market:

Arnold — 1460 Ritchie Highway, Arnold, MD 21012

Catonsville — 1000 Ingleside Avenue, Catonsville, MD 21228

Clinton — 9023 Woodyard Road, Clinton, MD 20735

Crofton — 2120 Baldwin Avenue, Crofton, MD 21114

Landover Hills — 7467 Annapolis Road, Landover Hills, MD 20784

Rockville — 1101 Nelson Street, Rockville, MD 20850

Rosedale — 1230 Race Road, Rosedale, MD 21237

 

21


Table of Contents

The Company leases its corporate headquarters, its Rockbridge and Winterfield offices in the Virginia markets and the Arnold, Clinton, Landover Hills and Rockville offices in the Maryland market. The Company also has loan production offices in Fairfax, Virginia and Cumming, Georgia, both of which are leased.

All of the Company’s properties are in good operating condition and are adequate for the Company’s present and anticipated needs.

 

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company, including its subsidiaries, is a party or of which its property is the subject.

 

ITEM 4. (Removed and Reserved)

 

22


Table of Contents

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price for Securities

The Company’s common stock, warrants and units trade on NYSE Amex (formerly NYSE Alternext US and the American Stock Exchange) under the symbols “BTC,” “BTC.WS,” and “BTC.U,” respectively.

The following table sets forth, for each quarter of 2008 and 2009, the quarterly high and low sales prices of the Company’s common stock, warrants and units as reported on NYSE Amex.

 

     Common Stock    Warrants    Units
     High    Low    High    Low    High    Low

2008

                 

Quarter ended March 31

   $         7.54    $         7.38    $         0.63    $         0.45    $         7.56    $         7.55

Quarter ended June 30

     7.65      3.97      0.81      0.50      5.46      5.46

Quarter ended September 30

     5.00      3.81      0.82      0.45      4.87      4.25

Quarter ended December 31

     4.24      1.90      0.58      0.26      3.45      3.45

2009

                 

Quarter ended March 31

     3.85      2.58      0.52      0.35      4.00      3.15

Quarter ended June 30

     4.40      3.10      0.81      0.44      4.76      4.00

Quarter ended September 30

     3.71      3.13      0.77      0.46      4.21      4.21

Quarter ended December 31

     3.56      2.34      0.60      0.16      4.17      3.30

Holders of Record

As of December 31, 2009, there were 2,195 holders of record of the Company’s common stock, three holders of record of its warrants and one holder of record of its units, not including beneficial holders of securities held in street name.

Dividends

The Company commenced declaring dividends on its common stock in 2008 following the mergers with BOE and TFC. From the second quarter of 2008 through the first quarter of 2010, the Company paid a quarterly cash dividend of $0.04 per share to the holders of its common stock.

In addition, on December 19, 2008, the Company received $17.680 million of capital funding from the Department of the Treasury, and the capital is considered senior preferred stock. In accepting these funds, the Company is required to pay dividends of five percent annually for the first five years, and nine percent for years thereafter. The Company has made dividend payments for this capital on a quarterly basis commencing in February 2009.

The Company’s dividend policy is subject to the discretion of the board of directors and future dividend payments will depend upon a number of factors, including future earnings, alternative investment opportunities, financial condition, cash requirements, and general business conditions. Under a capital plan that the Company adopted in October 2009, the Company’s policy is to pay quarterly cash dividends. However, the Company has determined to limit any cash dividend payment to no more than 50% of its prior year’s earnings, excluding any goodwill impairment. The Company retains the discretion to modify this determination if its capital ratios and related models indicate that such modification is prudent and consistent with the maintenance of targeted capital

 

23


Table of Contents

levels and the improvement of return on equity on a quarterly basis. In addition, if the Company’s capital levels fall or are forecasted to fall below “well capitalized” levels, the Company will consider the suspension of the dividend payment.

The Company’s ability to distribute cash dividends will depend primarily on the ability of its banking subsidiary to pay dividends to it. The Bank is subject to legal limitations on the amount of dividends that it is permitted to pay. Furthermore, neither the Company nor the Bank may declare or pay a cash dividend on any of its capital stock if it is insolvent or if the payment of the dividend would render the entity insolvent or unable to pay its obligations as they become due in the ordinary course of business. For additional information on these limitations, see “Regulation and Supervision — Capital Requirements” in Item 1 above.

In addition, while shares of the senior preferred stock are outstanding, the Company could be subject to limitations on dividends on its common stock. Common stock dividends cannot be increased until the third anniversary of the Department of the Treasury’s investment without its consent unless, prior to the third anniversary, the senior preferred stock is redeemed in whole or the Department of the Treasury has transferred all of its senior preferred stock to third parties.

Following the payment of its cash dividend in February 2010, the Company determined to suspend the payment of its quarterly dividend to holders of common stock. While the Company believes that its capital and liquidity levels remain above the averages of its peers, the Company incurred a net loss to common stockholders for the 2009 year and remains concerned over asset quality and the uncertainty of the real estate markets and general economy in the central Virginia region. Due to these factors, the Company has determined that it is currently prudent to retain capital until such time as the Company experiences a return to consistent quarterly profitability.

The Company intends to continue to pay dividends with respect to its senior preferred stock and outstanding trust preferred securities, subject to regulatory requirements.

Purchases of Equity Securities by the Issuer

The Company does not currently have in place a repurchase program with respect to any of its securities. In addition, the Company did not repurchase any of its securities during the quarter ended December 31, 2009.

 

24


Table of Contents

Stock Performance Graph

The stock performance graph set forth below shows the cumulative stockholder return on the Company’s common stock during the period from September 5, 2006, the date on which such stock first traded, to December 31, 2009, as compared with (i) an overall stock market index, the NASDAQ Composite Index, and (ii) a published industry index, the SNL Bank and Thrift Index. The graph assumes that $100 was invested on September 5, 2006 in the Company’s common stock and in each of the comparable indices and that dividends were reinvested.

LOGO

 

     Period Ending
Index    09/05/06    12/31/06    12/31/07    12/31/08    12/31/09

Community Bankers Trust Corporation

   100.00    100.70    104.37    43.15    49.13

NASDAQ Composite

   100.00    109.50    120.25    71.50    102.88

SNL Bank and Thrift

   100.00    106.93    81.54    46.89    46.26

 

25


Table of Contents
ITEM 6. SELECTED FINANCIAL DATA

The selected financial data of the Company appear below. We have also provided below selected financial data for the Company’s predecessor.

The Company’s historical information is derived from its consolidated financial statements as of the year ended December 31, 2009, 2008, and the nine months ended December 31, 2007, included elsewhere in this report. Company historical information for the year ended March 31, 2007 and for the period from inception (April 6, 2005) to March 31, 2006 is derived from its consolidated financial statements, which are not included elsewhere in this report.

The historical information for TCF as predecessor is derived from its audited financial statements for the period ended May 31, 2008 and the year ended December 31, 2007, included elsewhere in this report. TCF historical information for the years ended December 31, 2006 and 2005 is derived from its audited financial statements, which are not included elsewhere in this report.

The historical information for BOE as predecessor is derived from its audited financial statements for the period ended May 31, 2008 and the year ended December 31, 2007, included elsewhere in this report. BOE historical information for the years ended December 31, 2006 and 2005 is derived from its audited financial statements, which are not included elsewhere in this report

The information provided below is only a summary and should be read in conjunction with each company’s consolidated financial statements and related notes and Management’s Discussion and Analysis contained elsewhere in this report. The historical results included below and elsewhere in this report are not indicative of the future performance of the Company and its subsidiaries.

Historical Financial Information of the Company

 

     Twelve
months ended
12/31/2009
    Twelve
months ended
12/31/2008
    Nine months
ended
12/31/2007
    Twelve
months ended
3/31/2007
    Period from
April 6, 2005
(inception)
to 3/31/2006
     (dollars in thousands, except per share amounts)

Results of Operations

          

Interest and dividend income

   $ 64,520      $ 23,335      $ 1,944      $ 2,268      $ —  

Interest expense

     25,134        8,560        —          —          —  
                                      

Net interest income

     39,386        14,775        1,944        2,268        —  

Provision for loan losses

     19,089        2,572        —          —          —  
                                      

Net interest income after provision for loan losses

     20,297        12,203        1,944        2,268        —  

Noninterest income

     26,240        1,780        —          —          —  

Noninterest expenses

     75,468        12,627        263        338        —  
                                      

(Loss)/income before income taxes

     (28,931     1,356        1,681        1,930        —  

Income tax expense

     404        133        576        806        —  
                                      

Net (loss) income

   $ (29,335   $ 1,223      $ 1,105      $ 1,124      $ —  
                                      

Financial Condition

          

Assets

   $ 1,226,723      $ 1,030,240      $ 59,441      $ 58,812      $ 437

FDIC Indemnification asset

     76,107        —          —          —          —  

Loans, covered by FDIC shared-loss agreement

     150,935        —          —          —          —  

Loans, net of unearned income (excluding covered loans)

     578,629        523,298        —          —          —  

Deposits

     1,031,402        806,348        —          —          —  

Stockholders’ equity

     131,594        164,403        45,312        44,279        47

Ratios

          

Return on average assets

     (2.33 %)      0.25     1.87     1.95     —  

Return on average equity

     (18.99 %)      1.52     2.47     2.52     —  

Non-GAAP return on average tangible assets (1)

     0.30     0.42     —          —          —  

Non-GAAP return on average tangible common equity (1)

     3.74     4.61     —          —          —  

Efficiency ratio (2)

     115.00     76.27     13.53     14.90     —  

Equity to assets

     10.73     15.96     76.23     75.29     —  

Loan to deposit ratio

     70.74     64.90     —          —          —  

Tangible Common Equity / Tangible Assets

     7.67     9.64     76.23     75.29     —  

Per Share Data

          

Earnings per common share, basic

   $ (1.41   $ 0.07      $ 0.12      $ 0.14      $ —  

Earnings per common share, diluted

   $ (1.41   $ 0.07      $ 0.09      $ 0.11      $ —  

Non-GAAP earnings per common share, diluted (1)

   $ 0.17      $ 0.11      $ 0.09      $ 0.11      $ —  

Cash dividends paid

   $ 3,435      $ 1,755      $ —        $ —        $ —  

Market value per share

   $ 3.21      $ 3.00      $ 7.41      $ 7.26      $ —  

Book value per tangible common share

   $ 4.24      $ 4.30      $ 4.83      $ 5.54      $ —  

Price to earnings ratio, diluted

     (2.27 %)      42.86     82.33     66.25     —  

Price to book value ratio

     60.6     43.9     153.3     131.1     —  

Dividend payout ratio

     (11.33 %)      143.50     —          —          —  

Weighted average shares outstanding, basic

     21,468,455        16,429,894        9,375,000        7,997,740        1,807,292

Weighted average shares outstanding, diluted

     21,468,455        17,517,895        11,807,432        10,256,708        1,807,292

Asset quality ratios

          

Allowance for loan losses

   $ 18,169      $ 6,939      $ —        $ —        $ —  

Allowance for loan losses / non-covered loans (3)

     3.14     1.33     —          —          —  

Allowance for loan losses / nonperforming non-covered loans (3)

     89.69     140.72     —          —          —  

Allowance for loan losses / nonaccrual non-covered loans (3)

     90.80     153.04     —          —          —  

Non-covered nonperforming assets / non-covered loans and non-covered other real estate (3)

     3.77     0.98     —          —          —  

Capital ratios

          

Leverage ratio

     8.93     12.54     —          —          —  

Tier 1 risk-based capital ratio

     14.82     18.92     —          —          —  

Total risk-based capital ratio

     16.03     20.00     —          —          —  

 

(1) Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, section “Non GAAP Measures” for a reconciliation.
(2) The efficiency ratio is calculated by dividing noninterest expense over the sum of net interest income plus noninterest income.
(3) Excludes assets covered by FDIC shared-loss agreements.

