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EX-31.2 - EXHIBIT 31.2 - Community Bankers Trust Corptv487125_ex31-2.htm
EX-21.1 - EXHIBIT 21.1 - Community Bankers Trust Corptv487125_ex21-1.htm
EX-31.1 - EXHIBIT 31.1 - Community Bankers Trust Corptv487125_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Community Bankers Trust Corptv487125_ex32-1.htm
EX-23.1 - EXHIBIT 23.1 - Community Bankers Trust Corptv487125_ex23-1.htm

 

 

 

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, 2017

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)

 

Virginia   20-2652949

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

   

9954 Mayland Drive, Suite 2100

Richmond, Virginia

  23233
(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

Common Stock, $0.01 par value   The NASDAQ Stock Market, LLC

 

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 Section 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨   Accelerated filer                   x
Non-accelerated filer    ¨ (Do not check if a smaller reporting company)   Smaller reporting company  ¨
    Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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.    $174,575,122

 

On February 28, 2018, there were 22,074,523 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

2018 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K.

 

 

 

 

 

 

TABLE OF CONTENTS

FORM 10-K

December 31, 2017

 

    Page
PART I
Item 1. Business 3
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 19
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Mine Safety Disclosures 20
 
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 21
Item 6. Selected Financial Data 23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 45
Item 8. Financial Statements and Supplementary Data 46
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 93
Item 9A. Controls and Procedures 93
Item 9B. Other Information 94
 
PART III
Item 10. Directors, Executive Officers and Corporate Governance 94
Item 11. Executive Compensation 94
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 94
Item 13. Certain Relationships and Related Transactions, and Director Independence 94
Item 14. Principal Accounting Fees and Services 94
 
PART IV
Item 15. Exhibits, Financial Statement Schedules 94
Item 16. Form 10-K Summary 96

 

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PART I

 

ITEM 1.BUSINESS

 

GENERAL

 

The Company is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 26 full-service offices in Virginia and Maryland. The Bank also operates one loan production office in Virginia.

 

The Bank was established in 1926. 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 industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities.

 

Essex Services, Inc. is a wholly-owned subsidiary of the Bank. Essex Services and its financial consultants offer a broad range of investment products and alternatives through an affiliation with Infinex Investments, Inc., an independent broker-dealer. It also offers insurance products through an ownership interest in Bankers Insurance, LLC, an independent insurance agency.

 

The Company’s corporate headquarters are located at 9954 Mayland Drive, Suite 2100, Richmond, Virginia 23233. The telephone number of the corporate headquarters is (804) 934-9999. The Company’s website is www.cbtrustcorp.com, and the Banks’s website is www.essexbank.com.

 

The Company’s common stock trades on the NASDAQ Capital Market under the symbol “ESXB”.

 

STRATEGY

 

The Company operates in some of the strongest growth markets in Virginia and Maryland. Its operating strategy has been to provide the products and services of the larger financial institutions, but delivered with the individual service focus of a small community bank. This strategy has allowed the Company to have significant organic growth in its core markets.

 

The Company’s markets are diverse enough to spread economic risk throughout a number of different customer bases. Operating under the individual community delivery philosophy, the Company seeks to enhance customer relationships through superior products delivered with extraordinary service, while maintaining a prudent approach to credit quality and risk controls. The Company’s associates are the most important element in its strategy for success, and therefore there is significant focus on training and building a team-oriented environment. In a constantly changing world, competition remains intense for community banks. One of the features that sets the Company apart from other organizations is the ability and desire to give superior personal service to customers.

 

In 2017, the Company expanded on its internal “Growing to Win” campaign and engaged its associates to determine and reflect on the core values that the Company wants to deliver to associates, customers and shareholders. The Company’s mission statement is “To provide financial inspiration through intriguingly unique experiences that educate and empower action”. What makes the Company intriguingly unique is the consistent delivery of core values to the customers and the communities of which it is a part.

 

The Company’s strategic focus on the offering a broad array of products delivered with individual service has resulted in expanded market presence, earnings growth and increased value for shareholders. Since this strategy has been historically successful, management believes that it will continue to provide solid results. Additionally, the Company has been focused on controlling risks and allowing growth in a safe and sound manner. The Company continues to build the capital strength and growth capacities to execute its strategies to create superior value for shareholders.

 

OPERATIONS

 

The Company’s operating strategy is delineated by business lines and by the functional support areas that help accomplish the stated goals and financial budget of the organization. A major component of future income is growth in three core business lines – retail and small business banking, commercial and industrial banking and real estate lending. These core businesses, combined with the Company’s geographic locations, dictate the market position that the Company needs to take to be successful. The majority of new loan growth will occur in all three lines, although the retail segment primarily provides the funding through core deposit relationship growth.

 

Retail and Small Business Banking

 

The Company markets to consumers in geographic areas around its branch network not only through existing bricks and mortar, but also with alternative delivery mechanisms and new product development such as online banking, remote deposit capture, mobile banking and telephonic banking. In addition, the Company attracts new customers by making its service through these distribution points convenient. All of the Company’s existing markets are prime targets for expanding the consumer side of its business with full loan and deposit relationships, and the Company has restructured its retail group to accommodate growth. In addition, the Company is focused on potential growth in new market areas in which it currently operates loan production offices.

 

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Commercial and Industrial Banking

 

In the commercial and industrial banking group, the Company focuses on small to mid-sized business customers (sales of $5 million to $15 million each year) who are not targeted by larger banks and for whom smaller community banks have limited expertise. The Company has an experienced team with a strong loan pipeline. The typical relationship consists of working capital lines and equipment loans with the primary deposit accounts of the customer. Most of these relationships will be new to the Company and create strong and positive growth potential.

 

Commercial Real Estate Lending

 

The Company has historically held a significant concentration in real estate loans. The current strategy is to manage the existing real estate portfolio and add income producing property loans and builders and other development loans to the portfolio. The Company originates both owner occupied and non-owner occupied borrowings where the cash flows provide significant debt coverage for the relationship.

 

COMPETITION

 

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

 

The activities in which the Company engages are highly competitive. Financial institutions such as 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 the Company faces. 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 and Maryland, including some of the largest banks in the country, have offices in the Company’s market areas. Many of these institutions have capital resources, broader geographic markets, and legal lending limits substantially in excess of those available to the Company. The Company faces competition from institutions that offer products and services that it does not or cannot currently offer. Some institutions with which the Company competes offer interest rate levels on loan and deposit products that the Company is unwilling to offer due to interest rate risk and overall profitability concerns. The Company expects 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 Company 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.

 

CORPORATE HISTORY

 

The Company was formed in 2005 as a special purpose acquisition company to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the banking industry.

 

In May 2008, the Company acquired each of TransCommunity Financial Corporation (TFC), which was the holding company for TransCommunity Bank, N.A., and BOE Financial Services of Virginia, Inc. (BOE), which was the holding company for the Bank. TFC had been the holding company for four separately-chartered banking subsidiaries — Bank of Powhatan, Bank of Goochland, Bank of Louisa and Bank of Rockbridge – until 2007, when they were consolidated into the newly created TransCommunity Bank. Later in 2008, TransCommunity Bank was consolidated into the Bank under the Bank’s state charter and, until 2010, the former branch offices of TFC operated as separate divisions under the Bank’s charter, using the names of TFC’s former banking subsidiaries.

 

 4 

 

 

In November 2008, the Bank acquired certain fixed assets and assumed all deposit liabilities relating to four former branch offices of The Community Bank (TCB), a Georgia state-chartered bank, following its failure. The transaction was consummated pursuant to a Purchase and Assumption Agreement by and among the FDIC, both as Receiver for The Community Bank and in its corporate capacity, and the Bank. The Bank sold those offices and related deposits to Community & Southern Bank on November 8, 2013.

 

In January 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), following its failure. The transaction was consummated pursuant to a Purchase and Assumption Agreement by and among the FDIC, both as Receiver for SFSB and in its corporate capacity, and the Bank. The Bank entered into a shared loss arrangement with the FDIC with respect to loans and real estate assets acquired. The Bank terminated this arrangement on September 10, 2015.

 

In January 2014, the Company completed a reincorporation from Delaware, its original state of incorporation, to Virginia. As a result of the reincorporation, the Company’s corporate affairs are now governed by Virginia law. The purpose of the reincorporation to Virginia was annual cost savings of over $175,000 that the Company realizes from the difference between Delaware’s franchise tax and Virginia’s annual corporate fee. The form of the reincorporation was the merger of the then existing Delaware corporation into a newly created Virginia corporation. The Company retained the same name and conducts business in the same manner as before the reincorporation. In addition, all of the issued and outstanding shares of the Company’s common stock and preferred stock became shares of a Virginia corporation. The reincorporation had no effect on the Bank and its operations.

 

TARP INVESTMENT

 

In December 2008, the Company issued 17,680 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and a related common stock warrant to the Treasury for a total price of $17,680,000. The issuance and receipt of proceeds from the Treasury were made under its voluntary Capital Purchase Program. The Series A Preferred Stock qualified as Tier 1 capital. The Series A Preferred Stock had a liquidation amount per share equal to $1,000. The Series A Preferred Stock paid cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The Company could have deferred dividend payments, but the dividend was a cumulative dividend that accrued for payment in the future. The common stock warrant permitted the Treasury to purchase 780,000 shares of common stock at an exercise price of $3.40 per share.

 

During 2013 and 2014, the Company repurchased all of the outstanding shares of Series A Preferred Stock. In 2013, the Company repurchased 7,000 shares and funded it through the earnings of its banking subsidiary. The Company paid the Treasury $7.0 million, which represented 100% of the par value of the preferred stock repurchased plus accrued dividends with respect to such shares. On April 23, 2014, the Company repurchased the remaining 10,680 shares and funded it through an unsecured third-party term loan. The Company paid the Treasury $10.9 million, which represented 100% of the par value of the preferred stock repurchased plus accrued dividends with respect to such shares. The form of all repurchases were redemptions under the terms of the Series A Preferred Stock.

 

On June 4, 2014, the Company paid the Treasury $780,000 to repurchase the warrant that had been associated with the Series A Preferred Stock. The Company used its own funds to repurchase the warrant.

 

There are no other investments from the Company’s participation in the Capital Purchase Program that remain outstanding.

 

EMPLOYEES

 

As of December 31, 2017, the Company had 264 full-time equivalent 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.

 

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.

 

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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 FDIC.

 

The following description 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 banks and not for the protection of shareholders 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. Accordingly, 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. 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. While federal law permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, or to establish interstate de novo branches, the Federal Reserve has jurisdiction under the BHCA to approve any bank or nonbank acquisition, merger or consolidation, or the establishment of any interstate de novo branches, proposed by a bank holding company.

 

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’s Deposit Insurance Fund (the “DIF”) 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 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 (the “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 shareholders in the event that a receiver is appointed to distribute the assets of the Bank.

 

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

 

The Dodd-Frank Act

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) significantly restructures the financial regulatory regime in the United States and has a broad impact on the financial services industry. While some rulemaking under the Dodd-Frank Act has occurred, many of the act’s provisions require study or rulemaking by federal agencies, a process which will take years to implement fully.

 

Among other things, the Dodd-Frank Act provides for new capital standards that eliminate the treatment of trust preferred securities as Tier 1 capital. Existing trust preferred securities were grandfathered for banking entities with less than $15 billion of assets, such as the Company. The Dodd-Frank Act permanently raised deposit insurance levels to $250,000. Pursuant to modifications under the Dodd-Frank Act, deposit insurance assessments are calculated based on an insured depository institution’s assets rather than its insured deposits, and the minimum reserve ratio of the FDIC’s DIF is to be raised to 1.35%. The payment of interest on business demand deposit accounts is permitted by the Dodd-Frank Act. Further, the Dodd-Frank Act bars banking organizations, such as the Company, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances.

 

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The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”) as an independent bureau of the Federal Reserve System. The CFPB has the exclusive authority to prescribe rules governing the provision of consumer financial products and services, which in the case of the Bank will be enforced by the Federal Reserve. The Dodd-Frank Act also provides that debit card interchange fees must be reasonable and proportional to the cost incurred by the card issuer with respect to the transaction. This provision is known as the “Durbin Amendment.” In 2011, the Federal Reserve adopted regulations setting the maximum permissible interchange fee as the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, with an additional adjustment of up to one cent per transaction if the card issuer implements certain fraud-prevention standards. The interchange fee restriction only applies to financial institutions with assets of $10 billion or more and therefore has no effect on the Company.

 

The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained. The Dodd-Frank Act also provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or compensation that gives rise to excessive risk or could lead to a material financial loss to such firm. Prior to the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk to the financial institution of such behaviour.

 

Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized, many of the new requirements have yet to be implemented and will likely be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact such requirements will have on the operations of the Company and the Bank is unclear. The changes resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business practices, impose more stringent capital requirements, liquidity and leverage ratio requirements, or otherwise adversely affect the business of the Company and the Bank. These changes may also require the Company to invest significant management attention and resources to evaluate and make necessary changes to comply with new statutory and regulatory requirements.

 

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.

 

In 2013, the Federal Reserve adopted a final rule (the “Basel III Rule”) revising the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to be consistent with the agreements reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (Basel III) and certain provisions of the Dodd-Frank Act. The Basel III Rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (referred to as “banking organizations”). For community banking organizations, like the Company, these revised capital requirements began being phased in beginning on January 1, 2015.

 

Under the requirements prior to effectiveness of the Basel III Rule, banking organizations must have maintained 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 risk-based capital ratio (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 risk-based capital ratio (Tier 1 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.

 

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Under pre-Basel III Rule regulations, a bank was considered:

 

·“Well capitalized” if it had a Total Capital Ratio of 10% or greater, Tier 1 Ratio of 6% or greater, a Leverage Ratio of 5% 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 had a Total Capital Ratio of 8% or greater, a Tier 1 Ratio of 4% or greater, and a Leverage Ratio of 4% or greater — or 3% in certain circumstances — and was not well capitalized;
·“Undercapitalized” if it had a Total Capital Ratio of less than 8% or greater, a Tier 1 Ratio of less than 4%, and a Leverage Ratio of less than 4% — or 3% in certain circumstances;
·“Significantly undercapitalized” if it had a Total Capital Ratio of less than 6%, a Tier 1 Ratio of less than 3%, or a Leverage Ratio of less than 3%; or
·“Critically undercapitalized” if its tangible equity was equal to or less than 2% of average quarterly tangible assets.

