Edgar Filing: Community Bankers Trust Corp

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

	For the quarterly period ended March 31, 2016

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)

(804) 934-9999

(Registrant’s telephone number, including area code)

n/a

(Former name, former address and former fiscal year, if changed since last report)

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 þ 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 þ No ¨

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

Large accelerated filer ¨		Accelerated filer þ

Non-accelerated filer ¨	(Do not check if a smaller reporting company)	Smaller reporting company ¨

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

At March 31, 2016, there were 21,887,150 shares of the Company’s common stock outstanding.

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM 10-Q

March 31, 2016

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets	3
Unaudited Consolidated Statements of Income	4
Unaudited Consolidated Statements of Comprehensive Income	5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity	6
Unaudited Consolidated Statements of Cash Flows	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	41
Item 4. Controls and Procedures	42
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3. Defaults upon Senior Securities	43
Item 4. Mine Safety Disclosures	43
Item 5. Other Information	43
Item 6. Exhibits	43
SIGNATURES	44

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2016 AND DECEMBER 31, 2015

(dollars in thousands)

	March 31, 2016			December 31, 2015
	(Unaudited)
ASSETS
Cash and due from banks	$	8,465		$	7,393
Interest bearing bank deposits		5,774			9,576
Total cash and cash equivalents		14,239			16,969

Securities available for sale, at fair value		206,604			243,270
Securities held to maturity, at cost (fair value of $45,874 and $37,611, respectively)		44,298			36,478
Equity securities, restricted, at cost		8,397			8,423
Total securities		259,299			288,171

Loans held for sale		1,038			2,101

Loans		765,485			748,724
Purchased credit impaired (PCI) loans		56,696			58,955
Total loans		822,181			807,679
Allowance for loan losses (loans of $9,594 and $9,559, respectively; PCI loans of $484 and $484, respectively)		(10,078	)		(10,043	)
Net loans		812,103			797,636

Bank premises and equipment, net		27,219			27,378
Bank premises and equipment held for sale		—			110
Other real estate owned		5,095			5,490
Bank owned life insurance		21,773			21,620
Core deposit intangibles, net		2,329			2,805
Other assets		16,951			18,277
Total assets	$	1,160,046		$	1,180,557

LIABILITIES
Deposits:
Noninterest bearing	$	104,166		$	96,216
Interest bearing		829,886			849,303
Total deposits		934,052			945,519

Federal funds purchased		11,017			18,921
Federal Home Loan Bank advances		91,466			95,656
Long-term debt		4,874			5,675
Trust preferred capital notes		4,124			4,124
Other liabilities		5,626			6,175
Total liabilities		1,051,159			1,076,070

SHAREHOLDERS’ EQUITY
Common stock (200,000,000 shares authorized, $0.01 par value; 21,887,150 and 21,866,944 shares issued and outstanding, respectively)		219			219
Additional paid in capital		146,075			145,907
Retained deficit		(38,630	)		(41,050	)
Accumulated other comprehensive income (loss)		1,223			(589	)
Total shareholders’ equity		108,887			104,487
Total liabilities and shareholders’ equity	$	1,160,046		$	1,180,557