 

26


Table of Contents

Historical Financial Information of BOE as Predecessor

 

           For the Years Ended December 31  
     5/31/2008     2007     2006     2005  
           (dollars in thousands, except per share amounts)  

Summary balance sheet data:

        

Assets

   $ 317,803      $ 302,431      $ 281,378      $ 261,931   

Investment securities

     58,898        57,304        60,516        56,581   

Loans

     233,353        221,549        196,891        182,456   

Allowance for loan losses

     2,729        2,595        2,400        2,249   

Deposits

     256,382        244,593        230,865        223,132   

Other borrowed funds

     27,141        24,276        19,331        10,934   

Stockholders’ equity

     29,681        30,110        28,047        26,235   

Summary results of operations data:

        

Interest and dividend income

   $ 7,775      $ 18,694      $ 16,734      $ 14,343   

Interest expense

     3,745        8,695        6,972        4,469   
                                

Net interest income

     4,030        9,999        9,762        9,874   

Provision for loan losses

     200        6        125        240   
                                

Net interest income after provision for loan losses

     3,830        9,993        9,637        9,634   

Noninterest income

     854        1,958        2,251        1,601   

Noninterest expense

     4,882        8,763        7,893        7,262   
                                

(Loss) income from continuing operations before income taxes

     (198     3,188        3,995        3,973   

Income tax (benefit) expense

     (10     580        872        872   
                                

Net income (loss )

   $ (188   $ 2,608      $ 3,123      $ 3,101   
                                

Per Share Data:

        

Net income (loss) per share - basic

   $ (0.15   $ 2.16      $ 2.60      $ 2.60   

Net income (loss) per share - diluted

   $ (0.15   $ 2.15      $ 2.58      $ 2.58   

Book value

   $ 24.46      $ 24.84      $ 23.22      $ 21.90   

Weighted average number of shares outstanding

     1,213,285        1,214,944        1,210,922        1,203,725   

Operating ratios:

        

Loan to deposit ratio

     91.02     90.58     85.28     81.77

Asset quality ratios:

        

Allowance for loan losses to nonperforming assets

     687.41     2276.32     2352.94     548.54

Allowance for loan losses to total loans

     1.17     1.17     1.22     1.23

Nonperforming assets to total loans

     0.17     0.05     0.05     0.22

Capital ratios: (1)

        

Leverage ratio

     11.00     11.40     11.70     11.55

Tier 1 risk-based capital ratio

     14.30     14.70     15.40     14.76

Total risk-based capital ratio

     15.20     15.70     16.40     15.67
        

(1)    Capital ratios for May 31, 2008 period were taken from March 31, 2008 data.

       

 

27


Table of Contents

Historical Financial Information of TFC as Predecessor

 

           For the Years Ended December 31  
     5/31/2008     2007     2006     2005  
           (dollars in thousands, except per share amounts)  

Summary balance sheet data:

        

Assets

   $ 270,053      $ 238,271      $ 198,445      $ 190,648   

Investment securities

     11,285        16,643        35,017        31,237   

Loans

     241,880        205,480        151,399        134,930   

Allowance for loan losses

     3,426        3,036        2,065        1,602   

Deposits

     232,134        203,598        164,973        146,603   

Other borrowed funds

     5,218        —          2,017        12,787   

Stockholders’ equity

     28,387        33,233        30,553        30,370   

Summary results of operations data:

        

Interest and dividend income

   $ 7,111      $ 17,143      $ 14,307      $ 10,957   

Interest expense

     3,318        6,676        4,958        3,497   
                                

Net interest income

     3,793        10,467        9,349        7,460   

Provision for loan losses

     1,348        1,686        493        266   
                                

Net interest income after provision for loan losses

     2,445        8,781        8,856        7,194   

Noninterest income

     429        1,110        1,011        791   

Noninterest expense

     8,229        10,643        8,933        9,334   
                                

(Loss) income from continuing operations before income taxes

     (5,355     (752     934        (1,349

Income tax (benefit) expense

     (1,454     (3,325     15        —     
                                

Net income (loss) from continuing operations

     (3,901     2,573        919        (1,349

Net loss from discontinued operations

     —          (77     (802     (423
                                

Net income (loss)

   $ (3,901   $ 2,496      $ 117      $ (1,772
                                

Per Share Data:

        

Net income (loss) per share from continuing operations - basic and diluted

   $ (0.85   $ 0.56      $ 0.20      $ (0.41

Net income (loss) per share - basic and diluted

   $ (0.85   $ 0.54      $ 0.03      $ (0.53

Book value

   $ 6.19      $ 7.24      $ 6.67      $ 6.63   

Weighted average number of shares outstanding

     4,586,741        4,586,741        4,581,741        3,315,479   

Operating ratios:

        

Loan to deposit ratio

     104.20     100.92     91.78     92.15

Asset quality ratios:

        

Allowance for loan losses to nonperforming assets

     87.53     142.2     214.86     970.91

Allowance for loan losses to total loans

     1.42     1.48     1.36     1.19

Nonperforming assets to total loans

     1.62     1.04     0.63     0.12

Capital ratios: (1)

        

Leverage ratio

     13.36     13.61     15.86     17.59

Tier 1 risk-based capital ratio

     13.64     13.95     17.16     18.91

Total risk-based capital ratio

     14.89     15.20     18.32     19.92
        

(1)    Capital ratios for May 31, 2008 period were taken from March 31, 2008 data.

       

 

28


Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Community Bankers Trust Corporation (the “Company”) is a bank holding company that was incorporated under Delaware law on April 6, 2005. The Company is headquartered in Glen Allen, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 25 full-service offices in Virginia, Maryland and Georgia. The Bank changed its name from Bank of Essex to Essex Bank on April 20, 2009.

The Bank was established in 1926 and is headquartered in Tappahannock, Virginia. The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals and small businesses, including individual and commercial demand and time deposit accounts, commercial and consumer loans, travelers checks, safe deposit box facilities, investment services and fixed rate residential mortgages. Fourteen offices are located in Virginia, primarily from the Chesapeake Bay to just west of Richmond, seven are located in Maryland along the Baltimore-Washington corridor and four are located in the Atlanta, Georgia metropolitan market.

The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates earned thereon. The Company’s cost of funds is a function of the average amount of interest-bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on non-accrual loans and the amount of additions to the allowance for loan losses. Additionally, the Bank earns non-interest income from service charges on deposit accounts and other fee or commission-based services and products. Other sources of non-interest income can include gains or losses on securities transactions, gains from loan sales, transactions involving bank-owned property, and income from Bank Owned Life Insurance (“BOLI”) policies. The Company’s income is offset by non-interest expense, which consists of goodwill impairment and other charges, salaries and benefits, occupancy and equipment costs, professional fees, and other operational expenses. The provision for loan losses and income taxes materially affect income.

Caution About Forward-Looking Statements

The Company makes certain forward-looking statements in this Form 10-K that are subject to risks and uncertainties. These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.

These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors, including, without limitation, the effects of and changes in the following:

 

   

general economic and market conditions, either nationally or locally;

 

   

the interest rate environment;

 

   

competitive pressures among banks and financial institutions or from companies outside the banking industry;

 

   

real estate values;

 

29


Table of Contents
   

the quality or composition of the Company’s loan or investment portfolios;

 

   

the demand for deposit, loan, and investment products and other financial services;

 

   

the demand, development and acceptance of new products and services;

 

   

the timing of future reimbursements from the FDIC to the Company under the shared-loss agreements;

 

   

consumer profiles and spending and savings habits;

 

   

the securities and credit markets;

 

   

the integration of banking and other internal operations, and associated costs;

 

   

management’s evaluation of goodwill and other assets on a periodic basis, and any resulting impairment charges, under applicable accounting standards;

 

   

the soundness of other financial institutions with which the Company does business;

 

   

inflation;

 

   

technology; and

 

   

legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the “Risk Factors” discussion in Part I, Item 1A, of this report.

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Critical Accounting Policies

The following is a summary of the Company’s critical accounting policies that are highly dependent on estimates, assumptions and judgments.

Allowance for Loan and Lease Losses on Non-covered Loans

The allowance for loan and lease losses (“ALLL”) is maintained at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. Since arriving at an appropriate ALLL involves a high degree of management judgment, an ongoing quarterly analysis to develop a range of estimated losses is utilized. In accordance with accounting principles generally accepted in the United States, best estimates within the range of potential credit loss to determine the appropriate ALLL is utilized. Credit losses are charged and recoveries are credited to the ALLL.

The Company utilizes an internal risk grading system for its loans. Those larger credits that exhibit probable or well defined credit weaknesses are subject to individual review. The borrower’s cash flow, adequacy of collateral coverage, and other options available to the Company, including legal remedies, are evaluated. The review of individual loans includes those loans that are impaired as defined by FASB ASC310, Receivables. Collectability of both principal and interest when assessing the need for loss provision is considered. Historical loss rates are applied to other loans not subject to specific allocations. The loss rates are determined from historical net charge offs experienced by the Bank.

Historical loss rates for commercial and retail loans are adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Factors that are considered include delinquency trends, current economic conditions and trends, strength of supervision and administration of the loan portfolio, levels of underperforming loans, level of recoveries to prior year’s charge offs, trend in loan losses, industry concentrations and their relative strengths, amount of unsecured loans and underwriting exceptions. These factors are reviewed quarterly and a weighted score is assigned depending on the level and extent of the risk. The total of each of these weighted factors is then applied against the applicable portion of the portfolio and the ALLL is adjusted to ensure an appropriate level.

Allowance for Loan and Lease Losses on Covered Loans

The assets acquired in the SFSB acquisition are covered by a shared-loss agreement with the FDIC. Under the shared-loss agreements, the FDIC will reimburse the Bank for 80% of losses arising from covered loans and foreclosed real estate assets, on the first $118 million in losses of such covered loans and foreclosed real estate assets, and for 95% of losses on covered loans and foreclosed real estate assets thereafter. Under the shared-loss agreements, a “loss” on a covered loan or foreclosed real estate is defined generally as a realized loss incurred through a permitted disposition, foreclosure, short-sale or restructuring of the covered

loan or foreclosed real estate. The reimbursements for losses on single family one-to-four residential mortgage loans are to be made monthly until the end of the month in which the tenth anniversary of the closing of the transaction occurs, and the reimbursements for losses on other covered assets are to be made quarterly until the end of the quarter in which the eighth anniversary of the closing of the transaction occurs. The shared-loss agreements provide for indemnification from the first dollar of losses without any threshold requirement. The reimbursable losses from the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction, January 30, 2009. New loans made after that date are not covered by the shared-loss agreements.