 

Among other things, the Basel III Rule establishes a new common equity tier 1 (CET1) minimum capital requirement, introduces a “capital conservation buffer” and raises minimum risk-based capital requirements. Under the new rule, CET1 is defined as comprising Tier 1 Capital, less non-cumulative perpetual preferred stock and grandfathered trust-preferred and other securities, plus certain regulatory deductions. The Basel III Rule establishes a new minimum required ratio of CET1 to risk-weighted assets (CET1 Ratio) of 4.5%, and raises the minimum Tier 1 Ratio to 6.0% (from the prior 4.0% minimum). Furthermore, the minimum required Leverage Ratio is increased in the final Basel III Rule to 4.0% for all banking organizations irrespective of differences in composite supervisory ratings.

 

In conjunction with the changes in the required minimum capital ratios, the Basel III Rule also changes the definitions of the five regulatory capitalization categories set forth above, effective January 1, 2015. A table illustrating these changes is set forth below.

 

Capitalization Category  Total Capital
Ratio (%)
  Tier 1 Ratio
(%)
  CET1 Ratio
(%)
  Leverage Ratio
(%)
            
Well capitalized (prior)  ≥ 10  ≥ 6  N/A  ≥ 5
Well capitalized (Basel III)  ≥ 10  ≥ 8  ≥ 6.5  ≥ 5
             
Adequately capitalized (prior)  ≥ 8  ≥ 4  N/A  ≥ 4
Adequately capitalized (Basel III)  ≥ 8  ≥ 6  ≥ 4.5  ≥ 4
             
Undercapitalized (prior)  < 8  < 4  N/A  < 4
Undercapitalized (Basel III)  < 8  < 6  < 4.5  < 4
             
Significantly undercapitalized (prior)  < 6  < 3  N/A  < 3
Significantly undercapitalized (Basel III)  < 6  < 4  < 3  < 3

 

Critically undercapitalized (prior) GAAP tangible equity ≤ 2% of average quarterly assets
Critically undercapitalized (Basel III) Basel III tangible equity (Tier 1 Capital plus non-tier 1 perpetual preferred stock) ≤ 2% of total assets

 

The new required capital conservation buffer is comprised of an additional 2.5% above the minimum risk-based capital ratios. Institutions that do not maintain the required capital buffer will be subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. This capital conservation buffer is in addition to, and not included with, the minimum ratios described above. A table illustrating these limitations on the ratio which can be paid out (defined in the Basel III Rule as “maximum payout ratio”) is set forth below.

 

Capital Conservation Buffer  Maximum payout ratio (as a
percentage of eligible retained
income)
 
Greater than 2.5%.   No applicable limitation. 
≤ 2.5% and > 1.875%.   60% 
≤ 1.875% and > 1.25%   40% 
≤ 1.25% and > 0.625%   20% 
≤ 0.625%   0% 

 

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The Basel III Rule also introduces new methodologies for determining risk-weighted assets, including higher risk weightings, up to a maximum of 150%, for exposures that are more than 90 days past due or are on nonaccrual status and for certain commercial real estate facilities that finance the acquisition, development or construction of real property. The Basel III Rule also requires unrealized gains and losses on certain securities holdings to be included, or excluded, as applicable, for purposes of calculating certain regulatory capital requirements. Additionally, the Basel III Rule establishes that, for banking organizations with less than $15 billion in assets as of December 31, 2009, the ability to treat trust preferred securities as tier 1 capital would be permanently grandfathered in.

 

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.

 

Dividends

 

The Company is a legal entity, separate and distinct from the Bank. A significant portion of the revenues of the Company result from dividends paid to it by the Bank. There are various legal limitations applicable to the payment of dividends by the Bank to the Company and to the payment of dividends by the Company to its shareholders. The Bank is subject to various statutory restrictions on its ability to pay dividends to the Company. Under current regulations, prior approval from the Federal Reserve is required if cash dividends declared in any given year exceed net income for that year, plus retained net profits of the two preceding years. The payment of dividends by the Bank or the Company may be limited by other factors, such as requirements to maintain capital above regulatory guidelines. Bank regulatory agencies have the authority to prohibit the Bank or the Company from engaging in an unsafe or unsound practice in conducting its respective business. The payment of dividends, depending on the financial condition of the Bank, or the Company, could be deemed to constitute such an unsafe or unsound practice.

 

Under the FDIA, insured depository institutions such as the Bank, are prohibited from making capital distributions, including the payment of dividends, if, after making such distributions, the institution would become “undercapitalized” (as such term is used in the statute). Based on the Bank’s current financial condition, the Company does not expect that this provision will have any impact on its ability to receive dividends from the Bank.

 

Deposit Insurance

 

The Bank’s deposits are insured by the DIF of the FDIC up to the standard maximum insurance amount for each deposit insurance ownership category. As of January 1, 2015, the basic limit on FDIC deposit insurance coverage is $250,000 per depositor. Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC, subject to administrative and potential judicial hearing and review processes.

 

The DIF is funded by assessments on banks and other depository institutions. As required by the Dodd-Frank Act, in 2011, the FDIC approved a final rule that changed the assessment base for DIF assessments from domestic deposits to Tier 1 Capital. In addition, as also required by the Dodd-Frank Act, the FDIC has adopted a new large-bank pricing assessment scheme, set a target “designated reserve ratio” (described in more detail below) of 2 percent for the DIF and established a lower assessment rate schedule when the reserve ratio reaches 1.15 percent and, in lieu of dividends, provides for a lower assessment rate schedule, when the reserve ratio reaches 2 percent and 2.5 percent. An institution’s assessment rate depends upon the institution’s assigned risk category, which is based on supervisory evaluations, regulatory capital levels and certain other factors. Initial base assessment rates range from 2.5 to 45 basis points. The FDIC may make the following further adjustments to an institution’s initial base assessment rates: decreases for long-term unsecured debt including most senior unsecured debt and subordinated debt; increases for holding long-term unsecured debt or subordinated debt issued by other insured depository institutions; and increases for broker deposits in excess of 10 percent of domestic deposits for institutions not well rated and well capitalized.

 

The Dodd-Frank Act transferred to the FDIC increased discretion with regard to managing the required amount of reserves for the DIF, or the “designated reserve ratio.” Among other changes, the Dodd-Frank Act (i) raised the minimum designated reserve ratio to 1.35 percent and removed the upper limit on the designated reserve ratio, (ii) requires that the designated reserve ratio reach 1.35 percent by September 2020, and (iii) requires the FDIC to offset the effect on institutions with total consolidated assets of less than $10 billion by raising the designated reserve ratio from 1.15 percent to 1.35 percent. The FDIA requires that the FDIC consider the appropriate level for the designated reserve ratio on at least an annual basis. In 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35 percent by September 30, 2020, as required by the Dodd-Frank Act.

 

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Incentive Compensation

 

In 2010, the federal banking regulators issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s Board of Directors.

 

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.  At December 31, 2017, the Company had not been made aware of any instances of non-compliance with the new guidance.

 

The Gramm-Leach-Bliley Act of 1999

 

The Gramm-Leach-Bliley Act of 1999 (Gramm-Leach-Bliley) drew 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.

 

Gramm-Leach-Bliley created a new form of financial organization called a financial holding company that may own and control banks, insurance companies and securities firms, thereby repealing the prohibition in the Glass-Steagall Act on bank affiliations with companies that are engaged primarily in securities underwriting activities. 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, including, for example, insurance, securities transactions (including underwriting, broker/dealer activities and investment advisory services) and traditional banking-related activities. The Company is currently not a financial holding company under Gramm-Leach-Bliley.

 

Gramm-Leach-Bliley directed federal banking regulators 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 affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Company, as a bank holding company, is subject to these rules.

 

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.

 

Gramm-Leach-Bliley 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 Gramm-Leach-Bliley 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.

 

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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.

 

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.

 

Future Regulations

 

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company or the Bank.

 

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 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 non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services.

 

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While we believe we compete effectively with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, smaller asset base, lack of geographic diversification and inability to spread our marketing costs across a broader market. If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, our net interest margin and income could be negatively affected. Failure to compete effectively to attract new, or to retain existing, clients may reduce or limit our margins and our market share and may adversely affect our results of operations, financial condition, and growth.

 

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

 

We operate in a mixed market environment with influences from both rural and urban areas. Because our lending operation is concentrated in localized areas in Virginia and Maryland, we will be affected by the general economic conditions in these markets. Changes in the local 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 conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and the demand for banking products and services generally, which could negatively affect our financial condition and performance. Although we might not have significant credit exposure to all the businesses in our areas, the downturn in any of these businesses could have a negative impact on local economic conditions and real estate collateral values generally, which could negatively affect our profitability.

 

We may not be able to successfully manage our long-term growth, which may adversely affect our results of operations and financial condition.

 

A key aspect of our long-term business strategy is our continued growth and expansion. Our ability to continue to grow depends, in part, upon our ability to:

 

·open new branch offices or acquire existing branches or other financial institutions;
·attract deposits to those locations; and
·identify attractive loan and investment opportunities.

 

We may not be able to successfully implement our growth strategy if we are unable to identify attractive markets, locations or opportunities to expand in the future, or if we are subject to regulatory restrictions on growth or expansion of our operations. In addition, we compete with our companies for acquisition and expansion opportunities, and many of those competitors have greater financial resources than us and thus may be able to pay more for such an opportunity than we can.

 

Our ability to manage our growth successfully also will depend on whether we can maintain capital levels adequate to support our growth, maintain cost controls and asset quality and successfully integrate any businesses we acquire into our organization. As we identify opportunities to implement our growth strategy by opening new branches or acquiring branches or other banks, we may incur increased personnel, occupancy and other operating expenses. In the case of new branches, we must absorb those higher expenses while we begin to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, any plans for branch expansion could decrease our earnings in the short run, even if we efficiently execute our branching strategy.

 

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

 

Our profitability depends in substantial part upon the spread between the interest rates earned on investments and loans and interest rates paid on deposits and other interest-bearing liabilities. These rates are normally in line with general market rates and rise and fall based on our view of our financing and liquidity needs. We may selectively pay above-market rates to attract deposits as we have done in some of our marketing promotions in the past. Changes in interest rates will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits, which, in turn, may affect the growth in loan and retail deposit volume. We attempt to minimize our exposure to interest rate risk, but cannot eliminate it. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments. 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 economic conditions generally. Fluctuations in market rates are neither predictable nor controllable and may have a material and negative effect on our business, financial condition and results of operations.

 

Changes in interest rates also affect the value of our loans. An increase in interest rates could adversely affect our borrowers’ ability to pay the principal or interest on existing loans or reduce their desire to borrow more money. This situation may lead to an increase in non-performing assets or a decrease in loan originations, either of which could have a material and negative effect on our results of operations.

 

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Our operations may be adversely affected by cyber security risks.

 

In the ordinary course of business, we collect and store sensitive data, including proprietary business information and personally identifiable information of our customers and employees in systems and on networks. The secure processing, maintenance, and use of this information is critical to our operations and business strategy. In addition, we rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. We have invested in accepted technologies, and we continually review processes and practices that are designed to protect our networks, computers and data from damage or unauthorized access. Despite these security measures, our computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems, and the information stored there could be accessed, damaged or disclosed. A breach in security or other failure could result in legal claims, regulatory penalties, disruption in operations, increased expenses, loss of customers and business partners and damage to our reputation, which could adversely affect our business and financial condition. Furthermore, as cyber threats continue to evolve and increase, we may be required to expend significant additional financial and operational resources to modify or enhance our protective measures, or to investigate and remediate any identified information security vulnerabilities.

 

Our liquidity needs could adversely affect results of operations and financial condition.

 

Our primary sources of funds are deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including, but not limited to, changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, availability of, and/or access to, sources of refinancing, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to customers on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances, sales of securities and loans, federal funds lines of credit from correspondent banks and borrowings from the Federal Reserve Discount Window, as well as additional out-of-market time deposits and brokered deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

 

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. Credit risk and credit losses can increase if our loans are concentrated to borrowers who, as a group, may be uniquely or disproportionately affected by economic or market conditions. Approximately 83.23% 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.

 

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If our concentration in commercial real estate increases significantly, we may have to take certain actions that could impact our balance sheet.

 

Regulators have been paying close attention to banks with higher commercial real estate concentrations, due to concerns about credit risk building in the industry. Concentration levels of concern include commercial real estate loans making up at least 300% of a bank’s total risk-based capital, construction, land development and other land loans comprising 100% or more of total risk-based capital and construction and total commercial real estate growth of 50% or more over the prior 36 months. While we currently are below all of these levels, if we exceed one or more of them, we may have to take certain actions to minimize the risk associated with higher concentration levels and otherwise bolster our balance sheet. These actions include ensuring robust risk management practices, including conducting regular appraisals, analyzing borrowers’ ability to repay credits, evaluating local economic conditions and operating with enhanced reporting and systems. At an extreme, these actions can also include curtailing our lending in these areas and raising capital.

 

We rely heavily on our management team and the unexpected loss of any of those personnel could adversely affect our operations; we depend on our ability to attract and retain key personnel.

 

We are a customer-focused and relationship-driven organization. We expect our future growth to be driven in a large part by the relationships maintained with our customers by our president and chief executive officer and other senior officers. The unexpected loss of any of our key employees could have an adverse effect on our business and possibly result in reduced revenues and earnings. We do maintain bank-owned life insurance on key officers that would help cover some of the economic impact of a loss caused by death.

 

The implementation of our business strategy will also require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or to solicit their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult. The market for these people is competitive, and we cannot assure you that we will be successful in attracting, hiring, motivating or retaining them.

 

The financial services industry, as well as the broader economy, may be subject to new legislation, regulation, and government policy.

 

At this time, it is difficult to predict the legislative and regulatory changes that will result from the current presidential and congressional administrations. The President and/or Congress may change existing financial services regulations or enact new policies affecting financial institutions, specifically community banks. Such changes may include amendments to the Dodd-Frank Act and structural changes to the CFPB. The new administration and Congress also may cause broader economic changes due to changes in governing ideology and governing style. New appointments to the Board of Governors of the Federal Reserve could affect monetary policy and interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.

 

We are subject to more stringent capital and liquidity requirements as a result of the Basel III regulatory capital reforms and the Dodd-Frank Act, which could adversely affect our return on equity and otherwise affect our business. 

 

We are subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that we must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. Under the Dodd-Frank Act, the federal banking agencies have established stricter capital requirements and leverage limits for banks and bank holding companies that are based on the Basel III regulatory capital reforms. These stricter capital requirements will be phased-in over a four-year period, which began on January 1, 2015, until they are fully-implemented on January 1, 2019. See “Business − Supervision and Regulation – Capital Requirements” for further information about the requirements.