See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

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

	Three months ended
	March 31, 2016			March 31, 2015
Interest and dividend income
Interest and fees on loans	$	8,553		$	7,747
Interest and fees on PCI loans		1,599			2,073
Interest on federal funds sold		—			1
Interest on deposits in other banks		21			17
Interest and dividends on securities
Taxable		1,271			1,368
Nontaxable		594			444
Total interest and dividend income		12,038			11,650
Interest expense
Interest on deposits		1,551			1,448
Interest on other borrowed funds		374			417
Total interest expense		1,925			1,865
Net interest income		10,113			9,785
Provision for loan losses		—			—
Net interest income after provision for loan losses		10,113			9,785
Noninterest income
Service charges on deposit accounts		569			528
Gain on securities transactions, net		259			297
Gain on sale of loans, net		—			46
Income on bank owned life insurance		188			186
Mortgage loan income		173			148
Other		132			192
Total noninterest income		1,321			1,397
Noninterest expense
Salaries and employee benefits		4,611			4,495
Occupancy expenses		641			688
Equipment expenses		239			240
FDIC assessment		251			237
Data processing fees		415			442
FDIC indemnification asset amortization		—			1,239
Amortization of intangibles		477			477
Other real estate expense (income), net		(102	)		85
Other operating expenses		1,499			1,616
Total noninterest expense		8,031			9,519
Income before income taxes		3,403			1,663
Income tax expense		983			351
Net income	$	2,420		$	1,312
Net income per share — basic	$	0.11		$	0.06
Net income per share — diluted	$	0.11		$	0.06
Weighted average number of shares outstanding
Basic		21,873			21,799
Diluted		22,065			21,963

See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(dollars in thousands)

	Three months ended
	March 31, 2016			March 31, 2015
Net income	$	2,420		$	1,312

Other comprehensive income
Unrealized gains on investment securities
Change in unrealized gain in investment securities		3,553			1,775
Tax related to unrealized gain in investment securities		(1,208	)		(604	)
Reclassification adjustment for gain in securities sold		(259	)		(297	)
Tax related to realized gain in securities sold		88			101
Cash flow hedge
Change in unrealized loss in cash flow hedge		(548	)		(378	)
Tax related to cash flow hedge		186			129
Total other comprehensive income		1,812			726
Total comprehensive income	$	4,232		$	2,038

See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(dollars and shares in thousands)

										Accumulated
										Other
					Additional					Comprehensive
	Common Stock				Paid in		Retained			Income
	Shares		Amount		Capital		Deficit			(Loss)			Total

Balance January 1, 2015		21,792	$	218	$	145,321	$	(38,553	)	$	664		$	107,650
Issuance of common stock		27		—		42		—			—			42
Exercise of stock options and stock-based compensation expense		—		—		116		—			—			116
Net income		—		—		—		1,312			—			1,312
Other comprehensive income		—		—		—		—			726			726
Balance March 31, 2015		21,819	$	218	$	145,479	$	(37,241	)	$	1,390		$	109,846
Balance January 1, 2016		21,867	$	219	$	145,907	$	(41,050	)	$	(589	)	$	104,487
Issuance of common stock		20		—		44		—			—			44
Exercise of stock options and stock-based compensation expense		—		—		124		—			—			124
Net income		—		—		—		2,420			—			2,420
Other comprehensive income		—		—		—		—			1,812			1,812
Balance March 31, 2016		21,887	$	219	$	146,075	$	(38,630	)	$	1,223		$	108,887

See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(dollars in thousands)

	March 31, 2016			March 31, 2015
Operating activities
Net income	$	2,420		$	1,312
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangibles amortization		844			871
Stock-based compensation expense		143			116
Amortization of purchased loan premium		63			81
Amortization of security premiums and accretion of discounts, net		409			744
Net gain on sale of securities		(259	)		(297	)
Net (gain) loss on sale and valuation of other real estate owned		(154	)		84
Net gain on sale of loans		—			(46	)
Originations of mortgages held for sale		(10,618	)		(11,619	)
Proceeds from sales of mortgages held for sale		11,681			8,820
Increase in bank owned life insurance		153			154
Changes in assets and liabilities:
Decrease in other assets		87			1,653
Decrease in other liabilities		(1,088	)		(263	)
Net cash provided by operating activities		3,681			1,610

Investing activities
Proceeds from available for sale securities		53,331			64,183
Proceeds from held to maturity securities		677			613
Proceeds from equity securities		935			228
Purchase of available for sale securities		(13,508	)		(28,599	)
Purchase of held to maturity securities		(8,510	)		(2,277	)
Purchase of equity securities		(909	)		—
Proceeds from sale of other real estate owned		543			868
Improvements of other real estate, net of insurance proceeds		(24	)		(21	)
Net increase in loans		(14,703	)		(18,785	)
Principal recoveries of loans previously charged off		173			106
Purchase of premises and equipment, net		(214	)		(672	)
Proceeds from sale of loans		—			2,252
Proceeds from sale of premises and equipment		145			—
Net cash provided by investing activities		17,936			17,896