The Company evaluated the acquired covered loans and has elected to account for them under ASC 310.

The covered loans acquired are subject to credit review standards described above for non-covered loans. If and when credit deterioration occurs subsequent to the acquisition date, a provision for credit loss for covered loans will be charged to earnings for the full amount without regard to the FDIC shared-loss agreements. The Company makes an estimate of the total cash flows it expects to collect from a pool of covered loans, which includes undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through allowance for loan loss. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool.

FDIC Indemnification Asset

The Company is accounting for the shared-loss agreements as an indemnification asset pursuant to the guidance in FASB ASC 805. The FDIC indemnification asset is required to be measured in the same manner as the asset or liability to which it relates. The FDIC indemnification asset is measured separately from the covered loans and other real estate owned assets because it is not contractually embedded in the covered loan and other real estate owned assets and is not transferable should the Company choose to dispose of them. Fair value was estimated using projected cash flows available for loss sharing based on the credit adjustments estimated for each loan pool and other real estate owned and the loss sharing percentages outlined in the Purchase and Assumption Agreements with the FDIC. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.

Because the acquired loans are subject to a FDIC loss sharing agreement and a corresponding indemnification asset exists to represent the value of expected payments from the FDIC, increases and decreases in loan accretable yield due to changing loss expectations will also have an impact to the valuation of the FDIC indemnification asset. Improvement in loss expectations will typically increase loan accretable yield and decrease the value of the FDIC indemnification asset, and in some instances, result in an amortizable premium on the FDIC indemnification asset. Increases in loss expectations will typically be recognized as impairment in the current period through allowance for loan losses while resulting in additional non-interest income for the amount of the increase in the FDIC indemnification asset.

 

30


Table of Contents

Goodwill and Other Intangible Assets

The Company adopted FASB ASC 350, Intangibles - Goodwill and Others. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value-based test. Goodwill impairment charges of $31.457 million were realized in 2009. Additionally, under ASC 350, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Any branch acquisition transactions were outside the scope of ASC 350 and, accordingly, intangible assets related to such transactions continued to amortize upon the adoption of ASC 350. The costs of purchased deposit relationships and other intangible assets, based on independent valuation by a qualified third party, are being amortized over their estimated lives. Core deposit intangible amortization expense charged to operations was $2.241 million for the year ended December 31, 2009 and $975,000 for the year ended December 31, 2008. The Company did not record any goodwill or other intangible prior to the TFC and BOE mergers.

OVERVIEW

As of December 31, 2009, the Company had total assets aggregating $1.227 billion versus $1.030 billion at the prior year end, representing an increase of $196.483 million, or 19.07%. The increase in assets for the year was the direct result of the SFSB acquisition in January of 2009. Total loans, including loans covered by FDIC shared-loss agreements of $150.935 million, aggregated $729.564 million on December 31, 2009 compared with $523.298 million at December 31, 2008, representing an increase of $206.266 million or 39.42%. The majority of loan growth during 2009 was attributable to the aforementioned SFSB acquisition.

As of December 31, 2008, the Company had total assets of $1.030 billion, an increase of $970.799 million, or 1,633.21%, from $59.441 million at December 31, 2007. Total loans aggregated $523.298 million on December 31, 2008 and were $0 on December 31, 2007. As further described in the Note 1 to the consolidated financial statements, the Company acquired TFC and BOE effective May 31, 2008. Financial statements and accompanying notes for TFC and BOE are included in this report.

The securities portfolio increased $8.482 million or 2.90% during 2009 to aggregate $300.951 million at December 31, 2009 compared with $292.469 million at December 31, 2008. As loan growth remained fairly stagnant due to weak credit conditions nationwide, management continued to invest excess funds in the securities portfolio to augment earnings.

The Company is required to account for the effect of market changes in the value of securities available-for-sale (“AFS”) under FASB ASC 320, Investments - Debt and Equity Securities. The market value of the December 31, 2009 and December 31, 2008 securities AFS portfolio were $179.440 and $193.992 million, respectively. At December 31, 2009, the Company had a net unrealized gain the AFS portfolio of $3.079 million versus a net unrealized loss of $700,000 at December 31, 2008.

 

31


Table of Contents

Total deposits grew $225.054 million or 27.91% during 2009 to aggregate $1.031 billion at December 31, 2009. This increase was attributed to the acquisition of SFSB in January of 2009. During 2009, management proactively managed excess liquidity afforded from its deposit base allowing higher priced time deposits to roll-over at lower rates or run-off if deemed volatile relative to pricing.

The Company had Federal Home Loan Bank (FHLB) advances aggregating $37.000 million at December 31, 2009 down slightly from the prior year of $37.900 million. Stockholders’ equity aggregated $131.594 million at December 31, 2009 compared with $164.403 million at December 31, 2008. The decline in stockholders’ equity was driven by a $31.457 million non-cash impairment of goodwill taken during the year. Total equity represented 10.73% and 15.96% of total assets at December 31, 2009 and 2008, respectively.

RESULTS OF OPERATIONS

Net income for 2009 reflects a full twelve months for the Company of consolidated operations for the holding company and the banking subsidiary, while net income for 2008 reflects five months for the Company and seven months of consolidated operations for the holding company and the banking subsidiary. Net income for 2007 is reflective of the nine month period from April 1, 2007 to December 31, 2007 for the holding company only, which did not have any operations. The Company changed accounting year end in 2007, thus resulting in the nine month operating period. It is important to note that prior year comparisons should be viewed with realization of twelve months of bank operations in 2009, seven months of bank operations in 2008 and, no bank operating activity in 2007.

From its inception until consummation of the acquisitions of TFC and BOE on May 31, 2008, the Company was a special purpose acquisition company, as described above, and had no substantial operations. Accordingly, since the Company’s operating activities prior to the acquisitions were insignificant relative to those of TFC and BOE, management believes that both TFC and BOE are the Company’s predecessors. Management has reached this conclusion based upon an evaluation of facts and circumstances, including the historical life of each of TFC and BOE, the historical level of operations of each of TFC and BOE, the purchase price paid for each of TFC and BOE and the fact that the consolidated Company’s operations, revenues and expenses after the acquisitions are most similar in all respects to those of TFC’s and BOE’s historical periods. Accordingly, the consolidated financial statements for the Predecessor Entities for the five months ended May 31, 2008 and the year ended December 31, 2007 have been presented.

Net Income

For the year ended December 31, 2009, the Company recorded a net loss available to common shareholders of $30.312 million compared with net income of $1.223 million for 2008. Basic and fully diluted earnings per share were ($1.41) for 2009 versus $0.07 for 2008, respectively. The net loss for the year of 2009 was primarily driven by two non-cash goodwill impairment charges aggregating $31.457 million taken during the second and fourth quarters, coupled with $19.089 million in loan loss provisions for the year. These items were offset by a gain of $20.255 million on the SFSB transaction.

For the year ended December 31, 2008, net income was $1.223 million. This compares with net income of $1.105 million for the year ended December 31, 2007, an increase of 10.68%, or $118,000. Basic earnings per share were $0.07 for 2008 and $0.12 for 2007. Fully diluted earnings per share were $0.07 for 2008 and $0.09 for 2007.

Nonaccrual loans, excluding covered loans, aggregated $20.011 million at December 31, 2009, or 3.46% of non-covered loans compared with $4.534 million at December 31, 2008, or 0.87% of non-covered loans at December 31, 2008. Non-covered other real estate owned increased $1.363 million to aggregate $1.586 million at December 31, 2009. Covered other real estate equaled $12.822 million at December 31, 2009. Loans past due 90 days or more and accruing interest equaled $247,000 at December 31, 2009 versus $397,000 at the prior year end. Net charged-offs totaled $7.859 million in 2009 versus $938,000 in 2008. Total non-performing non-covered assets equaled 3.77% and 0.98% of total non-covered loans and non-covered other real estate at December 31, 2009 and 2008, respectively.

 

32


Table of Contents

Net Interest Income

The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, including securities and loans, and interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income.

For the year ended December 31, 2009, net interest income was $39.386 million, which generated a tax equivalent net interest margin of 3.83%. The net interest margin is defined as net interest income divided by average interest-earning assets. The Bank’s net interest margin improved 22 basis points during 2009 from 3.61% in 2008 primarily from improved yields on earning assets. Most notably, the yields related to the fair market value of loans acquired from SFSB enhanced the margin. Concurrently, management proactively managed the deposit base in three states lowering the overall cost of funds during the year.

Interest and fees on non-covered loans increased $16.325 million or 82.90% to aggregate $36.019 million during 2009. Interest and fee income on covered loans equaled $15.139 million during 2009. In total, loan interest income continues to be the largest component driving the net interest margin. Total interest expense totaled $25.134 million during 2009 of which interest on deposits was $23.717 million. This compares with $8.560 million and $7.695 million, respectively in 2008.

Net interest income was $14.775 million for the year ended December 31, 2008 compared with $1.944 million in 2007, which was comprised solely of interest income on U.S. Treasury securities. Interest and fee income on loans equaled $19.694 million at December 31, 2008 and represented the largest component of interest income, despite a relatively low volume of loans relative to deposits at December 31, 2008. Total interest expense was primarily driven by deposit expense of $7.695 million during 2008.

The Company’s total loan to deposit ratio was 70.74% at December 31, 2009 versus 64.90% at December 31, 2008. The ratio increased during 2009 due to the new loans acquired during the SFSB acquisition, yet remains nominal relative to industry standards. As noted in the prior year, this ratio was affected during the fourth quarter of 2008 by the TCB transaction which accounted for $305.197 million of deposits at December 31, 2008. These excess funds were immediately invested in U. S. Government and Agency securities.

The following table presents the total amount of average balances, interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Except as indicated in the footnotes, no tax-equivalent adjustments were made. Any non-accruing loans have been included in the table as loans carrying a zero yield.