 

The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to use its capital for strategic opportunities. If we fail to meet these minimum capital guidelines and/or other regulatory requirements, our financial condition would be materially and adversely affected.

 

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New regulations issued by the Consumer Financial Protection Bureau could adversely affect our earnings.

 

The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. For example, the CFPB issued a final rule in 2014 requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms, or to originate “qualified mortgages” that meet specific requirements with respect to terms, pricing and fees. The new rule also contains new disclosure requirements at mortgage loan origination and in monthly statements.

 

The requirements under the CFPB’s regulations and policies could limit our ability to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact our profitability.

 

We rely on other companies to provide key components of our business infrastructure.

 

Third parties provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While we have selected these third party vendors carefully, we do not control their actions. Any problem caused by these third parties, including poor performance of services, failure to provide services, disruptions in services provided by a vendor and failure to handle current or higher volumes, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business, and may harm our reputation. Financial or operational difficulties of a third party vendor could also hurt our operations if those difficulties affect the vendor’s ability to serve us. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations.

 

The operational functions of business counterparties over which we may have limited or no control may experience disruptions that could adversely impact the Company.

 

Multiple major U.S. retailers have recently experienced data systems incursions reportedly resulting in the thefts of credit and debit card information, online account information, and other financial data of tens of millions of the retailers’ customers. Retailer incursions affect cards issued and deposit accounts maintained by many banks, including us. Although our systems are not breached in retailer incursions, these events can cause us to reissue a significant number of cards and take other costly steps to avoid significant theft loss to us and our customers. In some cases, we may be required to reimburse customers for the losses they incur. Other possible points of intrusion or disruption not within our control include internet service providers, electronic mail portal providers, social media portals, distant-server (cloud) service providers, electronic data security providers, telecommunications companies, and smart phone manufacturers.

 

We may need to raise capital that may not ultimately be available to us.

 

Regulatory authorities require us to maintain certain levels of capital to support our operations. While we remained “well capitalized” at December 31, 2017, we may need to raise additional capital in the future if we unexpectedly incur losses or due to regulatory mandates. The ability to raise capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may not be able to raise capital, if and when needed, on terms acceptable to us, or at all. If we cannot raise capital when needed, our ability to increase our capital ratios could be materially impaired, and we could face regulatory challenges.

 

We continually encounter technological change.

 

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

 

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A substantial decline in the value of our securities portfolio may result in an “other-than-temporary” impairment charge.

 

The total amount of our available-for-sale securities portfolio was $204.8 million at December 31, 2017. The measurement of the fair value of these securities involves significant judgment due to the complexity of the factors contributing to the measurement. Market volatility makes measurement of the fair value of our securities portfolio even more difficult and subjective. More generally, as market conditions continue to be volatile, we cannot provide assurance with respect to the amount of future unrealized losses in the portfolio. To the extent that any portion of the unrealized losses in these portfolios is determined to be other than temporary, and the loss is related to credit factors, we would recognize a charge to our earnings in the quarter during which such determination is made, and our capital ratios could be adversely affected.

 

Consumers may increasingly decide not to use us to complete their financial transactions, which would have a material adverse impact on our financial condition and operations.

 

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

 

Nonperforming assets adversely affect our results of operations and financial condition.

 

Our nonperforming assets adversely affect our net income in various ways. 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.

 

We rely upon independent appraisals to determine the value of the real estate, which secures a significant portion of our loans, and the values indicated by such appraisals may not be realizable if we are forced to foreclose upon such loans.

 

A significant portion of our loan portfolio consists of loans secured by real estate (83.23% at December 31, 2017). We rely upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of our loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, we may not be able to recover the outstanding balance of the loan and will suffer a loss.

 

Our risk-management framework may not be effective in mitigating risk and loss.

 

We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that we face. These risks include interest-rate, credit, liquidity, operations, reputation, compliance and litigation. While we assess and improve this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in our business. If conditions or circumstances arise that expose flaws or gaps in our risk-management program, or if its controls break down, our results of operations and financial condition may be adversely affected.

 

 16 

 

 

Negative perception of us through social media may adversely affect our reputation and business.

 

Our reputation is critical to the success of our business. We believe that our brand image has been well received by customers, reflecting the fact that the brand image, like our business, is based in part on trust and confidence. Our reputation and brand image could be negatively affected by rapid and widespread distribution of publicity through social media channels. Our reputation could also be affected by our association with customers affected negatively through social media distribution, or other third parties, or by circumstances outside of our control. Negative publicity, whether true or untrue, could affect our ability to attract or retain customers, or cause us to incur additional liabilities or costs, or result in additional regulatory scrutiny.

 

We are subject to extensive government regulation and supervision.

 

We are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, and not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes.

 

The banking industry continues to be faced with new and complex regulatory requirements and enhanced supervisory oversight. Banking regulators are increasingly concerned about, among other things, growth, commercial real estate concentrations, underwriting of commercial real estate and commercial and industrial loans, capital levels and cyber security. These factors are exerting downward pressure on revenues and upward pressure on required capital levels and the cost of doing business.

 

These provisions, or any other aspects of current proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities or change certain of our business practices, including our ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to our operations in order to comply, and could therefore also materially adversely affect our business, financial condition, and results of operations. Furthermore, failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.

 

Changes in accounting standards could impact reported earnings.

 

The authorities that promulgate accounting standards, including the Financial Accounting Standards Board and Securities and Exchange Commission, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of financial statements for prior periods. Such changes could also require the Company to incur additional personnel or technology costs.

 

Our disclosure controls and procedures and internal controls may not prevent or detect all errors or acts of fraud.

 

Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or omission. Additionally, controls can be circumvented by individual acts, by collusion by two or more people and/or by override of the established controls. Accordingly, because of the inherent limitations in our control systems and in human nature, misstatements due to error or fraud may occur and not be detected.

 

We can give no assurances that our deferred tax asset will not become impaired in the future because it is based on projections of future earnings, which are subject to uncertainty and estimates that may change based on economic conditions.

 

We can give no assurances that our deferred tax asset will not become impaired in the future. At December 31, 2017, we recorded net deferred income tax assets of $6.1 million. We assess the realization of deferred income tax assets and record a valuation allowance if it is “more likely than not” that we will not realize all or a portion of the deferred tax asset. We consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, we need a valuation allowance. Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to our core earnings capacity and our prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given an uncertain economic outlook and current banking industry conditions. Due to the uncertainty of estimates and projections, it is possible that we will be required to record adjustments to the valuation allowance in future reporting periods.

 

 17 

 

 

Deterioration in 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, including brokers and dealers, commercial banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could create market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Our credit risk may also 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.

 

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 Virginia’s Bureau of Financial Institutions. 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.

 

The FDIC deposit insurance assessments that we are required to pay may increase in the future, which would have an adverse effect on earnings.

 

As an insured depository institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC to maintain the level of the FDIC deposit insurance reserve ratio. The past failures of financial institutions have significantly increased the loss provisions of the DIF, resulting in a decline in the reserve ratio. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC revised its assessment rates, which raised deposit premiums for certain insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, the FDIC may increase the deposit insurance assessment rates. Any future assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect earnings and could negatively affect our stock price.

 

 18 

 

 

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.

 

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.

 

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

 

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.

 

Virginia law and the provisions of our articles of incorporation and bylaws could deter or prevent takeover attempts by a potential purchaser of our common stock that would be willing to pay you a premium for your shares of our common stock.

 

Our Articles of Incorporation and Bylaws contain provisions that may be deemed to have the effect of discouraging or delaying uninvited attempts by third parties to gain control of us. These provisions include the ability of our board to set the price, term, and rights of, and to issue, one or more series of our preferred stock. Our Articles of Incorporation and Bylaws do not provide for the ability of shareholders to call special meetings.

 

Similarly, the Virginia Stock Corporation Act contains provisions designed to protect Virginia corporations and employees from the adverse effects of hostile corporate takeovers. These provisions reduce the possibility that a third party could affect a change in control without the support of our incumbent directors. These provisions may also strengthen the position of current management by restricting the ability of shareholders to change the composition of the board, to affect its policies generally, and to benefit from actions that are opposed by the current board.

  

ITEM 1B.UNRESOLVED STAFF COMMENTS

 

None.

 

 19 

 

 

ITEM 2.PROPERTIES

 

The Company operates the following offices:

 

Corporate Headquarters:

Deep Run at Mayland — 9954 Mayland Drive, Suite 2100, Richmond, VA 23233

 

Virginia Branch Offices:

Bon Air — 2730 Buford Road, Richmond, VA 23235

Burgess — 14598 Northumberland Highway, Burgess, VA 22432

Callao — 654 Northumberland Highway, Callao, VA 22435

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

Cumberland — 1496 Anderson Highway, Cumberland, VA 23040

Deep Run at Mayland — 9954 Mayland Drive, Richmond, VA 23233

Fairfax — 10509 Judicial Drive, Fairfax, VA 22030

Flat Rock — 2320 Anderson Highway, Powhatan, VA 23139

Goochland Courthouse — 1949 Sandy Hook Road, Goochland, VA 23063

King William — 4935 Richmond-Tappahannock Highway, Aylett, VA 23009

Louisa — 217 East Main Street, Louisa, VA 23093

Lynchburg–Old Forest Road — 3638 Old Forest Road, Lynchburg, VA 24501

Lynchburg–Timberlake — 21437 Timberlake Road, Lynchburg, VA 24502

Mechanicsville — 6315 Mechanicsville Turnpike, Mechanicsville, VA 23111

Tappahannock–Dillard — 1325 Tappahannock Boulevard, Tappahannock, VA 22560

Tappahannock–Prince Street — 323 Prince Street, Tappahannock, VA 22560

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

West Broad Marketplace — 12254 West Broad Marketplace, Henrico, VA 23233

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

Winterfield — 3740 Winterfield Road, Midlothian, VA 23113

 

Maryland Branch Offices:

Annapolis — 1835 West Street, Annapolis, MD 21401

Arnold — 1460 Ritchie Highway, Arnold, MD 21012

Bowie — 6143 High Bridge Road, Bowie, MD 20720

Crofton — 2120 Baldwin Avenue, Crofton, MD 21114

Rockville — 1101 Nelson Street, Rockville, MD 20850

Rosedale — 1230 Race Road, Rosedale, MD 21237

 

The Company owns all of the offices listed above, except that it leases its corporate headquarters, the Fairfax, West Broad Marketplace and Winterfield offices in the Virginia market and the Arnold, Crofton and Rockville offices in the Maryland market. The Company also has a loan production office in Lynchburg, Virginia, which it leases.

 

The Company opened its West Board Marketplace branch office on May 16, 2017, its Lynchburg–Timberlake branch office on June 19, 2017 and its Lynchburg–Old Forest Road on December 4, 2017. The Company expects to open a branch office in the Stonehenge Village development in Midlothian, Virginia (12646 Stone Village Way) in July 2018.

 

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.MINE SAFETY DISCLOSURES

 

Not applicable.

 

 20 

 

 

PART II

 

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

 

MARKET PRICES FOR SECURITIES

 

The Company’s common stock trades on the NASDAQ Capital Market under the symbol “ESXB”.

 

The following table sets summarizes the high and low sales prices for the Company’s common stock for the quarterly periods during the years ended December 31, 2017 and 2016:

 

   2017   2016 
   High   Low   High   Low 
Quarter ended March 31  $8.50   $7.00   $5.45   $4.45 
Quarter ended June 30   8.30    6.95    5.30    4.72 
Quarter ended September 30   9.25    8.05    5.50    5.10 
Quarter ended December 31   9.35    7.90    7.25    5.35 

 

HOLDERS OF RECORD

 

As of December 31, 2017, there were 1,931 holders of record of the Company’s common stock, not including beneficial holders of securities held in street name.

 

DIVIDENDS

 

The Company’s dividend policy is subject to the discretion of the board of directors and future cash dividend payments to shareholders will depend upon a number of factors, including future earnings, alternative investment opportunities, financial condition, cash requirements and general business conditions.

 

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 under Section 5199(b) of the Revised Statues (12 U.S.C. 60), and the approval of the Federal Reserve would be required if the total of all dividends declared by a state member bank in any calendar year shall exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. Additionally, the Bank is further restricted by Regulation H, Section 208.5, Dividends and Other Distributions, which requires pre-approval of dividends that exceed undivided profits. 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 “Supervision and Regulation — Dividends” in Item 1 above.

 

In addition, until January 2017, the ability of each of the Company and the Bank to distribute cash dividends was subject to restrictions in a third-party term loan that the Company obtained in April 2014 to repurchase its then outstanding Series A Preferred Stock.   Specifically, neither the Company nor the Bank could have declared or made a dividend if there existed a default, or such action would have created a default, under the term loan, which required the Company to be in compliance with certain covenants, such as maintenance of minimum regulatory capital ratios, minimum return on assets, minimum cash on hand and minimum dividend capacity.  For additional information on the term loan, see Note 10 to the Notes to the Consolidated Financial Statements.

 

Following the payment of a 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 utilized dividends from the Bank for the payment of capital funding (Series A Preferred Stock) received from the Department of the Treasury until April 2014, when the Company completed the redemption of such funding. Until January 2017, the Company primarily utilized dividends from the Bank for principal and interest payments with respect to an unsecured third party loan that the Company obtained at the same time in connection with such redemption. Additional dividends from the Bank would be utilized for the payment of intercompany expenses and interest payments on trust preferred securities.

 

The Company does not plan to recommence the payment of its quarterly dividend to holders of common stock at the current time. The Company believes that the current use of earnings to support growth, maintain current capital levels and support payments under the third party loan are appropriate for the long-term growth of shareholder value in the Company.

 

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 year ended December 31, 2017.

 

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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 December 31, 2012, to December 31, 2017, 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 December 31, 2012 in the Company’s common stock and in each of the comparable indices and that dividends were reinvested.

 

 

 

       Period Ended 
Index  12/31/12   12/31/13   12/31/14   12/31/15   12/31/16   12/31/17 
Community Bankers Trust Corporation   100.00    141.89    166.79    202.64    273.58    307.55 
NASDAQ Composite Index   100.00    140.12    160.78    171.97    187.22    242.71 
SNL Bank and Thrift Index   100.00    136.92    152.85    155.94    196.86    231.49 

 

 22 

 

 

ITEM 6.SELECTED FINANCIAL DATA

 

The following table sets forth selected financial data for the Company over each of the past five years ended December 31. The historical results included below and elsewhere in this report are not indicative of the future performance of the Company and its subsidiaries.  