Financing activities
Net decrease in deposits		(11,467	)		(3,930	)
Net decrease in federal funds purchased		(7,904	)		(14,500	)
Net decrease in Federal Home Loan Bank borrowings		(4,190	)		(184	)
Proceeds from issuance of common stock		15			30
Payments on long-term debt		(801	)		(1,602	)
Net cash used in financing activities		(24,347	)		(20,186	)

Net decrease in cash and cash equivalents		(2,730	)		(680	)

Cash and cash equivalents:
Beginning of the period		16,969			22,353
End of the period	$	14,239		$	21,673

Supplemental disclosures of cash flow information
Interest paid	$	1,901	$	1,940
Income taxes paid		2,400		500
Transfers of loans to other real estate owned property		—		33

See accompanying notes to unaudited consolidated financial statements

COMMUNITY BANKERS TRUST CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Banking Activities and Significant Accounting Policies

Organization

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 22 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.

Financial Statements

The consolidated statements presented include accounts of the Company and the Bank, its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated. The statements should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the general practices within the banking industry. The interim financial statements have not been audited; however, in the opinion of management, all adjustments, consisting of normal accruals, were made that are necessary to present fairly the balance sheet of the Company as of March 31, 2016, and the statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the three months ended March 31, 2016. Results for the three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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. 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.

In preparing these financial statements, the Company has evaluated subsequent events and transactions for potential recognition or disclosure through the date the financial statements were issued.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The only amendment to potentially impact earnings is the one relating to income tax consequences, which refers to a change in the recording of the related tax effects of share-based compensation awards. Currently, an entity must determine for each award whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess tax benefit or a tax deficiency. Excess tax benefits are recognized in additional paid-in capital while tax deficiencies are recognized as income tax expense. Under the amendment, all excess tax benefits and tax deficiencies should be recognized as income tax benefit or expense in the income statement.

For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Also in March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments eliminate the requirement that, when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.

The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

Certain reclassifications have been made to prior period balances to conform to the current year presentations.

Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity at March 31, 2016 and December 31, 2015 were as follows (dollars in thousands):

	March 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	$	40,067	$	93	$	(455	)	$	39,705
U.S. Gov’t sponsored agencies		756		13		—			769
State, county and municipal		126,623		5,302		(374	)		131,551
Corporate and other bonds		15,734		61		(743	)		15,052
Mortgage backed – U.S. Gov’t agencies		6,652		29		(24	)		6,657
Mortgage backed – U.S. Gov’t sponsored agencies		12,807		70		(7	)		12,870
Total Securities Available for Sale	$	202,639	$	5,568	$	(1,603	)	$	206,604

Securities Held to Maturity
U.S. Treasury issue and other U.S. Gov’t agencies	$	8,507	$	14	$	—		$	8,521
State, county and municipal		34,868		1,546		(5	)		36,409
Mortgage backed – U.S. Gov’t agencies		923		21		—			944
Total Securities Held to Maturity	$	44,298	$	1,581	$	(5	)	$	45,874

	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
Total Securities Held to Maturity	$	36,478	$	1,168	$	(35	)	$	37,611

The amortized cost and fair value of securities at March 31, 2016 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without any penalties.