 

33


Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

NET INTEREST MARGIN ANALYSIS

AVERAGE BALANCE SHEET

(Dollars in thousands)

 

     Twelve months ended December 31, 2009     Twelve months ended December 31, 2008  
     Average
Balance
Sheet
    Interest
Income/
Expense
   Average
Rates
Earned/
Paid
    Average
Balance
Sheet
     Interest
Income/
Expense
   Average
Rates
Earned/
Paid
 

ASSETS:

               

Loans, including fees

   $ 554,875      $ 36,019    6.49   $ 291,819       $ 19,694    6.75

Loans covered by FDIC loss share

     161,243        15,139    9.39     —           —      —     
                                           

Total loans

     716,118        51,158    7.14     291,819         19,694    6.75

Interest bearing bank balances

     21,542        296    1.38     40,927         356    0.87

Federal funds sold

     16,567        37    0.22     4,895         90    1.84

Investments (taxable)

     228,871        9,635    4.21     60,451         2,297    3.80

Investments (tax exempt) (1)

     90,209        5,142    5.70     23,791         1,360    5.72
                                           

Total earning assets

     1,073,307        66,268    6.17     421,883         23,797    5.64

Allowance for loan losses

     (12,022          (3,360      

Non-earning assets

     199,245             65,682         
                           

Total assets

   $ 1,260,530           $ 484,205         
                           

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Demand — interest bearing

   $ 196,259      $ 1,933    0.98   $ 55,811       $ 845    1.51

Savings

     55,626        468    0.84     18,109         229    1.26

Time deposits

     727,085        21,316    2.93     231,756         6,621    2.86
                                       

Total deposits

     978,970        23,717    2.42     305,676         7,695    2.52

Fed funds purchased

     971        8    0.82     5,436         131    2.41

FHLB and other borrowings

     43,048        1,409    3.27     15,861         734    4.63
                                       

Total interest-bearing liabilities

     1,022,989        25,134    2.46     326,973         8,560    2.62
                       

Non-interest bearing deposits

     62,034             52,945         

Other liabilities

     21,012             23,935         
                           

Total liabilities

     1,106,035             403,853         

Stockholders’ equity

     154,495             80,352         
                           

Total liabilities and stockholders’ equity

   $ 1,260,530           $ 484,205         
                           

Net interest earnings

     $ 41,134         $ 15,237   
                       

Interest spread

        3.71         3.02
                       

Net interest margin

        3.83         3.61
                       

 

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.

 

34


Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME

FOR THE YEAR ENDED DECEMBER 31, 2009

(Dollars in thousands)

 

     2009 compared to 2008  
     Increase (Decrease)  
     Volume     Rate     Total  

Interest Income:

      

Loans, including fees

   $ 28,641      $ 2,823      $ 31,464   

Interest bearing bank balances

     (170     110        (60

Federal funds sold

     215        (268     (53

Investments

     10,192        (358     9,834   
                        

Total Earning Assets

     38,878        2,307        41,185   

Interest Expense:

      

Demand deposits

     2,121        (1,033     1,088   

Savings deposits

     473        (234     239   

Time deposits

     14,166        529        14,695   
                        

Total deposits

     16,760        (738     16,022   

Other borrowed funds

     923        (371     552   
                        

Total interest-bearing Liabilities

     17,683        (1,109     16,574   
                        

Net increase (decrease) in net interest income

   $ 21,195      $ 3,416      $ 24,611   
                        

Noninterest Income

Noninterest income equaled $26.240 million during 2009, which included a first quarter gain on the SFSB transaction of $20.255 million. Service charges on deposit accounts were $2.506 million; other noninterest income was $1.967 million, securities gains were $856,000, and gains on other real estate totaled $656,000.

Noninterest income was $1.780 million for the year-ended December 31, 2008 compared with $0 for 2007. Service charges on deposit accounts were $1.185 million and other noninterest income was $629,000. The largest components of service charge income were derived from NSF fees which aggregated $780,000 and deposit ATM fees which totaled $274,000 during 2008. The largest components of other noninterest income during 2008 were evidenced in Bank owned life insurance income of $161,000 and investment advisory fees of $72,000.

Provision for Loan Losses

For the year ended December 31, 2009, loan loss provisions were $19.089 million versus $2.572 million recorded for the seven months ended December 31, 2008. Net charge-offs were $7.859 million during 2009 versus $938,000 during 2008. There were no provisions, charge-offs or recoveries during 2007.

Significant increases were made to the loan loss reserve during the third quarter of 2009 as economic conditions continued to show signs of deterioration, which necessitated further provisions for impairments of classified assets. The most notable impetus for the provision was evidenced in one borrowing relationship which was previously impaired and on the Bank’s watch list. Current information related to unwinding that credit necessitated further impairment which amounted to approximately 50% of the provision during the third quarter and subsequent charge-off in the fourth quarter. After a $3.0 million charge-off in the fourth quarter, the amount of this loan outstanding at December 31, 2009 was $4.246 million, with specific allowance of $62,000. The loan was placed on non-accrual status during June of 2009. The loan, classified as commercial/residential real estate development which was originated approximately 10 years ago, is collateralized by real estate. The most recent appraisal on the underlying collateral dated April 2009 equaled $9.0 million. Other evaluation procedures included discussions with professionals knowledgeable with similar developments and potential buyers and sellers. The remaining balance of the provision during the third and fourth quarters of the year was attributable to downgraded credits and further insulation from the economic downturn. Management continues to monitor the loan portfolio closely and make appropriate adjustments using the Company’s internal risk rating system.

While the Maryland loan portfolio contains significant risk, it was considered in determining the initial fair value, which was reflected in adjustments recorded at the time of the SFSB transaction, less the FDIC guaranteed portion of losses on covered assets. Net-charge off activity has increased during recent quarters, a trend that is expected to continue until economic conditions improve. Please refer to the Asset Quality discussion below for further analysis.

 

35


Table of Contents

Noninterest Expenses

During 2009, noninterest expenses were $75.468 million; inclusive of the aforementioned $31.457 million in goodwill impairment charges. Salaries and employee benefits were $21.967 million and represented 49.91% of noninterest expense, exclusive of the goodwill impairment charge. Throughout the year, the management team has been expanded, providing additional depth to the management of the Company. The Company anticipates less staffing increases in 2010 relative to 2009 as its current staffing level has a greater capacity to effectively manage the Company through current and anticipated opportunities and challenges.

In February 2010, the Company approved two transaction-based bonus awards in the aggregate amount of $2.986 million to Gary A. Simanson, who was the Company’s chief strategic officer until April 2010. The approval of the bonus awards was made pursuant to a provision in Simanson’s employment agreement that provides for a cash bonus payment for financial advisory and other services that Simanson renders in connection with the negotiation and consummation of a merger or other business combination or the acquisition of a substantial portion of the assets or deposits of another financial institution. The bonus awards related to Simanson’s services with respect to the Bank’s acquisition of certain assets and assumption of all deposit liabilities of four former branch offices of TCB in November 2008 and the Bank’s acquisition of certain assets and assumption of all deposit liabilities of seven former branch offices of SFSB in January 2009. The amounts of the bonuses are based on, with respect to the TCB transaction, the total amount of non-brokered deposits that the Bank assumed in that transaction and, with respect to the SFSB transaction, the total amount of loans and other assets that the Bank acquired in that transaction, and the Company looked closely at a number of factors, including the value that each of the transactions provided the Company, in approving the bonuses. In accordance with generally accepted accounting principles, the Company reflected these bonuses in the financial statements for the year and three months ended December 31, 2009. See Note 27 to the Company’s financial information for additional information with respect to these bonus awards.

As of April 22, 2010, the Company is actively discussing with the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions certain issues with respect to the payment of these bonus awards. These issues include the compliance of the terms and structure of the bonus awards with Federal Reserve System Regulation W and the rules and regulations of the TARP Capital Purchase Program. The Company is working diligently to resolve these issues. The Company cannot make any assurances as to the amount of these bonus awards, if any, that will ultimately be paid following the resolution of these issues.

Other noninterest expense costs during 2009 included other operating expenses of $6.791 million, data processing fees of $2.837 million, occupancy expenses of $2.662 million, FDIC assessments of $2.904 million, amortization of core deposit intangibles of $2.241 million, professional fees of $2.012 million, equipment expense of $1.595 million, and legal fees of $1.002 million.

During 2009, the Company successfully integrated the core processing systems of both TCB and SFSB. Management anticipates operational efficiencies for these measures in 2010 and beyond. During the fourth quarter of 2008, the Company consolidated its core processing systems for TFC and BOE. While this created economies of scale and increased capacity, there were significant installation, training and implementation costs.

Noninterest expenses were $12.627 million during 2008. Salaries and employee benefits were $5.590 million and represented the largest component of this category. Other noninterest expenses included other operating expenses of $3.120 million, amortization of intangibles of $975,000, occupancy expenses of $884,000, equipment expense of $665,000, data processing fees of $499,000 and legal fees of $429,000 for the operating period.

Income Taxes

The Company recorded an income tax expense of $404,000 for 2009 compared to income tax expense of $133,000 and $576,000 for the years ended December 31, 2008 and 2007, respectively.

The substantial difference in income tax expense during 2009 relative to net operating loss is directly attributable to the goodwill impairement charges taken during the year and the Company’s inability to use it as a tax deduction, despite the substantial reduction to earnings.

The reduced income tax provision as a percentage of taxable income during 2008 was due in part to a net operating loss carry-forward afforded by the former TFC and by the addition of nontaxable interest income on bank-qualified state, county, and municipal securities.

 

36


Table of Contents

Asset Quality – non-covered assets

The allowance for loan losses represents management’s estimate of the amount appropriate to provide for probable losses inherent in the loan portfolio.

Non-covered loan quality is continually monitored, and the Company’s management has established an allowance for loan losses that it believes is appropriate for the risks inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the covered loan portfolio, the value and appropriateness of collateral and guarantors, non-performing credits and current and anticipated economic conditions. There are additional risks of future loan losses, which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends, as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies.

The Company maintains a list of non-covered loans that have potential weaknesses which may need special attention. This nonperforming loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. At December 31, 2009, nonperforming assets totaled $21.844 million and net charge-offs were $7.859 million. This compares with nonperforming assets of $5.154 million and net charge-offs of $938,000 for the year ended December 31, 2008. Nonperforming loans increased $15.327 million during 2009, primarily attributable to eight credit relationships aggregating approximately $14.928 million being placed in nonaccrual status. These borrowers are commercial/ residential land developers and their loans are secured by real estate. Approximately $3.0 million related to these loans was charged-off in the fourth quarter of 2009. The remaining increase in nonperforming loans during 2009 was all smaller credit relationships. These creditors were primarily commercial/residential land developers with loans secured by real estate.