 

   Year Ended December 31 
(dollars in thousands, except for per share amounts)  2017   2016   2015   2014   2013 
Results of Operations                         
Interest and dividend income  $53,315   $49,295   $47,552   $48,725   $50,045 
Interest expense   9,199    7,820    7,497    6,933    7,078 
Net interest income   44,116    41,475    40,055    41,792    42,967 
Provision for loan losses   550    166             
Net interest income after provision for loan losses   43,566    41,309    40,055    41,792    42,967 
Noninterest income   4,697    5,179    5,081    5,269    4,724 
Noninterest expenses   34,157    32,750    50,260    36,817    39,288 
Income (loss) before income taxes   14,106    13,738    (5,124)   10,244    8,403 
Income tax expense (benefit)   6,903    3,816    (2,627)   2,728    2,497 
Net income (loss)  $7,203   $9,922   $(2,497)  $7,516   $5,906 
                          
Financial Condition                         
Assets  $1,336,190   $1,249,816   $1,180,557   $1,155,734   $1,089,532 
FDIC indemnification asset               18,609    25,409 
PCI loans   44,333    51,964    58,955    67,460    73,275 
Loans   942,018    836,299    748,724    660,020    596,173 
Deposits   1,095,764    1,037,294    945,519    918,945    892,341 
Shareholders’ equity   124,003    114,536    104,487    107,650    106,659 
Ratios                         
Return on average assets   0.56%   0.83%   (0.22)%   0.67%   0.53%
Return on average equity   5.91%   8.92%   (2.31)%   7.09%   5.22%
Non-GAAP return on average tangible assets (1)   0.61%   0.94%   (0.11)%   0.79%   0.66%
Non-GAAP return on average tangible common equity (1)   6.40%   10.23%   (1.19)%   9.09%   8.38%
Efficiency ratio (2)   69.98%   70.20%   111.35%   78.23%   82.38%
Equity to assets   9.28%   9.15%   8.86%   9.31%   9.79%
Loan to deposits   90.01%   85.63%   85.42%   79.16%   75.02%
Average tangible common equity / average tangible assets (1)   9.50%   9.16%   9.10%   8.70%   7.90%
Asset Quality                         
Allowance for loan losses (3)  $8,969   $9,493   $9,559   $9,267   $10,444 
Allowance for loan losses / loans (3)   0.95%   1.14%   1.28%   1.40%   1.75%
Allowance for loan losses / nonaccrual loans (3)   99.37%   92.68%   89.59%   55.92%   86.28%
Non-covered nonperforming assets / loans and other real estate (3)   1.25%   1.74%   2.14%   3.64%   3.05%
Per Share Data                         
Earnings per share, basic  $0.33   $0.45   $(0.11)  $0.33   $0.22 
Earnings per share, diluted   0.32    0.45    (0.11)   0.33    0.22 
Non-GAAP earnings per share, diluted (1)   0.35    0.50    (0.06)   0.40    0.33 
Market value per share   8.15    7.25    5.37    4.42    3.76 
Book value per tangible common share (1)   5.62    5.17    4.65    4.72    4.07 
Price to earnings ratio, diluted   25.47    16.11    (48.82)   13.39    17.09 
Price to book value ratio   145.0%   139.2%   112.4%   89.5%   86.0%
Weighted average shares outstanding, basic   22,013,810    21,914,270    21,826,845    21,755,448    21,699,964 
Weighted average shares outstanding, diluted   22,512,206    22,161,221    21,826,845    21,980,979    21,922,132 

 

 23 

 

 

 

   Year Ended December 31 
   2017   2016   2015   2014   2013 
Capital Ratios                         
Leverage Ratio   9.74%   9.60%   9.38%   9.36%   9.52%
Common equity tier 1 capital ratio   11.50%   11.78%   11.62%   n/a    n/a 
Tier 1 risk-based capital ratio   11.88%   12.20%   12.08%   13.52%   15.62%
Total risk-based capital ratio   12.70%   13.16%   13.16%   14.72%   16.82%

 

(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 PCI loans.

 

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

 

The following discussion and analysis of the financial condition at December 31, 2017 and results of operations for the year ended December 31, 2017 of Community Bankers Trust Corporation (the “Company”) should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in this report.

 

GENERAL

 

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 26 full-service offices in Virginia and Maryland. The Bank also operates one loan production office in 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 industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities.

 

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 nonaccrual loans and the amount of additions to the allowance for loan losses. Additionally, the Bank earns noninterest income from service charges on deposit accounts and other fee or commission-based services and products. Other sources of noninterest income can include gains or losses on securities transactions, mortgage loan income, gains from loan sales, and income from bank owned life insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and benefits, occupancy and equipment costs, professional fees, transactions involving bank-owned property, the amortization of intangible assets and other operational expenses. The provision for loan losses and income taxes may materially affect income.

 

 24 

 

 

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

 

The Company makes certain forward-looking statements in this report 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:

 

·the quality or composition of the Company’s loan or investment portfolios, including collateral values and the repayment abilities of borrowers and issuers;

 

·assumptions that underlie the Company’s allowance for loan losses;

 

·general economic and market conditions, either nationally or in the Company’s market areas;

 

·the interest rate environment;

 

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

 

·real estate values;

 

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

 

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

 

·the performance of vendors or other parties with which the Company does business;

 

·time and costs associated with de novo branching, acquisitions, dispositions and similar transactions;

 

·the realization of gains and expense savings from acquisitions, dispositions and similar transactions;

 

·assumptions and estimates that underlie the accounting for purchased credit impaired loans;

 

·consumer profiles and spending and savings habits;

 

·levels of fraud in the banking industry;

 

·the level of attempted cyber attacks in the banking industry;

 

·the securities and credit markets;

 

·costs associated with the integration of banking and other internal operations;

 

·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.

 

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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 Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when either earning income, recognizing an expense, recovering an asset or relieving a liability. For example, the Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

 

The Company’s critical accounting policies are discussed in detail in Note 1 - “Nature of Banking Activities and Significant Accounting Policies” in Item 8 of this Form 10-K. The following is a summary of the Company’s critical accounting policies that are highly dependent on estimates, assumptions and judgments.

 

Allowance for Loan Losses on Loans

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. The evaluation also considers the following risk characteristics of each loan portfolio:

 

·Residential 1-4 family mortgage loans include HELOCs and single family investment properties secured by first liens. The carry risks associated with owner-occupied and investment properties are the continued credit-worthiness of the borrower, changes in the value of the collateral, successful property maintenance and collection of rents due from tenants. The Company manages these risks by using specific underwriting policies and procedures and by avoiding concentrations in geographic regions.

 

·Commercial real estate loans, including owner occupied and non-owner occupied mortgages, carry risks associated with the successful operations of the principal business operated on the property securing the loan or the successful operation of the real estate project securing the loan. General market conditions and economic activity may impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by avoiding concentrations to any one business or industry, and by diversifying the lending to various lines of businesses, such as retail, office, office warehouse, industrial and hotel.

 

·Construction and land development loans are generally made to commercial and residential builders/developers for specific construction projects, as well as to consumer borrowers. These carry more risk than real estate term loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market and state and local government regulations. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding concentrations to any one business or industry and by diversifying lending to various lines of businesses, in various geographic regions and in various sales or rental price points.

 

·Second mortgages on residential 1-4 family loans carry risk associated with the continued credit-worthiness of the borrower, changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the inferior lien position. The Company manages risk by using specific underwriting policies and procedures.

 

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·Multifamily loans carry risks associated with the successful operation of the property, general real estate market conditions and economic activity. In addition to using specific underwriting policies and procedures, the Company manages risk by avoiding concentrations to geographic regions and by diversifying the lending to various unit mixes, tenant profiles and rental rates.

 

·Agriculture loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time and inventory that may be affected by weather, biological, price, labor, regulatory and economic factors. The Company manages risks by using specific underwriting policies and procedures, as well as avoiding concentrations to individual borrowers and by diversifying lending to various agricultural lines of business (i.e., crops, cattle, dairy, etc.).

 

·Commercial loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time, accounts receivable whose collectability may change and inventory values that may be subject to various risks including obsolescence. General market conditions and economic activity may also impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by diversifying the lending to various industries and avoids geographic concentrations.

 

·Consumer installment loans carry risks associated with the continued credit-worthiness of the borrower and the value of rapidly depreciating assets or lack thereof. These types of loans are more likely than real estate loans to be quickly and adversely affected by job loss, divorce, illness or personal bankruptcy. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

 

·All other loans generally support the obligations of state and political subdivisions in the U.S. and are not a material source of business for the Company. The loans carry risks associated with the continued credit-worthiness of the obligations and economic activity. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

 

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

 

The allowance consists of specific, general and unallocated components. For loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. The unallocated component covers uncertainties the could affect management’s estimate of probable losses.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

 

Accounting for Certain Loans Acquired in a Transfer

 

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 310, Receivables requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit arrangements are excluded from the scope of FASB ASC 310 which limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments through the allowance for loan losses.

 

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The Company’s acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the “PCI loans”), subject to FASB ASC Topic 805, Business Combinations, were recorded at fair value and no separate valuation allowance was recorded at the date of acquisition. FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. The Company is applying the provisions of FASB ASC 310-30 to all loans acquired in the SFSB transaction. The Company has grouped loans together based on common risk characteristics including product type, delinquency status and loan documentation requirements among others.

 

The PCI loans are subject to the credit review standards described above for loans. If and when credit deterioration occurs subsequent to the date that the loans were acquired, a provision for loan loss for PCI loans will be charged to earnings for the full amount.

 

The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each pool’s contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to collect from the pool is referred to as nonaccretable difference, which is not accreted into income. Judgmental prepayment assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. 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 the allowance for loan loss. Subsequent increases in expected or actual 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 accretable yield with the amount of periodic accretion adjusted over the remaining life of the pool.

 

Other Real Estate Owned

 

Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at the fair value at the date of foreclosure net of estimated disposal costs, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or the fair value less costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses. Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred.

 

Other Intangibles

 

The Company is accounting for other intangible assets in accordance with FASB ASC 350, Intangibles - Goodwill and Others. Under FASB 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. 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. The core deposit intangible is evaluated for impairment in accordance with FASB ASC 350.

 

Income Taxes

 

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

 

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income. The Company had no interest or penalties during the years ended December 31, 2017, 2016 or 2015. Under FASB ASC 740, Income Taxes, a valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies that would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that the deferred tax assets are realizable; therefore, no allowance is required.

 

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The Company and its subsidiaries are subject to U. S. federal income tax as well as Virginia and Maryland state income tax. All years from 2014 through 2017 are open to examination by the respective tax authorities.

 

OVERVIEW

 

Total assets increased $86.4 million, or 6.9%, to $1.336 billion at December 31, 2017 as compared with $1.250 billion at December 31, 2016. Total loans were $942.0 million at December 31, 2017, increasing $105.7 million, or 12.6%, from year end 2016.  Total PCI loans were $44.3 million at December 31, 2017 versus $52.0 million at year end 2016.

 

The Company’s securities portfolio, excluding equity securities, declined $11.7 million, or 4.5%, from $262.7 million at December 31, 2016 to $251.0 million at December 31, 2017. Net realized gains of $210,000 were recognized during 2017 through sales and call activity, as compared with $634,000 recognized during 2016. The decline in the volume of securities was a strategic decision by management to fund strong loan growth with securities sales, normal securities amortization, call activity, sales and maturities.

 

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 AFS portfolio was $204.8 million and $216.1 million at December 31, 2017 and 2016, respectively. The Company had a net unrealized gain of $1.2 million and a net unrealized loss of $621,000 in the AFS portfolio at December 31, 2017 and 2016, respectively.

 

Noninterest bearing deposits increased $24.1 million, or 18.7%, from $128.9 million at December 31, 2016 to $153.0 million at December 31, 2017. Interest bearing deposits at December 31, 2017 were $942.7 million, an increase of $34.3 million, or 3.8%, from $908.4 million at December 31, 2016. NOW, MMDA and savings account balances increased $19.7 million, $32.0 million and $3.6 million, respectively, since December 31, 2016. Total time deposits declined $21.0 million, or 3.7%. While retail time deposits increased by $18.8 million, or 3.6%, the level of brokered deposits declined by $39.8 million, or 74.5%, and were $13.6 million at December 31, 2017. Excluding brokered deposits, retail interest bearing deposits increased in 2017 by $74.1 million, or 8.7%.

 

FHLB advances were $101.4 million at December 31, 2017, compared with $81.9 million at December 31, 2016. The increase in FHLB advances was offset by the decline in brokered deposits. FHLB advances were less costly than most brokered deposit alternatives in 2017.

 

Long term debt totaled $0 and $1.7 million at December 31, 2017 and 2016, respectively. This borrowing, initially in the amount of $10.7 million, was obtained in April 2014, and the proceeds were used to redeem the Company’s remaining outstanding TARP preferred stock. The Company had paid down this debt by $9.0 million at December 31, 2016, and the loan, which was scheduled to be fully paid on April 21, 2017, was fully paid on January 9, 2017.

 

Shareholders' equity was $124.0 million at December 31, 2017 and $114.5 million at December 31, 2016.

 

RESULTS OF OPERATIONS

 

Net Income

 

For the year ended December 31, 2017, net income was $7.2 million, or $0.33 per common share basic and $0.32 fully diluted, compared with net income of $9.9 million, or $0.45 per common share, basic and fully diluted, for the year ended December 31, 2016. Net income in 2017 was affected by a charge of $3.5 million to income tax expense in the fourth quarter of 2017 related to the re-measurement of net deferred tax assets resulting from the new 21% federal corporate tax rate established by the Tax Cuts and Jobs Act of 2017.

 

For the year ended December 31, 2016, net income was $9.9 million, or $0.45 per common share, basic and fully diluted, compared with a net loss of $2.5 million, or ($0.11) per common share, for the year ended December 31, 2015.

 

Net income in 2015 was affected by the third quarter termination of the Bank’s FDIC shared-loss agreements in order to improve profitability beginning in the fourth quarter of 2015. As part of the termination of the shared-loss agreements, the FDIC paid $3.1 million in cash to the Bank, and the remaining $13.1 million of the FDIC indemnification asset related to the agreements was charged off. This transaction eliminated future indemnification asset amortization expense, which had totaled $5.2 million for the 12-month period from July 1, 2014 through June 30, 2015.