	Held to Maturity				Available for Sale
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	4,657	$	4,670	$	395	$	393
Due after one year through five years		11,273		11,808		74,532		76,677
Due after five years through ten years		19,080		19,749		95,978		97,937
Due after ten years		9,288		9,647		31,734		31,597
Total securities	$	44,298	$	45,874	$	202,639	$	206,604

Proceeds from sales of securities were $51.4 million and $40.6 million during the three months ended March 31, 2016 and 2015, respectively. Gains and losses on the sale of securities are determined using the specific identification method. Gross realized gains and losses on sales of securities available for sale during the three months ended March 31, 2016 and 2015 were as follows (dollars in thousands):

	Three Months Ended
	March 31, 2016			March 31, 2015
Gross realized gains	$	754		$	453
Gross realized losses		(495	)		(156	)
Net securities gains	$	259		$	297

In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and ability of management to hold its investment for a period of time to allow a recovery in fair value. There were no investments held that had OTTI losses for the three months ended March 31, 2016 and 2015.

The fair value and gross unrealized losses for securities, segregated by the length of time that individual securities have been in a continuous gross unrealized loss position, at March 31, 2016 and December 31, 2015 were as follows (dollars in thousands):

	March 31, 2016
	Less than 12 Months					12 Months or More					Total

Securities Available for Sale	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury issue and other U.S. Gov’t agencies	$	10,683	$	(61	)	$	18,593	$	(394	)	$	29,276	$	(455	)
State, county and municipal		5,041		(24	)		6,293		(350	)		11,334		(374	)
Corporate and other bonds		9,091		(678	)		3,647		(65	)		12,738		(743	)
Mortgage backed – U.S. Gov’t agencies		-		-			1,974		(24	)		1,974		(24	)
Mortgage backed – U.S. Gov’t sponsored agencies		2,520		(5	)		165		(2	)		2,685		(7	)
Total	$	27,335	$	(768	)	$	30,672	$	(835	)	$	58,007	$	(1,603	)

Securities Held to Maturity
State, county and municipal	$	-	$	-		$	620	$	(5	)	$	620	$	(5	)

	December 31, 2015
	Less than 12 Months					12 Months or More					Total

Securities Available for Sale	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury issue and other U.S. Gov’t agencies	$	20,408	$	(84	)	$	28,063	$	(576	)	$	48,471	$	(660	)
U.S. Gov’t sponsored agencies		742		(14	)		-		-			742		(14	)
State, county and municipal		23,733		(252	)		10,270		(615	)		34,003		(867	)
Corporate and other bonds		8,996		(669	)		3,290		(42	)		12,286		(711	)
Mortgage backed – U.S. Gov’t agencies		6,386		(88	)		1,919		(79	)		8,305		(167	)
Mortgage backed – U.S. Gov’t sponsored agencies		24,129		(360	)		175		(2	)		24,304		(362	)
Total	$	84,394	$	(1,467	)	$	43,717	$	(1,314	)	$	128,111	$	(2,781	)

Securities Held to Maturity
State, county and municipal	$	3,889	$	(35	)	$	-	$	-		$	3,889	$	(35	)

The unrealized losses (impairments) in the investment portfolio at March 31, 2016 and December 31, 2015 are generally a result of market fluctuations that occur daily. The unrealized losses are from 68 securities at March 31, 2016. Of those, 47 are investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities throughout the United States. Twenty-one investment grade corporate obligations comprise the remaining securities with unrealized losses at March 31, 2016. The Company considers the reason for impairment, length of impairment, and ability and intent to hold until the full value is recovered in determining if the impairment is temporary in nature. Based on this analysis, the Company has determined these impairments to be temporary in nature. The Company does not intend to sell, and it is more likely than not that the Company will not be required to sell, these securities until they recover in value or reach maturity.

Market prices are affected by conditions beyond the control of the Company. Investment decisions are made by the management group of the Company and reflect the overall liquidity and strategic asset/liability objectives of the Company. Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the Company’s income statement and balance sheet.

Securities with amortized costs of $80.4 million and $88.7 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits as required or permitted by law and the cash flow hedge. At each of March 31, 2016 and December 31, 2015, there were no securities purchased from a single issuer, other than U.S. Treasury issue and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.