The following table sets forth selected asset quality data and ratios with respect to our non-covered assets of December 31, 2009 and 2008 (dollars in thousands):

 

     2009     2008  

Nonaccrual loans

   $ 20,011      $ 4,534   

Loans 90 days past due and accruing interest

     247        397   
                

Total nonperforming loans

   $ 20,258      $ 4,931   

Other real estate owned (OREO) - non-covered

     1,586        223   
                

Total nonperforming non-covered assets

   $ 21,844      $ 5,154   
                

Nonperforming non-covered assets to non-covered loans and non-covered OREO

     3.77     0.98

Allowance for loan losses to nonperforming non-covered loans

     89.69     140.72

A further breakout of nonaccrual loans, excluding covered loans, at December 31, 2009 and 2008 is below:

 

     December 31, 2009     December 31, 2008  
     Amount
of Non
Accrual
   Non
Covered
Loans
   Percentage
of Non
Covered
Loans
    Amount
of Non
Accrual
   Non
Covered
Loans
   Percentage
of Non
Covered
Loans
 

Mortgage loans on real estate

                

Residential 1-4 family

   $ 4,750    $ 146,141    3.25   $ 594    $ 129,607    0.46

Commercial

     3,861      188,991    2.04     782      158,062    0.49

Construction and land development

     10,115      144,297    7.01     1,655      139,515    1.19

Second mortgages

     194      13,935    1.39     497      15,599    3.19

Multifamily

     —        11,995    0.00     —        9,370    0.00

Agriculture

     —        5,516    0.00     433      5,143    8.42
                                        

Total real estate loans

     18,920      510,875    3.70     3,961      457,296    0.87

Commercial loans

     174      42,157    0.41     224      45,320    0.49

Consumer installment loans

                

Personal

     910      14,145    6.43     25      14,457    0.17

All other loans

     7      12,205    0.06     324      7,005    4.63
                                        

Gross loans

   $ 20,011    $ 579,382    3.45   $ 4,534    $ 524,078    0.87
                                        

See Note 4 to the Company’s financial statements for information related to the allowance for loan losses. As of December 31, 2009 and December 31, 2008, total impaired non-covered loans equaled $56.456 million and $26.216 million, respectively.

See Note 3 to the TFC financial statements and Note 3 to the BOE financial statements for asset quality data as of, and for the periods ended, May 31, 2008 and December 31, 2007.

Asset Quality –covered assets

Loans accounted for under ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans.

The Company makes an estimate of the total cash flows it expects to collect from a pool of covered loans, which includes undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool. No impairment charges were posted to the allowance for loan losses during 2009.

Covered assets that would normally be considered nonperforming except for the accounting requirements regarding purchased impaired loans and other real estate owned covered by FDIC shared-loss agreement, at December 31, 2009 are as follows (dollars in thousands):

 

     2009

Nonaccrual covered loans (1)

   $ 49,906

Other real estate owned (OREO) - covered

     12,822
      

Total nonperforming covered assets

   $ 62,728
      

 

(1) Amount is based on contractual book value. Contractual book value of total covered loans is $242.0 million. In accordance with ASC 310, covered loans are recorded at fair market value of $150.9 million.

For more information regarding the FDIC shared-loss agreements, see the discussion of the allowance for covered loans under the “Critical Accounting Policies” section of this document.

 

37


Table of Contents

Capital Requirements

The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends and economic conditions. The Company seeks to maintain a strong capital base to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Company.

The federal banking regulators have defined three tests for assessing the capital strength and adequacy of banks, based on two definitions of capital. “Tier 1 Capital” is defined as a combination of common and qualifying preferred stockholders’ equity less goodwill. “Tier 2 Capital” is defined as qualifying subordinated debt and a portion of the allowance for loan losses. “Total Capital” is defined as Tier 1 Capital plus Tier 2 Capital. Three risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets and are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. “Tier 1 Risk-based Capital” is Tier 1 Capital divided by risk-weighted assets. “Total Risk-based Capital” is Total Capital divided by risk-weighted assets. The Leverage ratio is Tier 1 Capital divided by total average assets.

 

38


Table of Contents

The Company’s ratio of total capital to risk-weighted assets was 16.03% on December 31, 2009. The ratio of Tier 1 Capital to risk-weighted assets was 14.82% on December 31, 2009. The Company’s leverage ratio (Tier 1 capital to average adjusted total assets) was 8.93% on December 31, 2009. It is important to note that the decline in the leverage ratio for the year was the direct result of adding assets to the balance sheet for the SFSB transaction. While these assets are partially guaranteed by the FDIC, this ratio does not adjust average assets accordingly for the “covered” risk associated with the FDIC guarantee.

All capital ratios exceed regulatory minimums. In the fourth quarter of 2003, BOE issued trust preferred subordinated debt that qualifies as regulatory capital. This trust preferred debt has a 30-year maturity with a 5-year call option and was issued at a rate of three month LIBOR plus 3.00%. The weighted average cost of this instrument was 3.89% during 2009.

The Company’s ratio of total capital to risk-weighted assets was 20.00% on December 31, 2008. The ratio of Tier 1 Capital to risk-weighted assets was 18.92% on December 31, 2008. The Company’s leverage ratio (Tier 1 capital to average adjusted total assets) was 12.54% on December 31, 2008. Trust preferred debt had a weighted average cost of 6.33% from May 31, 2008, the date of the merger with BOE, through December 31, 2008.

Loans

Asset growth during 2009 was centered in loans related to the SFSB transaction (the “covered loans”). Total loans, including FDIC covered loans, at December 31, 2009 were $729.564 million, an increase of $206.266 million, or 39.42%, compared with $523.298 million at December 31, 2008. The fair value of SFSB loans aggregated $150.935 million at December 31, 2009. Accordingly, the non-covered loan portfolio increased $55.331 million or 10.57% during the year. Of this amount, approximately $21 million of additional loans were purchased from the FDIC during 2009 related to the TCB transaction in 2008.

As of December 31, 2008, loans purchased under the TCB agreement totaled $1.5 million, all of which were secured by deposits.

The following table indicates the total dollar amount of loans outstanding and the percentage of gross loans as of December 31, 2009 and December 31, 2008 (dollars in thousands):

 

     2009  
     Non-covered loans     Covered Loans     Total Loans  

Mortgage loans on real estate

             

Residential 1-4 family

   $ 146,141      25.22   $ 119,065    78.88   $ 265,206      36.31

Commercial

     188,991      32.62     5,835    3.87     194,826      26.68

Construction and land development

     144,297      24.91     17,020    11.28     161,317      22.09

Second mortgages

     13,935      2.41     8,194    5.43     22,129      3.03

Multifamily

     11,995      2.07     —      0.00     11,995      1.64

Agriculture

     5,516      0.95     627    0.41     6,143      0.84
                                         

Total real estate loans

     510,875      88.18     150,741    99.87     661,616      90.59

Commercial loans

     42,157      7.28     —      0.00     42,157      5.77

Consumer installment loans

             

Personal

     14,145      2.44     194    0.13     14,339      1.97

All other loans

     12,205      2.10     —      0.00     12,205      1.67
                                         

Gross loans

     579,382      100.00     150,935    100.00     730,317      100.00
                         

Less unearned income on loans

     (753       —          (753  
                             

Loans, net of unearned income

   $ 578,629        $ 150,935      $ 729,564     
                             

 

39


Table of Contents
     2008  
     Total Loans  

Mortgage loans on real estate

    

Residential 1-4 family

   $ 129,607      24.73

Commercial

     158,062      30.16

Construction and land development

     139,515      26.62

Second mortgages

     15,599      2.98

Multifamily

     9,370      1.79

Agriculture

     5,143      0.98
              

Total real estate loans

     457,296      87.26

Commercial loans

     45,320      8.65

Consumer installment loans

    

Personal

     14,457      2.76

All other loans

     7,005      1.33
              

Gross loans

     524,078      100.00
        

Less unearned income on loans

     (780  
          

Loans, net of unearned income

   $ 523,298     
          

See Note 3 to the TFC financial statements and Note 3 to the BOE financial statements for loan information as of May 31, 2008 and December 31, 2007.

The Company has a significant portion of its loan portfolio in real estate secured borrowings. The following table indicates the contractual maturity of commercial and real estate construction loans as of December 31, 2009:

 

     Non-covered loans    Covered loans
(dollars in thousands)    Commercial    Real Estate
Construction
   Commercial    Real Estate
Construction

Within 1 year

   $ 23,722    $ 115,558    $ —      $ 9,681
                           

Variable Rate

           

One to Five Years

   $ 1,050    $ 16,200    $ —      $ —  

After Five Years

     1,505      1,630      —        7,126
                           

Total

   $ 2,555    $ 17,830    $ —      $ 7,126
                       

Fixed Rate

           

One to Five Years

   $ 14,500    $ 10,631    $ —      $ —  

After Five Years

     1,380      278      —        213
                           

Total

   $ 15,880    $ 10,909    $ —      $ 213
                           

Total Maturities

   $ 42,157    $ 144,297    $ —      $ 17,020
                           

Most of 1-4 family residential loans have contractual maturities exceeding five years.

 

40


Table of Contents

Allowance for Credit Losses on Non-covered loans

The following table indicates the dollar amount of the allowance for loan losses, including charge-offs and recoveries by loan type as of December 31 and related ratios:

 

(Dollars in thousands)             
     2009     2008  

Balance, beginning of year

   $ 6 ,939      $ —     

Allowance from acquired predecessor banks

     —          5,305   

Loans charged-off:

    

Commercial

     434        539   

Real estate

     7,753        212   

Consumer and other loans

     414        229   
                

Total loans charged-off

     8,601        980   

Recoveries:

    

Commercial

     22        —     

Real estate

     614        —     

Consumer and other loans

     106        42   
                

Total recoveries

     742        42   
                

Net charge-offs (recoveries)

     7,859        938   

Provision for loan losses

     19,089        2,572   

Balance, end of year

   $ 18,169      $ 6,939   
                

Allowance for loan losses to non-covered loans

     3.14     1.33

Net charge-offs (recoveries) to average non-covered loans

     1.42     0.32

Allowance to nonperforming non-covered loans

     89.69     140.72

During 2009, the Bank’s net charge-offs increased $6.921 million from the prior year and were primarily centered in real estate. Net charge-offs by loan category to total net charge-offs were the following for 2009: 5.24% for commercial loans, 90.84% for real estate loans, and 3.92% for consumer loans.

During 2008, net charge-offs for commercial loans were 57.46% of total net charge-offs. Net charge-offs for real estate loans were 22.60% of net charge-offs, while net charge-offs for consumer loans were 19.94% of net charge-offs.

See Note 3 to the TFC financial statements and Note 3 to the BOE financial statements for allowance for loan loss information as of, and for the periods ended, May 31, 2008 and December 31, 2007.

While the entire allowance is available to cover charge-offs from all loan types, the following table indicates the dollar amount allocation of the allowance for loan losses by loan type, as well as the ratio of the related outstanding loan balances to non-covered loans as of December 31, 2009 and December 31, 2008 (dollars in thousands):

 

     2009     2008  
     amount    %(1)     amount    %(1)  

Commercial

   $ 2,442    7.28      $ 2,919    8.7

Real Estate Construction and land development

     4,972    24.91     338    26.6

Real Estate Mortgage

     10,284    63.27     3,528    60.6

Consumer and other

     471    4.54     154    4.1
                          
   $ 18,169    100.0   $ 6,939    100.0
                          

 

(1) The percent represents the loan balance divided by total non-covered loans.

Allowance for Credit Losses on Covered Loans

The covered loans acquired are subject to credit review standards described above for non-covered loans. If and when credit deterioration occurs subsequent to the acquisition date, a provision for credit loss for covered loans will be charged to earnings for the full amount without regard to the FDIC shared-loss agreements. The Company makes an estimate of the total cash flows it expects to collect from a pool of covered loans, which includes undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairment in the current period through allowance for loan loss. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool.