 

In addition to the shared-loss termination charge, the Company had write-downs totaling $1.1 million with respect to two bank buildings held for sale and one parcel in other real estate owned in the third quarter of 2015. Also contributing to the increase in net income for the year ended 2016 was an increase in net interest income of $1.4 million, or 3.5%, as compared to the year ended 2015.

 

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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. Net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing deposits and other borrowed funds, referred to as a “rate change.”

 

For the 2017 year, net interest income increased $2.6 million, or 6.4%, and was $44.1 million. The tax equivalent yield (non-GAAP) on earning assets was 4.54% for 2017 compared with 4.50% for 2016. Interest and fees on loans of $40.3 million in 2017 was an increase of $4.3 million, or 12.0%, compared with $36.0 million for 2016. Interest and fees on PCI loans declined $497,000 over this same time frame. Securities income increased $139,000 for 2017 compared to 2016, and the tax-equivalent yield on the portfolio was 3.12% in 2017 and 3.11% in 2016.

 

Interest expense of $9.2 million for 2017 represented an increase of $1.4 million, or 17.6%, compared with 2016. Total average interest bearing liabilities increased $53.0 million, as loan growth has been fueled by this increase and an average balance increase of $20.5 million, or 17.6%, in noninterest bearing deposits.

 

Interest spread is the product of yield on earning assets less cost of total interest bearing liabilities. The Company's net interest spread declined from 3.69% for the year ended December 31, 2016 to 3.64% for the same period in 2017. The tax equivalent yield (non-GAAP) on earning assets increased from 4.50% for the year ended December 31, 2016 to 4.54% for the year ended December 31, 2017. The yield on total loans was stable, finishing at 5.01% for each of 2017 and 2016. PCI loan yield rose from 11.29% to 11.95%, and the yield on loans, excluding PCI loans, increased 6 basis points, from 4.57% to 4.63%. The tax-equivalent yield on securities increased from 3.11% for 2016 to 3.12% for 2017, as the Company sold lower yielding securities during the course of 2017 to fund loan demand.

 

For the 2016 year, net interest income increased $1.4 million, or 3.6%, and was $41.5 million. The tax equivalent yield on earning assets was 4.50% for 2016 compared with 4.57% for 2015. Interest and fees on loans of $36.0 million in 2016 was an increase of $4.0 million, or 12.5%, compared with $32.0 million for 2015. Interest and fees on PCI loans declined $1.6 million over this same time frame. Of that decline, $475,000 related to cash payments on ADC loans related to pools previously written down to a zero carrying value received in 2015 versus no such payments in 2016. Securities income declined $681,000 for 2016 compared 2015, as securities balances have been liquidated to fund loan growth.

 

Interest expense of $7.8 million for 2016 represented an increase of $323,000, or 4.31%, compared with 2015. Total average interest bearing liabilities increased $21.4 million, as loan growth has been fueled by this increase and an average balance increase of 23.0%, or $21.7 million, in noninterest bearing deposits, coupled with a decline in the average balance of securities of $36.3 million during 2016.

 

The Company’s total loan to deposit ratio was 90.01% at December 31, 2017 versus 85.63% at December 31, 2016 and 85.42% at December 31, 2015.

 

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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 footnote, no tax equivalent adjustments were made. Any non-accruing loans have been included in the table as loans carrying a zero yield.

 

NET INTEREST MARGIN ANALYSIS

AVERAGE BALANCE SHEETS

(Dollars in thousands)

 

   Year ended December 31, 2017   Year ended December 31, 2016   Year ended December 31, 2015 
           Average           Average           Average 
   Average   Interest   Rates   Average   Interest   Rates   Average   Interest   Rates 
   Balance   Income/   Earned/   Balance   Income/   Earned/   Balance   Income/   Earned/ 
   Sheet   Expense   Paid   Sheet   Expense   Paid   Sheet   Expense   Paid 
ASSETS:                                             
Loans, including fees  $870,258   $40,301    4.63%  $787,245   $35,998    4.57%  $687,463   $31,990    4.65%
PCI loans   47,983    5,733    11.95    55,178    6,230    11.29    63,552    7,875    12.39 
Total loans   918,241    46,034    5.01    842,423    42,228    5.01    751,015    39,865    5.31 
Interest bearing bank balances   15,618    196    1.26    17,922    122    0.68    14,551    59    0.41 
Federal funds sold   94    1    1.11    27        0.49    1,852    2    0.10 
Securities (taxable)   181,476    4,682    2.58    178,833    4,696    2.63    220,525    5,469    2.48 
Securities (tax exempt)(1)   85,305    3,639    4.27    82,045    3,407    4.15    76,644    3,268    4.26 
Total earning assets   1,200,734    54,552    4.54    1,121,250    50,453    4.50    1,064,587    48,663    4.57 
Allowance for loan losses   (9,431)             (9,967)             (9,981)          
Non-earning assets   89,904              85,779              95,190           
Total assets  $1,281,207             $1,197,062             $1,149,796           
                                              
LIABILITIES AND SHAREHOLDERS' EQUITY                                             
                                              
Demand - interest bearing  $264,082   $897    0.34%  $235,571   $636    0.27%  $229,220   $698    0.30%
Savings   91,687    243    0.26    86,499    236    0.27    83,614    260    0.31 
Time deposits   574,630    6,757    1.18    530,531    5,510    1.04    523,726    5,025    0.96 
Total deposits   930,399    7,897    0.85    852,601    6,382    0.75    836,560    5,983    0.72 
Short-term borrowings   1,556    25    1.58    1,776    16    0.88    1,516    12    0.76 
FHLB and other borrowings   85,127    1,277    1.50    105,455    1,210    1.15    96,937    1,179    1.22 
Long-term debt               4,257    212    4.97    7,707    323    4.20 
Total interest bearing liabilities   1,017,082    9,199    0.90    964,089    7,820    0.81    942,720    7,497    0.80 
Noninterest bearing deposits   136,674              116,215              94,476           
Other liabilities   5,550              5,543              4,490           
Total liabilities   1,159,306              1,085,847              1,041,686           
Shareholders' equity   121,901              111,215              108,110           
                                              
Total liabilities and shareholders' equity  $1,281,207             $1,197,062             $1,149,796           
Net interest earnings       $45,353             $42,633             $41,166      
Interest spread             3.64%             3.69%             3.77%
Net interest margin             3.78%             3.80%             3.87%
                                              
Tax equivalent adjustment:                                             
Securities       $1,237             $1,158             $1,111      

 

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

 

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The following table presents changes in interest income and interest expense and distinguishes between the changes related to increases or decreases in average outstanding balances of interest earning assets and interest bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). No tax equivalent adjustments were made.

 

EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME

FOR THE YEAR ENDED DECEMBER 31, 2017 AND 2016

(Dollars in thousands)

 

   2017 compared to 2016   2016 compared to 2015 
   Increase (Decrease)   Increase (Decrease) 
   Volume   Rate   Total   Volume   Rate   Total 
Interest Income:                              
                               
Loans, including fees  $3,796   $507   $4,303   $4,643   $(635)  $4,008 
PCI loans   (812)   315    (497)   (1,038)   (607)   (1,645)
Interest bearing bank balances and federal funds sold   (16)   91    75    12    49    61 
Investments   157    (18)   139    (931)   250    (681)
                               
Total Earning Assets   3,125    895    4,020    2,686    (943)   1,743 
                               
Interest Expense:                              
Demand deposits   77    184    261    19    (80)   (61)
Savings deposits   14    (7)   7    9    (34)   (25)
Time deposits   458    789    1,247    65    420    485 
Total deposits   549    966    1,515    93    306    399 
                               
Other borrowed funds   (320)   184    (136)   76    (152)   (76)
                               
Total interest-bearing liabilities   229    1,150    1,379    169    154    323 
Net increase (decrease) in net interest income  $2,896   $(255)  $2,641   $2,517   $(1,097)  $1,420 

 

 32 

 

 

Provision for Loan Losses

 

Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on such factors as historical credit loss experience, industry diversification of the commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review function and other relevant factors. See Allowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

 

Loans are charged-off against the allowance for loan losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations.

 

Management also actively monitors its PCI loan portfolio for impairment and necessary loan loss provisions. Provisions for PCI loans may be necessary due to a change in expected cash flows or an increase in expected losses within a pool of loans.

 

The provision for loan losses was $550,000 for the year ended December 31, 2017 compared with $166,000 and $0 for the years ended December 31, 2016 and 2015, respectively. The Company records a separate provision for loan losses for its loan portfolio and its PCI loan portfolio. The provision for loan losses on loans, excluding PCI loans, was $550,000 for the year ended December 31, 2017 compared with $450,000 and $0 for the years ended December 31, 2016 and 2015, respectively. The provision for loan losses on PCI loans was a $284,000 credit for the year ended December 31, 2016, which was the result of improvement in expected losses on the Company’s PCI portfolio. There was no provision for the PCI loan portfolio for the years ended December 31, 2017 and 2015. With respect to the loan portfolio, the provision was taken as additional general reserves to support current period loan growth.

 

The allowance for loan losses, excluding PCI loans, equaled 99.4% of nonaccrual loans at December 31, 2017 compared with 92.7% at December 31, 2016. The ratio of the allowance for loan losses to total loans, excluding PCI loans, was 0.95% at December 31, 2017 compared with 1.14% at December 31, 2016. Net charge-offs were $1.1 million in 2017 compared with net charge-offs of $516,000 in 2016.

 

While the PCI 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 acquisition. See the Asset Quality discussion below for further analysis.

 

Noninterest Income

 

Noninterest income was $4.7 million for the year ended December 31, 2017, a decrease of $482,000, or 9.3%, from $5.2 million for the year ended December 31, 2016. Securities gains were $210,000 in 2017 compared with $634,000 for 2016. Mortgage loan income declined by $364,000 from 2016 to 2017 and was $242,000. The Bank instituted a lower cost mortgage platform beginning in 2017, which resulted in a steady improvement in results during the year. Offsetting these decreases for 2017 compared with 2016 was an increase of $261,000 in service charges on deposit accounts, which were $2.7 million for the year ended December 31, 2017.

 

Noninterest income was $5.2 million for the year ended December 31, 2016, an increase of $98,000, or 1.9%, over $5.1 million for the year ended December 31, 2015. Securities gains of $634,000 in 2016 compared with $472,000 for 2015. Likewise, service charges on deposit accounts increased by $151,000 and were $2.4 million for 2016. Income on bank owned life insurance of $870,000 in 2016 is an increase of $119,000, or 15.9%. Offsetting these increases for 2016 compared with 2015 were decreases of $178,000 in mortgage loan income, which was $606,000 in 2016, $87,000 in other noninterest income, which was $649,000 in 2016, and $69,000 in gain on sale of loans in 2015, which was zero in 2016.

 

Noninterest Expenses

 

Noninterest expenses were $34.2 million for the year ended December 31, 2017, as compared with $32.8 million for the year ended December 31, 2016. This is an increase of $1.4 million, or 4.3%. Salaries and employee benefits increased $1.2 million in 2017 compared with 2016 reflecting two branch openings in 2016 and three in 2017. These new branches also impacted the 2017 increase in occupancy expenses, which were $393,000 higher in 2017 than the previous year. Data processing, advertising, equipment expenses and supplies all also were affected by the new branches as they increased $249,000, $157,000, $145,000 and $112,000, respectively. Offsetting these increases was a reduction of amortization of intangible assets, which was $1.9 million in 2016 and $898,000 in 2017. The Company has no intangible assets that are being amortized as of December 31, 2017.

 

Noninterest expenses were $32.8 million for the year ended December 31, 2016 compared with $50.3 million for the year ended December 31, 2015. This is a decrease of $17.5 million, or 34.8%. FDIC indemnification asset amortization was $0 for 2016 and $16.2 million for 2015, as a result of the termination of the shared-loss agreements and associated write-off. Other real estate expenses improved $1.1 million in 2016 and were $175,000. The expense in this category in 2015 was primarily from the write-down of $1.1 million in the two bank owned properties and other real estate owned noted previously. Other operating expenses declined $444,000 over the comparison period. Salaries and employee benefits increased $271,000, or 1.5%, in 2016 compared with 2015. FDIC assessment decreased $115,000 and occupancy expenses increased $145,000 in 2016, the result of the Bank’s new branches in Fairfax and Cumberland, Virginia.

 

 33 

 

 

Income Taxes

 

For the year ended December 31 2017, income tax expense of $6.9 million represented an effective tax rate of 48.9% compared with an income tax expense of $3.8 million for the year ended December 31, 2016. The increase in income tax expense for the year ended December 31, 2017 was related to a $3.5 million re-measurement of net deferred tax assets resulting from the new 21% federal corporate tax rate established by the Tax Cuts and Jobs Act of 2017 enacted in December 2017.

 

For the year ended December 31 2016, income tax expense of $3.8 million represented an effective tax rate of 27.8% compared with an income tax benefit of $2.6 million for the year ended December 31, 2015. The benefit for the year ended 2015 was the result of the net loss for the year generated by the accounting for the termination of the shared-loss agreements.

 

Loans

 

Total loans were $986.4 million at December 31, 2017, increasing $98.1 million from $888.3 million at December 31, 2016. Total loans, excluding PCI loans, were $942.0 million at December 31, 2017 versus $836.3 million at December 31, 2016. Total loans, excluding PCI loans, increased $105.7 million, or 12.6%, during 2017. Commercial loans exhibited the largest dollar volume increase year-over-year and were up $29.7 million, or 23.0%, and ended the year at $159.0 million. Commercial mortgage loans of $366.3 million at December 31, 2017 reflected an increase of 7.8%, or $26.5 million, since year end 2016. This is also the largest category of loans in the portfolio. Residential 1-4 family mortgage loans increased $19.7 million, or 9.5%, over this time frame and were $227.5 million at December 31, 2017. Multifamily loans of $59.0 million at December 31, 2017 was an increase of $19.9 million over the balance at December 31, 2016. PCI loans were $44.3 million at December 31, 2017, $7.6 million lower than at year-end 2016.