Note 3. Loans and Related Allowance for Loan Losses

The Company’s loans, net of deferred fees and costs, at March 31, 2016 and December 31, 2015 were comprised of the following (dollars in thousands):

	March 31, 2016					December 31, 2015
	Amount		% of Loans			Amount		% of Loans
Mortgage loans on real estate:
Residential 1-4 family	$	197,337		25.78	%	$	194,576		25.99	%
Commercial		320,473		41.87			317,955		42.47
Construction and land development		72,882		9.52			67,408		9.00
Second mortgages		8,170		1.07			8,378		1.12
Multifamily		47,852		6.25			45,389		6.06
Agriculture		6,068		0.79			6,238		0.83
Total real estate loans		652,782		85.28			639,944		85.47
Commercial loans		106,354		13.89			102,507		13.69
Consumer installment loans		5,007		0.65			4,928		0.66
All other loans		1,342		0.18			1,345		0.18
Total loans	$	765,485		100.00	%	$	748,724		100.00	%

The Company held $13.2 million and $13.4 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at March 31, 2016 and December 31, 2015, respectively. As these loans are 100% guaranteed by the USDA, no loan loss provision is required. These loan balances included an unamortized purchase premium of $538,000 and $586,000 at March 31, 2016 and December 31, 2015, respectively. Unamortized purchase premium is recognized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method.

At March 31, 2016 and December 31, 2015, the Company’s allowance for credit losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB ASC 310, Receivables, (ii) a general valuation component calculated in accordance with FASB Accounting Standards Codification (ASC) 450, Contingencies, based on historical loan loss experience, economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with ASC 310.

The following table summarizes information related to impaired loans as of March 31, 2016 (dollars in thousands):

With an allowance recorded:	Recorded Investment ⁽¹⁾		Unpaid Principal Balance ⁽²⁾		Related Allowance
Mortgage loans on real estate:
Residential 1-4 family	$	3,152	$	3,779	$	320
Commercial		534		763		77
Construction and land development		4,496		6,166		560
Second mortgages		148		150		21
Total real estate loans		8,330		10,858		978
Commercial loans		54		54		8
Consumer installment loans		80		87		12
Subtotal impaired loans with a valuation allowance		8,464		10,999		998
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family		1,203		1,312		—
Commercial		1,265		1,499		—
Total real estate loans		2,468		2,811		—
Subtotal impaired loans without a valuation allowance		2,468		2,811		—
Total:
Mortgage loans on real estate:
Residential 1-4 family		4,355		5,091		320
Commercial		1,799		2,262		77
Construction and land development		4,496		6,166		560
Second mortgages		148		150		21
Total real estate loans		10,798		13,669		978
Commercial loans		54		54		8
Consumer installment loans		80		87		12
Total impaired loans	$	10,932	$	13,810	$	998

(1)

The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment

(2)

The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs

The following table summarizes information related to impaired loans as of December 31, 2015 (dollars in thousands):

With an allowance recorded:	Recorded Investment ⁽¹⁾		Unpaid Principal Balance ⁽²⁾		Related Allowance
Mortgage loans on real estate:
Residential 1-4 family	$	2,777	$	3,034	$	414
Commercial		205		407		35
Construction and land development		4,509		6,179		574
Second mortgages		13		14		2
Total real estate loans		7,504		9,634		1,025
Consumer installment loans		78		84		14
Subtotal impaired loans with a valuation allowance		7,582		9,718		1,039
With no related allowance recorded:
Mortgage loans on real estate:
Residential 1-4 family		1,785		2,260		—
Commercial		1,303		1,500		—
Total real estate loans		3,088		3,760		—
Subtotal impaired loans without a valuation allowance		3,088		3,760		—
Total:
Mortgage loans on real estate:
Residential 1-4 family		4,562		5,294		414
Commercial		1,508		1,907		35
Construction and land development		4,509		6,179		574
Second mortgages		13		14		2
Total real estate loans		10,592		13,394		1,025
Consumer installment loans		78		84		14
Total impaired loans	$	10,670	$	13,478	$	1,039

(1)

The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment

(2)