 

41


Table of Contents

Securities

The Company invests funds in securities primarily to provide liquidity while earning income. At December 31, 2009 the investment portfolio aggregated $300.951 million increasing 2.90% or $8.482 million from the prior year. While investment growth was nominal in dollars during 2009, the composition of the securities portfolio shifted from being heavily concentrated in mortgage backed-securities to state county and municipal securities. This shift in the securities mix was made in an effort to maximize earnings without compromising the credit quality of the portfolio. At December 31, 2009, the Company had securities designated available for sale of $179.440 million, and held to maturity of $113.165 million with equity securities totaling $8.346 million. The Company does not hold any trust preferred securities, private label CMO’s, or other esoteric instruments that have evidenced credit deterioration throughout the financial industry.

As of December 31, 2008, securities equaled $292.469 million. The purchase and assumption of TCB on November 21, 2008, resulted in a large influx of cash immediately available for investment in December 2008. Nearly two-thirds, or 66.33%, of the securities portfolio was designated available for sale, which equaled $193.992 million at December 31, 2008. Securities classified held to maturity totaled $94.865 million, and the remaining $3.612 million were equity securities concentrated in restricted stock held with the Federal Reserve Bank, FHLB, and Community Bankers Bank.

The following table summarizes the securities portfolio, except restricted stock and equity securities, by issuer as of the dates indicated (available for sale securities are not adjusted for unrealized gains or losses):

 

     December 31
     2009    2008
(amortized cost)    (Dollars in thousands)

US government and agency securities

   $ 18,141    $ 34,729

Obligations of states and political subdivisions

     117,928      73,873

Corporate and other securities

     2,535      7,418

Mortgage-backed securities

     149,730      173,214
             
   $ 288,334    $ 289,234
             

See Note 2 to the TFC financial statements and Note 2 to the BOE financial statements for securities portfolio information as of May 31, 2008 and December 31, 2007.

 

42


Table of Contents

The following table summarizes the securities portfolio by contractual maturity and issuer, including their weighted average yields as of December 31, 2009, excluding restricted stock (dollars in thousands):

 

     1 Year or Less     1-5 Years     5-10 Years     Over 10 Years     Total  

U.S. Treasury Issue and other U.S. Government agencies

          

Amortized Cost

   $ 11,021      $ 5,001      $ 2,119      $ —        $ 18,141   

Fair Value

     11,310        5,129        2,137        —          18,576   

Weighted Avg Yield

     3.85     3.40     3.83     0.00     3.72

State, county and municipal

          

Amortized Cost

     7,268        25,757        58,122        26,781        117,928   

Fair Value

     7,327        26,202        58,906        27,312        119,747   

Weighted Avg Yield

     5.77     5.16     5.28     6.18     5.49

Corp bonds & other securities

          

Amortized Cost

     —          2,535        —          —          2,535   

Fair Value

     —          2,657        —          —          2,657   

Weighted Avg Yield

     0.00     4.69     0.00     0.00     4.69

Mortgage Backed securities

          

Amortized Cost

     3,859        93,411        46,766        5,694        149,730   

Fair Value

     3,898        96,442        48,364        5,896        154,600   

Weighted Avg Yield

     3.61     4.24     4.96     4.75     4.47

Financial securities

          

Amortized Cost

           1,192        1,192   

Fair Value

           868        868   

Weighted Avg Yield

           0.00     0.00

Total

          

Amortized Cost

     22,148        126,704        107,007        33,667        289,526   

Fair Value

     22,535        130,430        109,407        34,076        296,448   

Weighted Avg Yield

     4.44     4.40     5.11     5.72     4.82

The amortized cost and fair value of securities available for sale and held to maturity as of December 31 are as follows (dollars in thousands):

 

     2009
     Amortized
Cost
   Gross Unrealized     Fair Value
        Gains    Losses    

Securities Available for Sale

          

U.S. Treasury issue and other U.S. Government agencies

   $ 17,393    $ 434    $ (1   $ 17,826

State, county and municipal

     104,831      1,864      (557     106,138

Corp & other bonds

     1,511      93      —          1,604

Mortgage backed securities

     51,434      1,573      (3     53,004

Financial securities

     1,192      113      (437     868
                            

Total securities available for sale

   $ 176,361    $ 4,077    $ (998   $ 179,440
                            

Securities Held to Maturity

          

U.S. Treasury issue and other U.S. Government agencies

   $ 748    $ 2    $ —        $ 750

State, county and municipal

     13,097      516      (4     13,609

Corp & other bonds

     1,024      29      —          1,053

Mortgage backed securities

     98,296      3,308      (8     101,596
                            

Total securities held to maturity

   $ 113,165    $ 3,855    $ (12   $ 117,008
                            

 

43


Table of Contents
     2008
     Amortized
Cost
   Gross Unrealized     Fair Value
        Gains    Losses    

Securities Available for Sale

          

U.S. Treasury issue and other U.S. Government agencies

   $ 28,732    $ 358    $ (21   $ 29,069

State, county and municipal

     64,600      478      (2,184     62,894

Corp & other bonds

     7,418      19      (188     7,249

Mortgage backed securities

     93,619      803      (66     94,356

Financial securities

     323      111      (10     424
                            

Total securities available for sale

   $ 194,692    $ 1,769    $ (2,469   $ 193,992
                            

Securities Held to Maturity

          

U.S. Treasury issue and other U.S. Government agencies

   $ 5,997    $ 37    $ —        $ 6,034

State, county and municipal

     9,273      1      —          9,274

Mortgage backed securities

     79,595      62      —          79,657
                            

Total securities held to maturity

   $ 94,865    $ 100    $ —        $ 94,965
                            

Deposits

The Company’s lending and investing activities are funded primarily through its deposits. The following table summarizes the average balance and average rate paid on deposits by product for the periods ended December 31, 2009 and 2008 (dollars in thousands):

 

     2009     2008  
     Average
Balance
Sheet
   Interest
Expense
   Average
Rates
Paid
    Average
Balance
Sheet
   Interest
Expense
   Average
Rates
Paid
 

NOW

   $ 110,677    $ 710    0.64   $ 33,172    $ 197    0.59

MMDA

     85,582      1,223    1.43     22,639      648    2.86

Savings

     55,626      468    0.84     18,109      229    1.26

Time deposits less than $100,000

     487,455      15,110    3.10     112,716      3,431    3.04

Time deposits $100,000 and over

     239,630      6,206    2.59     119,040      3,190    2.68
                                        

Total deposits

   $ 978,970    $ 23,717    2.42   $ 305,676    $ 7,695    2.52
                                        

See Note 5 to the TFC financial statements and Note 5 to the BOE financial statements for average balance and average rate paid on deposits for the periods ended May 31, 2008 and December 31, 2007.

 

44


Table of Contents

The Company derives a significant amount of its deposits through time deposits, and certificates of deposit specifically. The following tables summarize the contractual maturity of time deposits, including those $100,000 or more, as of December 31, 2009:

Scheduled maturities of time deposits

 

     Total
     (Dollars in thousands)

2010

   $ 576,984

2011

     73,451

2012

     25,577

2013

     18,736

2014

     8,301
      

Total

   $ 703,049
      

Maturities of time deposits of $100,000 and over

 

     Total    % of Deposits  
     (Dollars in thousands)  

Within 3 months

   $ 61,953    6.0

3-6 months

     47,128    4.6

6-12 months

     120,940    11.7

over 12 months

     49,126    4.8
             

Total

   $ 279,147    27.1
             

Other Borrowings

The Company uses borrowings in conjunction with deposits to fund lending and investing activities. Borrowings include funding of a short-term and long-term nature. Short-term funding includes overnight borrowings from correspondent banks and securities sold under an agreement to repurchase. Long-term borrowings are obtained through the FHLB of Atlanta. The following information is provided for borrowings balances, rates, and maturities (dollars in thousands):

 

     As of December 31  
     2009     2008  

Short-term:

    

Fed Funds purchased

   $ 8,999      $ —     
                

Maximum month-end outstanding balance

   $ 8,999      $ —     

Average outstanding balance during the year

   $ 971      $ —     

Average interest rate during the year

     0.82     —     

Average interest rate at end of year

     0.60     —     

Long-term:

    

Federal Home Loan Bank advances

   $ 37,000      $ 37,900   
                

Maximum month-end outstanding balance

   $ 74,900      $ 37,900   

Average outstanding balance during the year

   $ 38,904      $ 15,861   

Average interest rate during the year

     3.23     4.63

Average interest rate at end of year

     3.21     3.14

 

45


Table of Contents

Maturities

   Fixed Rate

2010

   $ —  

2011

     —  

2012

     22,000

2013

     10,000

2014

     —  

Thereafter

     5,000
      

Total

   $ 37,000
      

See Note 6 to the TFC financial statements and Note 7 to the BOE financial statements for information regarding Borrowings as of, and for the periods ended, May 31, 2008 and December 31, 2007.

Liquidity

Liquidity represents the Company’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, and certain investment securities. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest-earning assets and interest-bearing liabilities. At December 31, 2009, the Company’s interest-earning assets exceeded its interest-bearing liabilities by approximately $29.8 million versus $144.7 million at December 31, 2008. The dramatic change relative to this ratio year-over-year is the direct result of recording the SFSB loan portfolio at fair value and carrying a FDIC indemnification asset of $76.1 million in non-earning assets.

SUMMARY OF LIQUID ASSETS

 

     December 31,  
     2009     2008  
     (Dollars in thousands)  

Cash and due from banks

   $ 13,575      $ 10,864   

Interest bearing bank deposits

     18,660        107,376   

Federal funds sold

     —          10,193   

Available for sale securities, at fair value

     169,432        174,891   
                

Total liquid assets

   $ 201,667      $ 303,324   
                

Deposits and other liabilities

     1,086,349        865,837   

Ratio of liquid assets to deposits and other liabilities

     18.56     37.24

Capital Resources

Capital resources are obtained and accumulated through earnings with which financial institutions may exercise control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s balance sheet. Moreover, capital levels are regulated and compared with industry standards. Management seeks to maintain a capital level exceeding regulatory statutes of “well capitalized” which is consistent to its overall growth plans, yet allows the Company to provide the optimal return to its shareholders.

On December 19, 2008, the Company entered into a Purchase Agreement with the U.S. Treasury pursuant to which it issued 17,680 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share, for a total price of $17.68 million. The issuance was made

 

46


Table of Contents

pursuant to the Treasury’s Capital Purchase Plan under TARP. The Preferred Stock pays a cumulative dividend at a rate of 5% per year during the first five years and thereafter at 9% per year. As part of its purchase of the Series A Preferred Stock, the Treasury Department received a warrant (the “Warrant”) to purchase 780,000 shares of the Company’s common stock at an initial per share exercise price of $3.40.