 

The following tables indicate the total dollar amount of loans outstanding and the percentage of gross loans as of December 31 of the years presented (dollars in thousands):  

 

   2017 
   Loans   PCI Loans   Total Loans 
Mortgage loans on real estate:                              
Residential 1-4 family  $227,542    24.16%  $39,805    89.79%  $267,347    27.10%
Commercial   366,331    38.89    547    1.23    366,878    37.20 
Construction and land development   107,814    11.44    1,588    3.58    109,402    11.09 
Second mortgages   8,410    0.89    2,136    4.82    10,546    1.07 
Multifamily   59,024    6.27    257    0.58    59,281    6.01 
Agriculture   7,483    0.79            7,483    0.76 
Total real estate loans   776,604    82.44    44,333    100.00    820,937    83.23 
Commercial loans   159,024    16.88            159,024    16.13 
Consumer installment loans   5,169    0.55            5,169    0.52 
All other loans   1,221    0.13            1,221    0.12 
Total loans  $942,018    100.00%  $44,333    100.00%  $986,351    100.00%

 

   2016 
   Loans   PCI Loans   Total Loans 
Mortgage loans on real estate:                              
Residential 1-4 family  $207,863    24.86%  $46,623    89.72%  $254,486    28.64%
Commercial   339,804    40.63    649    1.25    340,453    38.33 
Construction and land development   98,282    11.75    1,969    3.79    100,251    11.29 
Second mortgages   7,911    0.95    2,453    4.72    10,364    1.17 
Multifamily   39,084    4.67    270    0.52    39,354    4.43 
Agriculture   7,185    0.86            7,185    0.81 
Total real estate loans   700,129    83.72    51,964    100.00    752,093    84.67 
Commercial loans   129,300    15.46            129,300    14.56 
Consumer installment loans   5,627    0.67            5,627    0.63 
All other loans   1,243    0.15            1,243    0.14 
Total loans  $836,299    100.00%  $51,964    100.00%  $888,263    100.00%

 

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   2015 
   Loans   PCI Loans   Total Loans 
Mortgage loans on real estate:                              
Residential 1-4 family  $194,576    25.99%  $52,696    89.38%  $247,272    30.62%
Commercial   317,955    42.47    850    1.44    318,805    39.47 
Construction and land development   67,408    9.00    2,310    3.92    69,718    8.63 
Second mortgages   8,378    1.12    2,822    4.79    11,200    1.39 
Multifamily   45,389    6.06    277    0.47    45,666    5.65 
Agriculture   6,238    0.83            6,238    0.77 
Total real estate loans   639,944    85.47    58,955    100.00    698,899    86.53 
Commercial loans   102,507    13.69            102,507    12.69 
Consumer installment loans   4,928    0.66            4,928    0.61 
All other loans   1,345    0.18            1,345    0.17 
Total loans  $748,724    100.00%  $58,955    100.00%  $807,679    100.00%

 

   2014 
   Loans   PCI Loans   Total Loans 
Mortgage loans on real estate:                              
Residential 1-4 family  $167,171    25.33%  $60,171    89.20%  $227,342    31.25%
Commercial   282,127    42.75    1,148    1.70    283,275    38.94 
Construction and land development   57,027    8.64    2,456    3.64    59,483    8.18 
Second mortgages   5,997    0.91    3,409    5.05    9,406    1.29 
Multifamily   33,812    5.12    276    0.41    34,088    4.69 
Agriculture   7,163    1.08            7,163    0.98 
Total real estate loans   553,297    83.83    67,460    100.00    620,757    85.33 
Commercial loans   99,783    15.12            99,783    13.72 
Consumer installment loans   5,496    0.83            5,496    0.76 
All other loans   1,444    0.22            1,444    0.19 
Total loans  $660,020    100.00%  $67,460    100.00%  $727,480    100.00%

 

   2013 
   Loans   PCI Loans   Total Loans 
Mortgage loans on real estate:                              
Residential 1-4 family  $144,279    24.20%  $64,610    88.18%  $208,889    31.20%
Commercial   247,106    41.45    1,389    1.90    248,495    37.12 
Construction and land development   55,238    9.27    2,940    4.01    58,178    8.69 
Second mortgages   6,849    1.15    3,898    5.32    10,747    1.61 
Multifamily   35,748    6.00    266    0.36    36,014    5.38 
Agriculture   9,558    1.60    172    0.23    9,730    1.45 
Total real estate loans   498,778    83.67    73,275    100.00    572,053    85.45 
Commercial loans   90,282    15.14            90,282    13.49 
Consumer installment loans   5,667    0.95            5,667    0.85 
All other loans   1,446    0.24            1,446    0.21 
Total loans  $596,173    100.00%  $73,275    100.00%  $669,448    100.00%

  

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The following table indicates the contractual maturity of commercial and construction and land development loans as of December 31, 2017 (dollars in thousands):

 

   Commercial   Construction and land
development
 
Within 1 year  $63,464   $69,975 
Variable Rate          
One to Five Years  $24,534   $3,551 
After Five Years   14,326    15,231 
Total  $38,860   $18,782 
Fixed Rate          
One to Five Years  $47,944   $19,901 
After Five Years   8,756    744 
Total  $56,700   $20,645 
Total Maturities  $                 159,024   $109,402 

 

Asset Quality – Assets, Excluding PCI Loans

 

The Company maintains a list of loans that have potential weaknesses and thus 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, 2017, nonperforming assets totaled $11.8 million and net charge-offs were $1.1 million. Nonperforming assets totaled $14.7 million and net charge-offs were $516,000 at December 31, 2016.

 

Nonperforming loans were $9.0 million at December 31, 2017 compared to $10.2 million at December 31, 2016, a $1.2 million decrease. Additions to nonaccrual loans during 2017 totaled $7.0 million. The increase related to one relationship comprised of commercial and commercial real estate loans totaling $3.9 million, one commercial loan relationship of $1.3 million and several small real estate relationships. There were $1.2 million in charge-offs taken during 2017, including $693,000 related to the $3.9 million relationship noted above. The remaining charge-offs were mainly centered in real estate and commercial loans. There were $4.7 million in pay-offs, including $3.2 million related to the $3.9 million relationship noted above. There were also $1.4 million in pay-downs during the year and $926,000 in loans returned to accruing status. Foreclosures for the period totaled $23,000.

 

The following table sets forth selected asset quality data and ratios with respect to assets, excluding PCI loans, at December 31 of the years presented (dollars in thousands):

 

   2017   2016   2015   2014   2013 
Nonaccrual loans  $9,026   $10,243   $10,670   $16,571   $12,105 
Loans past due 90 days and accruing interest                    
Total nonperforming loans   9,026    10,243    10,670    16,571    12,105 
OREO   2,791    4,427    5,490    7,743    6,244 
Total nonperforming assets  $11,817   $14,670   $16,160   $24,314   $18,349 
                          
Accruing troubled debt restructure loans  $5,271   $4,653   $4,596   $6,195   $9,922 
                          
Balances                         
Specific reserve on impaired loans   959    1,130    1,144    1,761    1,636 
General reserve related to unimpaired loans   8,010    8,363    8,415    7,506    8,808 
Total allowance for loan losses   8,969    9,493    9,559    9,267    10,444 
Average loans during the year, net of unearned income   870,258    787,245    687,463    621,213    585,343 
                          
Impaired loans   14,297    18,541    15,266    22,929    22,027 
Non-impaired loans   927,721    817,758    733,476    637,091    574,146 
Total loans, net of unearned income   942,018    836,299    748,742    660,020    596,173 
                          
Ratios                         
Allowance for loan losses to loans   0.95%   1.14%   1.28%   1.40%   1.75%
Allowance for loan losses to nonaccrual loans   99.37    92.68    89.59    55.92    86.28 
General reserve to non-impaired loans   0.86    1.02    1.15    1.18    1.53 
Nonaccrual loans to loans   0.96    1.22    1.43    2.51    2.03 
Nonperforming assets to loans and OREO   1.25    1.74    2.14    3.64    3.05 
Net charge-offs (recoveries) to average loans   0.12    0.07    (0.04)   0.19    0.42 

 

 36 

 

 

At December 31, 2017, the Company had six construction and land development credit relationships in nonaccrual status. The borrowers for all of these relationships are residential land developers. All of the relationships are secured by the real estate to be developed, and all of such projects are in the Company’s central Virginia market. The total amount of the credit exposure outstanding at December 31, 2017 was $4.3 million. These loans have either been charged down or sufficiently reserved against to equate to the current expected realizable value. The total amount of the allowance for loan losses attributed to all six relationships was $556,000 at December 31, 2017, or 13.00% of the total credit exposure outstanding.

 

The Company performs troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be restructured into multiple new loans. The Company had 23 and 19 loans for the years ended December 31, 2017 and 2016, respectively, that met the definition of a TDR, which are loans that for reasons related to the debtor’s financial difficulties have been restructured on terms and conditions that would otherwise not be offered or granted. There were six loans totaling $3.4 million and seven loans totaling $4.1 million for the years ended December 31, 2017 and 2016, respectively, that were restructured using multiple new loans. At December 31, 2017 and 2016, the aggregated outstanding principal of all TDRs was $7.0 million and $6.7 million, respectively, of which $1.7 million and $2.0 million, respectively, were classified as nonaccrual.

 

The primary benefit of the restructured multiple loan workout strategy is to maximize the potential return by restructuring the loan into a “good loan” (the A loan) and a “bad loan” (the B loan). The impact on interest is positive because the Bank is collecting interest on the A loan rather than potentially not collecting interest on the entire original loan structure. The A loan is underwritten pursuant to the Bank’s standard requirements and graded accordingly. The B loan is classified as either “doubtful” or “loss”. An impairment analysis is performed on the B loan, and, based on its results, all or a portion of the B loan is charged-off or a specific loan loss reserve is established.

 

The Company does not modify its nonaccrual policies in this arrangement, and the A loan and the B loan stand on their own terms. At inception, this structure meets the definition of a TDR. If the loan is on nonaccrual at the time of restructure, the A loan is held on nonaccrual until six consecutive payments have been received, at which time it may be put back on an accrual status. The B loan is placed on nonaccrual. Under the terms of each loan, the borrower’s payment is contractually due.

 

The following table presents the composition of the Company’s nonaccrual loans, excluding PCI loans, as of December 31 of the years presented (dollars in thousands):  

 

   2017   2016   2015   2014   2013 
Mortgage loans on real estate:                         
Residential 1-4 family  $1,962   $2,893   $4,562   $3,342   $4,229 
Commercial   1,498    1,758    1,508    607    1,382 
Construction and land development   4,277    5,495    4,509    4,920    5,882 
Second mortgages           13    61    225 
Agriculture   68                205 
Total real estate loans   7,805    10,146    10,592    8,930    11,923 
Commercial loans   1,214    53        7,521    127 
Consumer installment loans   7    44    78    120    55 
Total loans  $9,026   $10,243   $10,670   $16,571   $12,105 

 

Allowance for Credit Losses on Loans

 

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

 

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 loan portfolio, the value and appropriateness of collateral and guarantors, nonperforming loans 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. See Allowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

 

In conjunction with the impairment analysis the Company performs as part of its allowance methodology, the Company frequently orders appraisals for all loans with balances in excess of $250,000 when the most recent appraisal is greater than 18 months old and /or deemed to be invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. A ratio analysis is used for all loans with balances less than $250,000. The Company maintains detailed analysis and other information for its allowance methodology, both for internal purposes and for review by its regulators.

 

 37 

 

 

The following table indicates the dollar amount of the allowance for loan losses, excluding PCI loans, including charge-offs and recoveries by loan type and related ratios as of December 31 of the years presented (dollars in thousands):

 

   2017   2016   2015   2014   2013 
Balance, beginning of year  $9,493   $9,559   $9,267   $10,444   $12,920 
Loans charged-off:                         
Commercial   431    -    3    1,217    325 
Real estate   797    687    1,183    1,179    2,999 
Consumer and other loans   285    191    174    134    167 
Total loans charged-off   1,513    878    1,360    2,530    3,491 
Recoveries:                         
Commercial   5    11    1,211    1,065    82 
Real estate   282    245    343    178    857 
Consumer and other loans   152    106    98    110    76 
Total recoveries   439    362    1,652    1,353    1,015 
Net charge-offs (recoveries)   1,074    516    (292)   1,177    2,476 
Provision for loan losses   550    450    -    -    - 
Balance, end of year  $8,969   $9,493   $9,559   $9,267   $10,444 
Allowance for loan losses to loans   0.95%   1.14%   1.28%   1.40%   1.75%
Net charge-offs (recoveries) to average loans   0.12%   0.07%   (0.04)%   0.19%   0.42%
Allowance to nonperforming loans   99.37%   92.68%   89.59%   55.92%   86.28%

 

During 2017, the Company’s net charge-offs increased $558,000 from net charge-offs in the prior year and were primarily centered in real estate loans. Net charge-offs by loan category to total net charge-offs were the following for 2017: 39.7% for commercial loans, 47.9% for real estate loans, and 12.4% for consumer loans.

 

During 2016, the Company’s net charge-offs increased $808,000 from a net recovery in the prior year and were primarily centered in real estate loans. Net charge-offs (recoveries) by loan category to total net charge-offs were the following for 2016: (2.1%) for commercial loans, 85.7% for real estate loans, and 16.4% for consumer loans.

 

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 loans, excluding PCI loans, as of December 31 of the years presented (dollars in thousands):

 

   2017   2016   2015   2014   2013 
   Amount   %   Amount   %   Amount   %   Amount   %   Amount   % 
Commercial  $1,139    16.9%  $602    15.5%  $631    13.6%  $977    15.2%  $1,554    15.1%
Construction and land development   1,247    11.4    2,195    11.7    1,298    9.0    1,792    8.6    2,163    9.3 
Real estate mortgage   6,423    71.0    5,068    72.0    6,914    76.4    4,822    75.2    6,065    74.4 
Consumer and other   113    0.7    142    0.8    118    1.0    131    1.0    160    1.2 
Unallocated   47        1,486        598        1,545        502     
Total allowance  $8,969    100.00%  $9,493    100.00%  $9,559    100.00%  $9,267    100.00%  $10,444    100.00%

 

The allowance for loan losses for each of the periods presented includes an amount that could not be related to individual types of loans and thus is referred to as the unallocated portion of the allowance. The Company recognizes the inherent imprecision in the estimates of losses due to various uncertainties and variability related to the factors used. Specifically, the provision of $450,000 taken during the year ended 2016 primarily due to loan growth resulted in an elevated unallocated amount of $1.5 million at December 31, 2016. Several factors justified the maintenance of this unallocated amount, including an unusually low level of delinquencies at December 31, 2016, which the Company believed was unsustainable over the next several quarters and was not reflective of the Company’s experience, as well as the fact that the Company believed the allowance as reported was indicative of the credit risks of the loan portfolio at December 31, 2016. During 2017, delinquencies increased $886,000, net charge-offs were $1.1 million, and the Company recorded a provision of $550,000, all of which contributed to the reduction of the unallocated amount to $47,000 at December 31, 2017.