The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs

The following table summarizes the average recorded investment of impaired loans for the three months ended March 31, 2016 and 2015 (dollars in thousands):

	Three months ended
	March 31, 2016		March 31, 2015
Mortgage loans on real estate:
Residential 1-4 family	$	4,458	$	3,199
Commercial		1,654		1,279
Construction and land development		4,502		4,915
Second mortgages		81		61
Total real estate loans		10,695		9,454
Commercial loans		27		7,465
Consumer installment loans		79		105
Total impaired loans	$	10,801	$	17,024

During each of the three months ended March 31, 2016 and 2015, all of the impaired loans were also nonaccruing for which no interest income was recognized.

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was an insignificant amount of cash basis income recognized during the three months ended March 31, 2016. Cash basis income of $168,000 was recognized during the three months ended March 31, 2015. For the three months ended March 31, 2016, and 2015, estimated interest income of $204,000 and $326,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

The following table presents nonaccrual loans by loan category as of March 31, 2016 and December 31, 2015 (dollars in thousands):

	March 31, 2016		December 31, 2015
Mortgage loans on real estate:
Residential 1-4 family	$	4,355	$	4,562
Commercial		1,799		1,508
Construction and land development		4,496		4,509
Second mortgages		148		13
Total real estate loans		10,798		10,592
Commercial loans		54		—
Consumer installment loans		80		78
Total loans	$	10,932	$	10,670

The following tables present an age analysis of past due status of loans by category as of March 31, 2016 and December 31, 2015 (dollars in thousands):

	March 31, 2016
	30-89 Days Past Due		90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Recorded Investment 90 Days Past Due and Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	798	$	4,355	$	5,153	$	192,184	$	197,337	$	—
Commercial		1,647		1,799		3,446		317,027		320,473		—
Construction and land development		1,023		4,496		5,519		67,363		72,882		—
Second mortgages		—		148		148		8,022		8,170		—
Multifamily		—		—		—		47,852		47,852		—
Agriculture		—		—		—		6,068		6,068		—
Total real estate loans		3,468		10,798		14,266		638,516		652,782		—
Commercial loans		60		54		114		106,240		106,354		—
Consumer installment loans		7		80		87		4,920		5,007		—
All other loans		35		—		35		1,307		1,342		—
Total loans	$	3,570	$	10,932	$	14,502	$	750,983	$	765,485	$	—

	December 31, 2015
	30-89 Days Past Due		90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Recorded Investment 90 Days Past Due and Accruing
Mortgage loans on real estate:
Residential 1-4 family	$	811	$	4,562	$	5,373	$	189,203	$	194,576	$	—
Commercial		1,471		1,508		2,979		314,976		317,955		—
Construction and land development		51		4,509		4,560		62,848		67,408		—
Second mortgages		135		13		148		8,230		8,378		—
Multifamily		—		—		—		45,389		45,389		—
Agriculture		—		—		—		6,238		6,238		—
Total real estate loans		2,468		10,592		13,060		626,884		639,944		—
Commercial loans		16		—		16		102,491		102,507		—
Consumer installment loans		10		78		88		4,840		4,928		—
All other loans		33		—		33		1,312		1,345		—
Total loans	$	2,527	$	10,670	$	13,197	$	735,527	$	748,724	$	—

Activity in the allowance for loan losses on loans by segment for the three months ended March 31, 2016 and 2015 is presented in the following tables (dollars in thousands):

	December 31, 2015		Provision Allocation			Charge-offs			Recoveries		March 31, 2016
Mortgage loans on real estate:
Residential 1-4 family	$	3,041	$	(409	)	$	(19	)	$	98	$	2,711
Commercial		4,022		(473	)		(37	)		12		3,524
Construction and land development		1,353		330			—			1		1,684
Second mortgages		103		7			—			4		114
Multifamily		178		184			—			—		362
Agriculture		27		(11	)		—			—		16
Total real estate loans		8,724		(372	)		(56	)		115		8,411
Commercial loans		727		357			—			—		1,084
Consumer installment loans		97		19			(82	)		58		92
All other loans		11		(4	)		—			—		7
Total loans	$	9,559	$	—		$	(138	)	$	173	$	9,594