On December 12, 2003, BOE Statutory Trust I, a wholly-owned subsidiary of BOE, was formed for the purpose of issuing redeemable capital securities. On December 12, 2003, $4.124 million of trust preferred securities were issued through a direct placement. The securities have a LIBOR-indexed floating rate of interest. The weighted average interest rate at December 31, 2009 was 3.89%. Since May 31, 2008 through December 31, 2008, the weighted-average interest rate was 6.33%. The securities have a mandatory redemption date of December 12, 2033 and are subject to varying call provisions which began December 12, 2008. The trust preferred notes may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. The portion of the trust preferred not considered as Tier 1 capital may be included in Tier 2 capital. At December 31, 2009 and December 31, 2008, all trust preferred notes were included in Tier 1 capital.

The following table shows the Company’s capital ratios:

 

     As of December 31  
( Dollars in thousands)    2009     2008  
     Amount    Ratio     Amount    Ratio  

Total Capital to risk weighted assets

          

CBTC consolidated

   $ 116,410    16.03   $ 125,523    20.00

Essex Bank

     117,008    16.15     62,517    10.30

Tier 1 Capital to risk weighted assets

          

CBTC consolidated

     107,603    14.82     114,965    18.92

Essex Bank

     108,223    14.94     55,959    9.22

Tier 1 Capital to average adjusted assets

          

CBTC consolidated

     107,603    8.93     114,965    12.54

Essex Bank

     108,223    9.01     55,959    6.12

Financial Ratios

Financial ratios give investors a way to compare companies within industries to analyze financial performance. Return on average assets is net income as a percentage of average total assets. It is a key profitability ratio that indicates how effectively a bank has used its total resources. Return on average equity is net income as a percentage of average shareholders’ equity. It provides a measure of how productively a Company’s equity has been employed. Dividend payout ratio is the percentage of net income paid to shareholders as cash dividends during a given period. It is computed by dividing dividends per share by net income per common share. The Company utilizes leverage within guidelines prescribed by federal banking regulators as described in the section “Capital Requirements” in the preceding section. Leverage is average stockholders’ equity divided by total average assets.

 

     Year Ended December 31  
         2009             2008      

Return on average assets

   (2.33 %)    0.25

Return on average equity

   (18.99 %)    1.52

Dividend payout ratio

   (11.33 %)    143.50

Average equity to average asset ratio

   12.26   16.59

 

47


Table of Contents

Off-Balance Sheet Arrangements

A summary of the contract amount of the Bank’s exposure to off-balance sheet risk as of December 31, is as follows (dollars in thousands):

 

     2009    2008

Commitments with off-balance sheet risk:

     

Commitments to extend credit

   $ 88,668    $ 106,378

Standby letters of credit

     15,284      12,356
             

Total commitments with off-balance sheet risk

   $ 103,952    $ 118,734
             

Commitments with balance sheet risk:

     

Loans held for sale

   $ —      $ 200
             

Total commitments with balance sheet risk

     —        200
             

Total other commitments

   $ 103,952    $ 118,934
             

Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing clients. Those lines of credit may be drawn upon only to the total extent to which the Bank is committed.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a client to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Bank holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

A summary of the Corporation’s contractual obligations at December 31, 2009 is as follows (dollars in thousands):

 

     Total    Less Than
1  Year
   1-3 Years    4-5 Years    More Than
5  Years

Trust preferred debt

   $ 4,124    $ —      $ —      $ —      $ 4,124

Federal Home Loan Bank advances

     37,000      —        22,000      10,000      5,000

Operating leases

     7,348      679      925      871      4,873
                                  

Total contractual obligations

   $ 48,472    $ 679    $ 22,925    $ 10,871    $ 13,997
                                  

NON GAAP MEASURES

Beginning January 1, 2009, business combinations must be accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The Company has accounted for its previous business combinations under the purchase method of accounting. The original merger between the Company, TFC and BOE as well as acquisition of SFSB were business combinations accounted for using the purchase method of accounting. TCB transaction was accounted for as an asset purchase. At December 31, 2009, core deposit intangible assets and goodwill totaled $17.080 million and $5.727 million, respectively, compared with $17.163 million and $37.184 million, respectively, in 2008.

 

48


Table of Contents

In reporting the results of 2009 and 2008 in Item 6 above, the Company has provided supplemental performance measures on an operating or tangible basis. Such measures exclude amortization expense related to intangible assets, such as core deposit intangibles. In addition, the most significant impact on the Company’s GAAP earnings in 2009 arose from the goodwill impairment charge described earlier in this section. The goodwill impairment charge was a non-cash, traditionally non-recurring item that created the GAAP loss for the year, and thus the supplemental performance measures exclude this item. The Company believes these measures are useful to investors as they exclude non-operating adjustments resulting from acquisition activity and allow investors to see the combined economic results of the organization. Non-GAAP operating earnings per share was $0.17 for the year ended December 31, 2009 compared with $0.11 in 2008. Non-GAAP return on average tangible common equity and assets for the year ended December 31, 2009 was 3.74% and 0.30%, respectively, compared with 1.27% and 0.42%, respectively, in 2008.

These measures are a supplement to GAAP used to prepare the Company’s financial statements and should not be viewed as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The following table reconciles these non-GAAP measures from their respective GAAP basis measures for the years ended December 31, (dollars in thousands):

 

     2009     2008  

Net (loss) income

   $ (29,335   $ 1,223   

Plus: core deposit intangible amortization, net of tax

     1,479        645   

Plus: goodwill impairment

     31,457        —     
                

Non-GAAP operating earnings

   $ 3,601      $ 1,868   
                

Average assets

   $ 1,260,530      $ 484,205   

Less: average goodwill

     22,547        30,462   

Less: average core deposit intangibles

     17,961        8,830   
                

Average tangible assets

   $ 1,220,022      $ 444,913   
                

Average equity

   $ 154,495      $ 80,352   

Less: average goodwill

     22,547        30,462   

Less: average core deposit intangibles

     17,961        8,830   

Less: average preferred equity

     17,775        533   
                

Average tangible common equity

   $ 96,212      $ 40,527   
                

Weighted average shares outstanding, diluted

     21,468        17,518   

Non-GAAP earnings per share, diluted

   $ 0.17      $ 0.11   

Non-GAAP return on average tangible assets

     0.30     0.42

Non-GAAP return on average tangible common equity

     3.74     4.61

Supplemental Information on Predecessor Entities

The following information represents a discussion and analysis of the results of operations of each of the Company’s Predecessor Entities for the five months ended May 31, 2008 and the year ended December 31, 2007.

TransCommunity Financial Corporation (TFC)

Results of Operations for the five months ended May 31, 2008

For the five months ended May 31, 2008, net losses were $3.9 million or $(.85) per share. The loss incurred was primarily the result of one-time noninterest expenses related to the May 31, 2008 acquisition by the Company as well as an increase in the provision for loan losses.

 

49


Table of Contents

Net interest income was $3.8 million for the five months ended May 31, 2008. Net interest margin was 3.86%. During this period, the Federal Reserve decreased interest rates four times for a total of 225 basis points. Most of TFC’s earning assets were centered in loans, and approximately two-thirds of those loans were adjustable rate. As a result, the balance sheet was considered to be asset sensitive. Therefore, the rate cuts were unfavorable to the net interest margin, which declined approximately 127 basis points for the five months ended May 31, 2008.

For the five months ended May 31, 2008, TFC’s provision for loan losses was $1.3 million. The increase in loan loss reserves was due to a combination of the provisions required to support loan growth, plus downgraded loans and seasoning of the loan portfolio. The ratio of net charge-offs to average loans was 0.43% for the five month period ended May 31, 2008.

For the five months ended May 31, 2008, noninterest income was $429,000. Service charges on bank accounts made up $342,000 of this amount.

For the five months ended May 31, 2008, noninterest expenses were $8.2 million. Salaries and employee benefits were $3.7 million and represented 45.06% of all noninterest expenses for the period. Additionally, TFC incurred occupancy expenses of $318,000, equipment expense of $295,000, and other noninterest expenses of $3.9 million, which were comprised of data processing fees of $1.9 million, professional fees of $1.0 million, legal and accounting fees of $260,000, and other expenses totaling $702,000.

One-time noninterest expenses related to the May 31, 2008 acquisition by the Company included $1.3 million in salaries and benefits related to severance and bonuses, $1.7 million in data processing resulting from the termination of a data processing contract and $1.0 million in professional fees.

An income tax benefit of $1.5 million was recorded for the five months ended May 31, 2008.

Overview as of December 31, 2007 and results of operations for the year then ended

As of December 31, 2007, TFC had total assets of $238.3 million, total loans of $205.5 million, total deposits of $203.6 million, and total stockholders’ equity of $33.2 million. For 2007, TFC reported net income of $2.5 million. Net income from continuing operations was $2.6 million, which included an income tax benefit of $3.3 million resulting from the removal of a previously established valuation allowance against the net deferred tax asset. Earnings per share from continuing operations for 2007 was $0.56. Net losses from discontinued operations equalled $77,000. Net income per share, both basic and diluted, for 2007 was $0.54.

Results of operations for 2007 were affected by non-recurring expenses related to bank charter consolidation and operating system conversion. Four bank charters were legally consolidated under a single bank, TFC, effective June 30, 2007. Also, during 2007, higher than expected accounting costs were incurred associated with amendments to TFC’s 2005 Form 10-KSB and First Quarter 2006 Form 10-Q. Strong loan growth coupled with net charge-offs of $715,000 resulted in a provision for loan losses of $1.7 million during 2007.

Net interest income was $10.5 million for the year ended December 31, 2007. Average total interest-earning assets were $204.1 million in 2007 and the average yield was 8.40%. Average total interest-bearing liabilities were $161.8 during 2007. Interest rates declined from September to December 2007, however, the average cost of interest-bearing liabilities was 4.13% during 2007. This overall increase in interest expense was attributable to core deposit growth concentrated in relatively higher cost certificates of deposit. For the year ended December 31, 2007, net interest spread was 4.27% and net interest margin was 5.13%.

TFC recorded a provision for loan losses of $1.7 million for the year ended December 31, 2007. The loan loss provision for 2007 was consistent with loan growth and net charge-offs that were experienced. The ratio of the allowance for loan losses to period-ending total loans was 1.48%, at December 31, 2007. The ratio of net charge-offs to average loans was 0.41% for the year ended December 31, 2007.

 

50


Table of Contents

The following table indicates the dollar amount allocation of the allowance for loan losses by loan type, as well as the ratio of the related outstanding loan balances to total loans as of December 31, 2007 (dollars in thousands):

 

Real estate

     

Construction and land development

   $ 607    20

Residential

     577    19

Commercial

     941    31

Commercial, industrial and agricultural

     729    24

Consumer and installment

     152    5

All other

     30    1
             

Total allowance for loan losses

   $ 3,036    100
             

For the year ended December 31, 2007, non-interest income from continuing operations was $1.1 million, all of which was customer service fees.