 

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Asset Quality and Allowance for Credit Losses – PCI assets

 

Loans accounted for under FASB 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 PCI loans are subject to credit review standards for loans. If and when credit deterioration occurs subsequent to the date that they were acquired, a provision for credit loss for PCI loans will be charged to earnings for the full amount. The Company makes an estimate of the total cash flows it expects to collect from a pool of PCI 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 impairments in the current period through the 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.

 

Securities

 

The Company’s securities portfolio decreased $10.7 million, or 4.0%, from $271.0 million at December 31, 2016 to $260.3 million at December 31, 2017. This decrease is the result of a shift in assets to higher yielding loans. At December 31, 2017, the Company had $204.8 million in securities available for sale and $46.1 million of securities held to maturity. Equity securities totaled $9.3 million. Realized gains of $210,000 occurred during 2017 through sales and call activity.

 

The Company’s securities portfolio decreased $17.2 million, or 6.0%, from $288.2 million at December 31, 2015 to $271.0 million at December 31, 2016. This decrease is the result of a shift in assets to higher yielding loans. At December 31, 2016, the Company had $216.1 million in securities available for sale and $46.6 million of securities held to maturity. Equity securities totaled $8.3 million. Realized gains of $634,000 occurred during 2016 through sales and call activity.

 

The following table summarizes the securities portfolio by contractual maturity and issuer, including weighted average yields, excluding restricted stock, as of December 31, 2017 (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   4,343    26,678    23,487    5,212    59,720 
Fair Value   4,312    26,392    23,414    5,261    59,379 
Weighted Avg Yield   (2.36)%   1.18%   2.24%   3.44%   1.54%
State, county and municipal (1)                         
Amortized Cost   5,575    71,114    75,198    7,823    159,710 
Fair Value   5,621    72,571    76,129    8,006    162,327 
Weighted Avg Yield   5.40%   3.90%   3.96%   4.41%   4.01%
Corporate bonds and other securities                         
Amortized Cost   -    801    4,699    1,823    7,323 
Fair Value   -    786    4,737    1,937    7,460 
Weighted Avg Yield   -    1.78%   1.77%   1.82%   1.78%
Mortgage Backed securities                         
Amortized Cost   -    13,435    9,569    -    23,004 
Fair Value   -    13,324    9,232    -    22,556 
Weighted Avg Yield   -    1.83%   2.22%   -    2.00%
Total                         
Amortized Cost   9,918    112,028    112,953    14,858    249,757 
Fair Value   9,933    113,073    113,512    15,204    251,722 
Weighted Avg Yield   2.00%   2.99%   3.36%   3.75%   3.16%

 

(1)Computed on a tax equivalent basis

 

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

 

       December 31, 2017     
       Gross Unrealized     
   Amortized Cost   Gains   Losses   Fair Value 
Securities Available for Sale                    
U.S. Treasury issue and other U.S. Gov’t agencies  $40,473   $165   $(382)  $40,256 
U.S. Gov’t  sponsored agencies   9,247    55    (24)   9,278 
State, county and municipal   124,032    2,324    (596)   125,760 
Corporate and other bonds   7,323    173    (36)   7,460 
Mortgage backed – U.S. Gov’t agencies   5,551    37    (146)   5,442 
Mortgage backed – U.S. Gov’t sponsored agencies   16,985    26    (373)   16,638 
  Total Securities Available for Sale  $203,611   $2,780   $(1,557)  $204,834 
                     
Securities Held to Maturity                    
U.S. Treasury issue and other U.S. Gov’t agencies  $10,000   $   $(155)  $9,845 
State, county and municipal   35,678    922    (33)   36,567 
Mortgage backed – U.S. Gov’t agencies   468    8        476 
  Total Securities Held to Maturity  $46,146   $930   $(188)  $46,888 

 

       December 31, 2016     
       Gross Unrealized     
   Amortized Cost   Gains   Losses   Fair Value 
Securities Available for Sale                    
U.S. Treasury issue and other U.S. Gov’t agencies  $58,724   $15   $(763)  $57,976 
U.S. Gov’t  sponsored agencies   3,452        (116)   3,336 
State, county and municipal   121,686    2,247    (1,160)   122,773 
Corporate and other bonds   15,936        (433)   15,503 
Mortgage backed – U.S. Gov’t agencies   3,614        (119)   3,495 
Mortgage backed – U.S. Gov’t sponsored agencies   13,330    21    (313)   13,038 
Total Securities Available for Sale  $216,742   $2,283   $(2,904)  $216,121 
                     
Securities Held to Maturity                    
U.S. Treasury issue and other U.S. Gov’t agencies  $10,000   $   $(154)  $9,846 
State, county and municipal   35,847    568    (185)   36,230 
Mortgage backed – U.S. Gov’t agencies   761    21        782 
Total Securities Held to Maturity  $46,608   $589   $(339)  $46,858 

 

       December 31, 2015     
       Gross Unrealized     
   Amortized Cost   Gains   Losses   Fair Value 
Securities Available for Sale                    
U.S. Treasury issue and other U.S. Gov’t agencies  $50,590   $11   $(660)  $49,941 
U.S. Gov’t  sponsored agencies   756        (14)   742 
State, county and municipal   138,965    3,400    (867)   141,498 
Corporate and other bonds   14,997    10    (711)   14,296 
Mortgage backed – U.S. Gov’t agencies   8,654    9    (167)   8,496 
Mortgage backed – U.S. Gov’t sponsored agencies   28,637    22    (362)   28,297 
Total Securities Available for Sale  $242,599   $3,452   $(2,781)  $243,270 
                     
Securities Held to Maturity                    
State, county and municipal  $35,456   $1,136   $(35)  $36,557 
Mortgage backed – U.S. Gov’t agencies   1,022    32        1,054 
Mortgage backed – U.S. Gov’t sponsored agencies                
Total Securities Held to Maturity  $36,478   $1,168   $(35)  $37,611 

 

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 of the years presented (dollars in thousands):

 

   2017   2016   2015 
       Average       Average       Average 
   Average   Rate   Average   Rate   Average   Rate 
    Balance   Paid    Balance   Paid    Balance   Paid 
NOW  $139,620    0.19%  $127,723    0.18%  $121,329    0.21%
MMDA   124,462    0.51    107,848    0.38    107,891    0.41 
Savings   91,687    0.26    86,499    0.27    83,614    0.31 
Time deposits less than $100,000   239,267    1.13    222,475    1.00    233,784    0.94 
Time deposits $100,000 and over   335,363    1.21    308,056    1.07    289,942    0.98 
Total deposits  $930,399    0.85   $852,601    0.75   $836,560    0.72 

 

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The Company derives a significant amount of its deposits through time deposits, and certificates of deposit specifically. The following table summarizes the contractual maturity of time deposits $100,000 or more, as of December 31, 2017 (dollars in thousands):

 

Within 3 months     $55,506 
3-6 months      59,434 
6-12 months      102,181 
over 12 months      95,136 
Total     $       312,257 

 

Borrowings

 

The Company uses borrowings in conjunction with deposits to fund lending and investing activities. Borrowings include overnight borrowings from correspondent banks (federal funds purchased) and funding from the Federal Home Loan Bank (FHLB). The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. The following information is provided for borrowings balances, rates, and maturities as of December 31 of the years presented (dollars in thousands):

 

       FHLB Borrowings 
   Federal Funds
Purchased
   Short-term
Advances
   Long-term notes
payable
   Total 
As of December 31, 2017                    
Amount outstanding at year end  $4,849   $70,500   $30,929   $101,429 
Maximum month-end outstanding balance   14,878    101,429    31,296      
Average outstanding balance during the year   1,556    53,884    27,083      
Average interest rate during the year   1.58%   1.34%   1.37%     
Average interest rate at year end   1.85%   1.45%   1.62%     
                     
As of December 31, 2016                    
Amount outstanding at year end  $4,714   $55,000   $26,887   $81,887 
Maximum month-end outstanding balance   12,301    121,466    37,082      
Average outstanding balance during the year   1,776    73,806    27,524      
Average interest rate during the year   0.88%   0.96%   1.26%     
Average interest rate at year end   1.10%   0.62%   1.35%     

 

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. A summary of the Company’s liquid assets at December 31, 2017 and 2016 was as follows (dollars in thousands):

 

   December 31, 2017   December 31, 2016 
Cash and due from banks  $14,642   $13,828 
Interest bearing bank deposits   7,316    7,244 
Federal funds sold        
Available for sale securities, at fair value, unpledged   168,221    170,898 
Total liquid assets  $190,179   $191,970 
           
Deposits and other liabilities  $1,212,187   $1,135,280 
Ratio of liquid assets to deposits and other liabilities   15.69%   16.91%

 

Capital Resources

 

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 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” that is consistent to its overall growth plans, yet allows the Company to provide the optimal return to its shareholders.

 

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Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III and which became effective January 1, 2015, the federal banking regulators have defined four tests for assessing the capital strength and adequacy of banks, based on three definitions of capital. “Common equity tier 1 capital” is defined as common equity, retained earnings, and accumulated other comprehensive income (AOCI), less certain intangibles. “Tier 1 capital” is defined as common equity tier 1 capital plus qualifying perpetual preferred stock, tier 1 minority interests, and grandfathered trust preferred securities. “Tier 2 capital” is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock, non-tier 1 minority interests and a limited amount of the allowance for loan losses. “Total capital” is defined as tier 1 capital plus tier 2 capital. Four risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets, and the ratios 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. “Common equity tier 1 capital ratio” is common equity tier 1 capital divided by risk-weighted assets. “Tier 1 risk-based capital ratio” is tier 1 capital divided by risk-weighted assets. “Total risk-based capital ratio” is total capital divided by risk-weighted assets. “Leverage ratio” is tier 1 capital divided by total average assets.

 

Under Basel III, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the Company does not maintain the full amount of the buffer. The capital conservation buffer will be phased in between January 1, 2016 and January 1, 2019 as follows: 2016 - 0.625%, 2017 – 1.25%, 2018 – 1.875% and 2019 – 2.5%. The Company had a capital conservation buffer of 4.70% and 5.16% at December 31, 2017 and 2016, respectively, well above the required buffer of 1.25% and 0.625% for 2017 and 2016, respectively.

 

The following table shows the Company’s capital ratios at the dates indicated (dollars in thousands):

 

   December 31, 2017   December 31, 2016 
   Amount   Ratio   Amount   Ratio 
                 
Total Capital to risk weighted assets                       
Company     $136,910    12.70%  $128,877    13.16%
Bank      134,972    12.52%   127,606    13.03%
Tier 1 Capital to risk weighted assets                       
Company      128,084    11.88%   119,527    12.20%
Bank      126,146    11.71%   118,256    12.07%
Common Equity Tier 1 Capital to risk weighted assets                    
Company   123,960    11.50%   115,403    11.78%
Bank   126,146    11.71%   118,256    12.07%
Tier 1 Capital to adjusted average total assets                       
Company      128,084    9.74%   119,527    9.60%
Bank      126,146    9.59%   118,256    9.50%

 

All capital ratios exceed regulatory minimums for well capitalized institutions as referenced in Note 21 to the Consolidated Financial Statements.

 

On December 12, 2003, BOE Statutory Trust I, a wholly-owned subsidiary of the Company, 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 average interest rate at December 31, 2017, 2016 and 2015 was 4.20%, 3.68% and 3.28%, respectively. The securities have a mandatory redemption date of December 12, 2033 and are subject to varying call provisions that began December 12, 2008. The principal asset of the Trust is $4.124 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital securities.

 

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Off-Balance Sheet Arrangements

 

A summary of the contract amount of the Company’s exposure to off-balance sheet risk as of December 31, 2017 and 2016, is as follows (dollars in thousands):

 

   December 31, 2017   December 31, 2016 
Commitments with off-balance sheet risk:          
Commitments to extend credit  $163,686   $134,517 
Standby letters of credit   6,532    7,151 
Total commitments with off-balance sheet risks  $170,218   $141,668 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company 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 customers. Those lines of credit may be drawn upon only to the total extent to which the Company is committed.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer 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 customers. The Company holds certificates of deposit, deposit accounts and real estate as collateral supporting those commitments for which collateral is deemed necessary.

 

On November 7, 2014, the Company entered into an interest rate swap with a total notional amount of $30 million.  The Company designated the swap as a cash flow hedge intended to protect against the variability in the expected future cash flows on the designated variable rate borrowings.  The swap hedges the interest rate risk, wherein the Company will receive an interest rate based on the three month LIBOR from the counterparty and pays an interest rate of 1.69% to the same counterparty calculated on the notional amount for a term of five years.  The Company intends to sequentially issue a series of three month fixed rate debt as part of a planned roll-over of short term debt for five years. The forecasted funding will be provided through one of the following wholesale funding sources: a new FHLB advance, a new repurchase agreement, or a pool of brokered CDs, based on whichever market offers the most advantageous pricing at the time that pricing is first initially determined for the effective date of the swap and each reset period thereafter. Each quarter when the Company rolls over the three month debt, it will decide at that time which funding source to use for that quarterly period.

  

At December 31, 2017, the fair value of the Company’s cash flow hedge was an unrealized gain of $177,000, which was recorded in other assets. The Company’s cash flow hedge is deemed to be effective. Therefore, the gain was recorded as a component of other comprehensive income recorded in the Company’s Consolidated Statements of Comprehensive Income (Loss).

 

Contractual Obligations

 

A summary of the Company’s contractual obligations at December 31, 2017 is as follows (dollars in thousands):

 

   Total   Less Than 1 Year   1-3 Years   4-5 Years   More Than 5
Years
 
Time deposits  $548,356   $376,168   $152,240   $19,948   $ 
Trust preferred debt   4,124                4,124 
Federal Home Loan Bank advances   101,429    80,500    11,096    9,833     
Operating leases   12,205    1,349    2,626    1,464    6,766 
Total contractual obligations  $666,114   $458,017   $165,962   $31,245   $10,890 

 

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 stockholders’ 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 common shareholders as cash dividends during a given period. The Company did not pay dividends to common shareholders during the years ended December 31, 2017, 2016 and 2015. 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 “Capital Requirements” section. Leverage is average shareholders’ equity divided by average total assets.

 

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The following table shows the Company’s financial ratios at the dates indicated:

 

   Year Ended December 31 
   2017   2016   2015 
Return on average assets   0.56%   0.83%   (0.22)%
Return on average equity   5.91%   8.92%   (2.31)%
Leverage   9.51%   9.29%   9.40%

 

Non-GAAP Measures

 

The Company accounts for business combinations under FASB ASC 805, Business Combinations, using the acquisition method of accounting. The original merger between the Company, TFC and BOE as well as the SFSB transaction were business combinations accounted for using the purchase method of accounting. The TCB transaction was accounted for as an asset purchase. At December 31, 2017, 2016 and 2015, core deposit intangible assets totaled $0, $898,000 and $2.8 million, respectively.