For the year ended December 31, 2007, non-interest expense was $10.6 million. Salary and benefits expense of $5.4 million composed the largest portion of this amount. Professional fees were $1.4 million and supplies and equipment were $1.1 million. Increases in these expenses in 2007 were due to (i) the consolidation of the division bank charters and associated operational support, and system conversion efforts, (ii) operation of the Bank of Rockbridge for a full calendar year, (iii) processing cost increases due to growth in accounts and activity, (iv) extraordinary fees charged by the TFC’s former outside auditing firm, and (v) employee merit adjustments, increased benefit costs, and implementation of a compensation plan for our directors.

 

51


Table of Contents

TRANSCOMMUNITY FINANCIAL CORPORATION

NET INTEREST MARGIN ANALYSIS

AVERAGE BALANCE SHEET

FOR THE YEAR ENDED DECEMBER 31, 2007

(dollars in thousands)

 

     Average
Balance
Sheet
    Interest
Income/
Expense
   Average
Rates
Earned/Paid
 

ASSETS:

       

Loans, including fees

   $ 176,240      $ 15,795    8.96

Federal funds sold

     11,471        570    4.97   

Investments (1)

     16,374        778    4.75   
                     

Total Earning Assets

     204,085        17,143    8.40   
           

Allowance for loan losses

     (2,211     

Non-earning assets

     13,234        
             

Total Assets

   $ 215,108        
             

LIABILITIES AND STOCKHOLDERS’ EQUITY

       

Deposits:

       

Demand — interest bearing

   $ 37,209      $ 723    1.94   

Savings

     10,097        156    1.55   

Time deposits

     113,712        5,749    5.06   
                     

Total deposits

     161,018        6,628    4.12   

Other borrowed Funds (1)

     752        48    6.38   
                 

Total interest-bearing liabilities

     161,770        6,676    4.13   
                     

Non-interest bearing deposits

     21,921        

Other liabilities

     1,087        
             

Total liabilities

     184,778        

Stockholders’ equity

     30,330        
             

Total liabilities and stockholders’ equity

   $ 215,108        
             

Net interest earnings

     $ 10,467   
           

Interest spread

        4.27
           

Net interest margin

        5.13
           

 

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.

The economic conditions during 2007 weakened and had a profound affect throughout the financial services and banking industry. In response to the economic downturn, the Federal Reserve began the first of several interest rate cuts in September 2007. During the last four months of 2007, there were three rate decreases that totalled 100 basis points. However, these rate cuts did not materially affect the net interest margin until after 2007.

Financial Ratios

 

     Year Ended
December 31, 2007
 

Return on average assets

   1.16

Return on average equity

   8.23

Dividend payout ratio

   0.00

Average equity to average assets

   14.10

 

52


Table of Contents

BOE Financial Services of Virginia, Inc. (BOE)

Results of Operations for the five months ended May 31, 2008

For the five months ended May 31, 2008, net losses were $188,000 or $(0.15) per share. The loss incurred was primarily the result of one-time noninterest expenses related to the May 31, 2008 acquisition by the Company.

Net interest income was $4.0 million for the five months ended May 31, 2008. Net interest margin was 3.62%. Interest rate cuts by the Federal Reserve during the five months ended May 31, 2008 compressed the net interest margin, which declined 41 basis points since year-end 2007.

For the five months ended May 31, 2008, the Company’s provision for loan losses was $200,000. Increases were made to the loan loss reserve due to general seasoning of the portfolio. The ratio of net charge-offs to average loans was 0.03% for the five month period ended May 31, 2008.

For the five months ended May 31, 2008, noninterest income was $854,000. Comprising this amount, service charge income was $464,000 and other income was $390,000. Included in other income for the five months ended May 31, 2008 is a $92,000 loss on sale of other real estate.

For the five months ended May 31, 2008, noninterest expenses were $4.9 million. Salaries and employee benefits were $2.5 million and represented 51.07% of all noninterest expenses for the period. Additionally BOE incurred data processing fees of $394,000, legal fees of $306,000, equipment expense of $286,000, professional fees of $258,000, and occupancy expenses of $216,000.

One-time noninterest expenses related to the May 31, 2008 acquisition by the Company included $375,000 in salaries and benefits, $160,000 in professional fees, $84,000 in legal fees, $54,000 in equipment expenses, and $167,000 in data processing expenses.

An income tax benefit of $10,000 was recorded for the five months ended May 31, 2008.

Overview as of December 31, 2007 and Results of Operations for the year then ended.

On December 31, 2007, BOE had total assets of $302.4 million, total loans of $221.5 million, total deposits of $244.6 million, and total stockholder’s equity of $30.1 million. BOE had net income of $2.6 million in 2007 resulting in fully diluted earnings per common share of $2.15. Return on average equity was 9.03% and return on average assets was 0.90% in 2007.

Net interest income, on a tax equivalent basis, was $10.7 million in 2007. BOE’s earning assets were $265.2 million. Income on loans receivable was $16.2 million and, on a tax equivalent basis, the yield on the loan portfolio was 7.80%, based on an average balance in loans receivable of $207.6 million. Average investment securities and federal funds sold were $57.6 million. The tax equivalent yield on investment securities, including equity securities and federal funds sold was 5.52%. The yield on earning assets of $265.2 million was 7.31%, based on $19.4 million in fully taxable equivalent income. BOE’s interest-bearing liabilities were $229.0 million. The cost of total interest bearing liabilities was 3.80%, based on $8.7 million in total interest expense. BOE’s net interest margin was 4.03% in 2007 and the net interest spread was 3.51%.

The provision for loan losses was $6,000 in 2007. During the third quarter of 2007 the Company realized a recovery of $400,000 on a loan charge-off from 2002. This bolstered the Company’s allowance for loan losses. Allowance for loan losses was $2.6 million on December 31, 2007. This was 1.17% of total loans as of that date. Charged-off loans were in a net recovery position in 2007 of $189,000 after charging off $256,000 and recovering a total of $445,000. The ratio of net charge-offs (recoveries) to average loans was (0.09)% for the year ended December 31, 2007.

 

53


Table of Contents

The following table indicates the dollar amount allocation of the allowance for loan losses by loan type, as well as the ratio of the related outstanding loan balances to total loans as of December 31, 2007 (dollars in thousands):

 

Real estate

   $ 1,887    86

Commercial, industrial and agricultural

     508    11

Consumer and installment

     200    3
             

Total allowance for loan losses

   $ 2,595    100
             

Non-interest income in 2007 was $2.0 million. Service charge income of $1.1 million made up the significant portion of this amount. Other income amounted to $848,000.

Non-interest expense was $8.8 million in 2007. Salaries and benefits were the largest component amounting to $4.8 million. Other operating expenses were $2.2 million. Occupancy expenses were $517,000, furniture and equipment related expenses were $514,000, and data processing expenses were $608,000 for the year.

 

54


Table of Contents

BOE FINANCIAL SERVICES OF VIRGINIA, INC.

NET INTEREST MARGIN ANALYSIS

AVERAGE BALANCE SHEET

FOR THE YEAR ENDED DECEMBER 31, 2007

(dollars in thousands)

 

     AVERAGE
BALANCE
    INTEREST
INCOME /
EXPENSE
   AVERAGE
YIELD
RATE
 

Earning Assets:

       

Loans receivable

   $ 207,620      $ 16,202    7.80

Securities, taxable

     19,332        963    4.98

Securities, non-taxable (1)

     34,627        2,022    5.84

Equity securities

     2,132        122    5.74

Federal funds sold

     1,490        73    4.89
                     

Total earning assets

     265,201        19,382    7.31

Non-Earning Assets:

       

Cash and due from banks

     5,049        

Allowance for loan losses

     (2,535     

Other assets

     21,470        
             

Total non-earning assets

     23,984        
             

Total assets

   $ 289,185        
             

Interest-Bearing Liabilities:

       

Deposits:

       

Interest-bearing demand (NOW) deposits

   $ 26,391      $ 91    0.34

Money market deposits

     16,195        439    2.71

Savings deposits

     20,221        249    1.23

Time deposits

     144,954        6,807    4.70

Federal funds purchased

     742        44    5.90

FHLB advances & other borrowings

     20,450        1,065    5.21
                 

Total interest-bearing liabilities

   $ 228,953      $ 8,695    3.80
                 

Non-Interest Bearing Liabilities:

       

Demand deposits

   $ 28,066        

Other liabilities

     3,299        
             

Total non-interest bearing liabilities

     31,365        

Total liabilities

     260,318        

Stockholders’ equity

     28,867        
             

Total liabilities and stockholders’ equity

   $ 289,185        
             

Interest spread

        3.51

Net interest margin

     $ 10,687    4.03
           

 

(1) Income and yields are reported on a tax-equivalent basis assuming a federal tax rate of 34%.

Financial Ratios

 

     Year Ended
December 31, 2007
 

Return on average assets

   0.90

Return on average equity

   9.03

Dividend payout ratio

   38.04

Average equity to average assets

   9.98

 

55


Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Corporation’s market risk is composed primarily of interest rate risk. The Corporation’s Asset and Liability Management Committee (“ALCO”) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk. The Board of Directors reviews and approves the guidelines established by ALCO.

Interest rate risk is monitored through the use of two complimentary modeling tools: earnings simulation modeling and economic value simulation (net present value estimation). Each of these models measures changes in a variety of interest rate scenarios. While each of the interest rate risk measures has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Corporation, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Earnings simulation and economic value models, which more effectively measure the cash flow and optionality impacts, are utilized by management on a regular basis and are explained below.

Earnings Simulation Analysis

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that management has input, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other potential analyses.

Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. Such assumptions are monitored and periodically adjusted as appropriate. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios.

The Corporation uses its simulation model to estimate earnings in rate environments where rates ramp up or down around a “most likely” rate scenario, based on implied forward rates. The analysis assesses the impact on net interest income over a 12 month time horizon by applying 12-month shock versus the implied forward rates of 200 basis points up and down. The following table represents the interest rate sensitivity on net interest income for the Corporation across the rate paths modeled as of December 31:

 

     Change in Net Interest Income
(dollars in thousands)    2009     2008
     %     $     %     $

Change in Yield curve

        

+200 bp

   (3.4 )%    $ (1,453   1.1   $ 282

+100 bp

   (2.3 )%      (994   0.3     74

most likely

   0     —        0     —  

–100 bp

   3.7     1,568      0.2     59

–200 bp

   8.4     3,598      2.5     648

 

56


Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

 

Community Bankers Trust Corporation

  

Report of Independent Registered Public Accounting Firms

   58

Consolidated Balance Sheets as of December 31, 2009 and December 31, 2008

   62

Consolidated Statements of Income (Loss) for the years ended December 31, 2009, December  31, 2008 and nine months ended December 31, 2007

   63

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December  31, 2009, December 31, 2008 and nine months ended December 31, 2007

   64

Consolidated Statements of Cash Flows for the years ended December 31, 2009, December  31, 2008 and nine months ended December 31, 2007

   65

Notes to Consolidated Financial Statements

   66

TransCommunity Financial Corporation

  

Report of Independent Registered Public Accounting Firm