 

In reporting the results of 2017, 2016 and 2015 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. 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 (loss) per share were $0.35 for the year ended December 31, 2017 compared with $0.50 in 2016 and $(0.06) in 2015. Non-GAAP return on average tangible common equity and assets for the year ended December 31, 2017 was 6.40% and 0.61%, respectively, compared with 10.23% and 0.94%, respectively, in 2016 and (1.19)% and (0.11)%, respectively, in 2015.

 

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, 2017, 2016 and 2015 (dollars in thousands):

 

   2017   2016   2015 
Net (loss) income  $7,203   $9,922   $(2,497)
Plus: core deposit intangible amortization, net of tax   585    1,259    1,259 
Non-GAAP operating earnings  $7,788   $11,181   $(1,238)
                
Total shareholders' equity  $124,003   $114,536   $104,487 
Preferred stock (net)            
Core deposit intangible (net)       898    2,805 
Common tangible book value  $124,003   $113,638   $101,682 
Shares outstanding   22,073    21,960    21,867 
Common tangible book value per share  $5.62   $5.17   $4.65 
                
Average assets  $1,281,207   $1,197,062   $1,149,796 
Less: average core deposit intangibles   248    1,893    3,797 
Average tangible assets  $1,280,959   $1,195,169   $1,145,999 
                
Average equity  $121,901   $111,215   $108,110 
Less: average core deposit intangibles   248    1,893    3,797 
Less: average preferred equity            
Average tangible common equity  $121,653   $109,322   $104,313 
                
Weighted average shares outstanding, diluted   22,512    22,161    21,827 
Non-GAAP earnings per share, diluted  $0.35   $0.50   $(0.06)
Average tangible common equity/average tangible assets   9.50%   9.15%   9.10%
Non-GAAP return on average tangible assets   0.61%   0.94%   (0.11)%
Non-GAAP return on average tangible common equity   6.40%   10.23%   (1.19)%

 

 44 

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of interest rate risk is an important component of the Company’s asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee (ALCO) of the Bank. In this capacity, ALCO develops guidelines and strategies that govern the Company’s asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.

 

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, affecting net interest income, the primary component of the Company’s earnings. ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over various periods, it also employs additional tools to monitor potential longer-term interest rate risk.

 

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and results are analyzed at least quarterly. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 400 basis point upward shift and a 400 basis point downward shift in interest rates. The downward shift of 300 or 400 basis points is included in the analysis, although less meaningful in our current rate environment, because all results are monitored regardless of likelihood. A parallel shift in rates over a 12-month period is assumed.

 

The following table represents the change to net interest income given interest rate shocks up and down 100, 200, 300 and 400 basis points at December 31, 2017, 2016 and 2015 (dollars in thousands):

 

   2017   2016   2015 
   %   $   %   $   %   $ 
Change in Yield curve                               
+400 bp    4.7    2,132    4.6    1,931    (7.7)   (3,100)
+300 bp    3.6    1,637    3.3    1,369    (6.2)   (2,479)
+200 bp    2.6    1,185    2.2    897    (4.2)   (1,677)
+100 bp    1.4    632    0.9    390    (2.3)   (924)
most likely                         
-100 bp    (1.2)   (554)   0.1    45    2.6    1,054 
-200 bp    (3.9)   (1,782)   (1.4)   (585)   1.1    437 
-300 bp    (4.5)   (2,051)   (1.5)   (644)   0.9    376 
-400 bp    (4.6)   (2,055)   (1.6)   (648)   0.9    374 

 

At December 31, 2017, the Company’s interest rate risk model indicated that, in a rising rate environment of 400 basis points over a 12 month period, net interest income could increase by 4.7%. For the same time period, the interest rate risk model indicated that in a declining rate environment of 400 basis points, net interest income could decrease by 4.6%. While these percentages are subjective based upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to changes in interest rates.

 

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest rate levels such as yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances about the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

 

 45 

 

 

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to factors such as prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to, or in anticipation of, changes in interest rates.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Financial Statements

 

Reports of Independent Registered Public Accounting Firm 47
Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016 49
Consolidated Statements of Income (Loss) for the years ended December 31, 2017, December  31, 2016 and December 31, 2015 50
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017,  December 31, 2016, and December 31, 2015 51
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December  31, 2017, December 31, 2016 and December 31, 2015 52
Consolidated Statements of Cash Flows for the years ended December 31, 2017, December  31, 2016 and December 31, 2015 53
Notes to Consolidated Financial Statements 54

 

 46 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Community Bankers Trust Corporation

Richmond, Virginia

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Community Bankers Trust Corporation as of December 31, 2017 and 2016, the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Community Bankers Trust Corporation at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), Community Bankers Trust Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 15, 2018 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Community Bankers Trust Corporation’s management. Our responsibility is to express an opinion on Community Bankers Trust Corporation’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ BDO USA, LLP
We have served as Community Bankers Trust Corporation's auditor since 2015.
Richmond, Virginia
March 15, 2018

 

 47 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Community Bankers Trust Corporation

Richmond, Virginia

 

Opinion on Internal Control over Financial Reporting

 

We have audited Community Bankers Trust Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, Community Bankers Trust Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of Community Bankers Trust Corporation as of December 31, 2017 and 2016, the related consolidated statements of income (loss), comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and our report dated March 15, 2018 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

Community Bankers Trust Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Controls over Financial Reporting”. Our responsibility is to express an opinion on Community Bankers Trust Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Community Bankers Trust Corporation in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/S/ BDO USA, LLP
Richmond, Virginia
March 15, 2018

 

 48 

 

 

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2017 AND DECEMBER 31, 2016

(dollars in thousands)

 

   December 31, 2017   December 31, 2016 
ASSETS          
Cash and due from banks  $14,642   $13,828 
Interest bearing bank deposits   7,316    7,244 
Total cash and cash equivalents   21,958    21,072 
           
Securities available for sale, at fair value   204,834    216,121 
Securities held to maturity, at cost (fair value of $46,888 and $46,858, respectively)   46,146    46,608 
Equity securities, restricted, at cost   9,295    8,290 
Total securities   260,275    271,019 
           
Loans   942,018    836,299 
Purchased credit impaired (PCI) loans   44,333    51,964 
 Total  loans   986,351    888,263 
Allowance for loan losses (loans of $8,969 and $9,493, respectively; PCI loans of $200 and $200, respectively)   (9,169)   (9,693)
  Net loans   977,182    878,570 
           
Bank premises and equipment, net   30,198    28,357 
Other real estate owned   2,791    4,427 
Bank owned life insurance   28,099    27,339 
Core deposit intangibles, net       898 
Other assets   15,687    18,134 
Total assets  $1,336,190   $1,249,816 
           
LIABILITIES          
Deposits:          
Noninterest bearing  $153,028   $128,887 
Interest bearing   942,736    908,407 
Total deposits   1,095,764    1,037,294 
           
Federal funds purchased   4,849    4,714 
Federal Home Loan Bank borrowings   101,429    81,887 
Long-term debt       1,670 
Trust preferred capital notes   4,124    4,124 
Other liabilities   6,021    5,591 
Total liabilities   1,212,187    1,135,280 
           
SHAREHOLDERS’ EQUITY          
Common stock (200,000,000 shares authorized, $0.01 par value; 22,072,523 and 21,959,648 shares issued and outstanding, respectively)   221    220 
Additional paid in capital   147,671    146,667 
Retained deficit   (23,932)   (31,128)
Accumulated other comprehensive income (loss)   43    (1,223)
Total shareholders’ equity   124,003    114,536 
Total liabilities and shareholders’ equity  $1,336,190   $1,249,816 

 

See accompanying notes to consolidated financial statements

 

 49 

 

 

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(dollars and shares in thousands, except per share data)

 

   2017   2016   2015 
Interest and dividend income               
Interest and fees on loans  $40,301   $35,998   $31,990 
Interest and fees on PCI loans   5,733    6,230    7,875 
Interest on federal funds sold   1        2 
Interest on deposits in other banks   196    122    59 
Interest and dividends on securities               
Taxable   4,682    4,696    5,469 
Nontaxable   2,402    2,249    2,157 
Total interest and dividend income   53,315    49,295    47,552 
Interest expense               
Interest on deposits   7,897    6,382    5,983 
Interest on borrowed funds   1,302    1,438    1,514 
Total interest expense   9,199    7,820    7,497 
Net interest income   44,116    41,475    40,055 
Provision for loan losses   550    166     
Net interest income after provision for loan losses   43,566    41,309    40,055 
Noninterest income               
Service charges on deposit accounts   2,681    2,420    2,269 
Gain on securities transactions, net   210    634    472 
Gain on sale of loans, net           69 
Income on bank owned life insurance   939    870    751 
Mortgage loan income   242    606    784 
Other   625    649    736 
Total noninterest income   4,697    5,179    5,081 
Noninterest expense               
Salaries and employee benefits   19,604    18,412    18,141 
Occupancy expenses   3,130    2,737    2,592 
Equipment expenses   1,144    999    1,035 
FDIC assessment   726    823    938 
Data processing fees   1,923    1,674    1,709 
FDIC indemnification asset amortization           16,195 
Amortization of intangibles   898    1,907    1,908 
Other real estate expense, net   162    175    1,275 
Other operating expenses   6,570    6,023    6,467 
Total noninterest expense   34,157    32,750    50,260 
Income (loss) before income taxes   14,106    13,738    (5,124)
Income tax expense (benefit)   6,903    3,816    (2,627)
Net income (loss)  $7,203   $9,922   $(2,497)
Net income (loss) per share — basic  $0.33   $0.45   $(0.11)
Net income (loss) per share — diluted  $0.32   $0.45   $(0.11)
Weighted average number of shares outstanding               
Basic   22,014    21,914    21,827 
Diluted   22,512    22,161    21,827 

 

See accompanying notes to consolidated financial statements

 

 50 

 

 

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(dollars in thousands)

 

   2017   2016   2015 
Net income (loss)  $7,203   $9,922   $(2,497)
                
Other comprehensive income (loss):               
Unrealized gain on investment securities:               
Change in unrealized (loss) gain in investment securities   2,054    (658)   (1,056)
Tax related to unrealized  loss (gain) in investment securities   (712)   224    359 
Reclassification adjustment for gain in securities sold   (210)   (634)   (472)
Tax related to realized gain in securities sold   73    215    160 
Defined benefit pension plan:               
Change in prior service cost   5    4    5 
Change in unrealized gain (loss) in plan assets   (185)   199    (142)
Tax related to defined benefit pension plan   74    (69)   47 
Cash flow hedge:               
Change in unrealized gain (loss) in cash flow hedge   246    129    (234)
Tax related to cash flow hedge   (86)   (44)   80 
Total other comprehensive income (loss)   1,259    (634)   (1,253)
Total comprehensive income (loss)  $8,462   $9,288   $(3,750)

 

See accompanying notes to consolidated financial statements

 

 51 

 

 

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(dollars and shares in thousands)

 

                   Accumulated     
           Additional       Other     
   Common Stock   Paid in   Retained   Comprehensive     
   Shares   Amount   Capital   Deficit   Income (Loss)   Total 
                         
Balance December 31, 2014   21,792   $218   $145,321   $(38,553)  $664   $107,650 
Issuance of common stock   42    1    276            277 
Exercise and issuance of employee stock options   33        310            310 
Net loss               (2,497)       (2,497)
Other comprehensive loss                   (1,253)   (1,253)
Balance December 31, 2015   21,867    219    145,907    (41,050)   (589)   104,487 
Issuance of common stock   29        155            155 
Exercise and issuance of employee stock options   64    1    605            606 
Net income               9,922        9,922 
Other comprehensive loss                   (634)   (634)
Balance December 31, 2016   21,960    220    146,667    (31,128)   (1,223)   114,536 
Issuance of common stock   19        159            159 
Exercise and issuance of employee stock options   94    1    845            846 
Net income               7,203        7,203 
Impact of the Tax Cut and Jobs Act               (7)   7     
Other comprehensive income                   1,259    1,259 
Balance December 31, 2017   22,073   $221   $147,671   $(23,932)  $43   $124,003 

 

See accompanying notes to consolidated financial statements

 

 52 

 

 

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

(Dollars in thousands)

 

   2017   2016   2015 
Operating activities:               
Net income (loss)  $7,203   $9,922   $(2,497)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:               
Depreciation and intangibles amortization   2,601    3,447    3,494 
Stock-based compensation expense   745    566    467 
Tax benefit of exercised stock options   (163)   (62)   (34)
Amortization of purchased loan premium   195    243    304 
Deferred tax expense (benefit)   3,729        (6,077)
Provision for loan losses   550    166     
Amortization of security premiums and accretion of discounts, net   1,848    1,691    2,546 
Net gain on sale of securities   (210)   (634)   (472)
Net (gain) loss on sale and valuation of other real estate owned   (5)   (122)   1,111 
Net gain on sale of loans           (69)
Originations of mortgages held for sale       (49,185)   (55,465)
Proceeds from sales of mortgages held for sale       51,286    53,564 
Increase in bank owned life insurance investment   (760)   (719)   (751)
Loss on termination of FDIC shared-loss agreement           13,084 
Changes in assets and liabilities:               
(Increase) decrease in other assets   (1,490)   467    4,558 
Increase (decrease) in accrued expenses and other liabilities   741    (127)   1,522 
Net cash provided by operating activities   14,984    16,939    15,285 
                
Investing activities:               
Proceeds from available for sale securities   61,825    108,226    146,906 
Proceeds from held to maturity securities   946    10,484    4,583 
Proceeds from equity securities   1,255    3,961    1,845 
Purchase of available for sale securities   (50,174)   (83,357)   (121,854)
Purchase of held to maturity securities   (642)   (20,683)   (2,221)
Purchase of equity securities   (2,260)   (3,828)   (1,452)
Proceeds from sale of other real estate owned   2,141    2,376    2,900 
Improvements of other real estate, net of insurance proceeds       (34)   (516)
Net increase in loans   (100,296)   (83,115)   (85,675)
Principal recoveries of loans previously charged off   439    362    1,652 
Purchase of premises and equipment, net   (3,544)   (2,524)   (1,768)
Proceeds from termination of FDIC shared-loss agreements           3,100 
Purchase of small business investment company fund investment   (525)        
Proceeds from sale of loans       224    3,380