	December 31, 2014		Provision Allocation			Charge-offs			Recoveries		March 31, 2015
Mortgage loans on real estate:
Residential 1-4 family	$	3,100	$	12		$	(300	)	$	49	$	2,861
Commercial		2,618		(53	)		—			6		2,571
Construction and land development		1,930		(438	)		—			11		1,503
Second mortgages		63		(10	)		—			2		55
Multifamily		136		39			—			—		175
Agriculture		66		4			—			—		70
Total real estate loans		7,913		(446	)		(300	)		68		7,235
Commercial loans		1,242		402			—			6		1,650
Consumer installment loans		85		42			(62	)		32		97
All other loans		27		2			—			—		29
Total loans	$	9,267	$	—		$	(362	)	$	106	$	9,011

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of March 31, 2016 and December 31, 2015 (dollars in thousands):

	March 31, 2016
	Allowance for Loan Losses						Recorded Investment in Loans

	Individually Evaluated for Impairment ⁽¹⁾		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment ⁽¹⁾		Collectively Evaluated for Impairment		Total
Mortgage loans on real estate:
Residential 1-4 family	$	385	$	2,326	$	2,711	$	6,609	$	190,728	$	197,337
Commercial		89		3,435		3,524		6,500		313,973		320,473
Construction and land development		560		1,124		1,684		4,497		68,385		72,882
Second mortgages		21		93		114		148		8,022		8,170
Multifamily		—		362		362		—		47,852		47,852
Agriculture		—		16		16		—		6,068		6,068
Total real estate loans		1,055		7,356		8,411		17,754		635,028		652,782
Commercial loans		8		1,076		1,084		96		106,258		106,354
Consumer installment loans		12		80		92		328		4,679		5,007
All other loans		—		7		7		—		1,342		1,342
Total loans	$	1,075	$	8,519	$	9,594	$	18,178	$	747,307	$	765,485

	December 31, 2015
	Allowance for Loan Losses						Recorded Investment in Loans

	Individually Evaluated for Impairment ⁽¹⁾		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment ⁽¹⁾		Collectively Evaluated for Impairment		Total
Mortgage loans on real estate:
Residential 1-4 family	$	450	$	2,591	$	3,041	$	6,972	$	187,604	$	194,576
Commercial		55		3,967		4,022		6,362		311,593		317,955
Construction and land development		564		789		1,353		4,509		62,899		67,408
Second mortgages		2		101		103		13		8,365		8,378
Multifamily		—		178		178		—		45,389		45,389
Agriculture		—		27		27		—		6,238		6,238
Total real estate loans		1,071		7,653		8,724		17,856		622,088		639,944
Commercial loans		—		727		727		58		102,449		102,507
Consumer installment loans		12		85		97		78		4,850		4,928
All other loans		—		11		11		—		1,345		1,345
Total loans	$	1,083	$	8,476	$	9,559	$	17,992	$	730,732	$	748,724

⁽¹⁾ The category “Individually Evaluated for Impairment” includes loans individually evaluated for impairment and determined not to be impaired. These loans totalled $7.2 million and $7.3 million at March 31, 2016 and December 31, 2015, respectively. The allowance for loan losses allocated to these loans was $77,000 and $44,000 at March 31, 2016 and December 31, 2015, respectively.

Loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows:

Pass - A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $13.2 million and $13.4 million at March 31, 2016 and December 31, 2015, respectively.

Special Mention - A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification.

Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful - A doubtful loan has all the weaknesses inherent in a loan classified as substandard with the added characteristics that the weaknesses make collection or liquidation in full, highly questionable and improbable, on the basis of currently existing facts, conditions, and values. The possibility of loss is extremely high.

The following tables present the composition of loans by credit quality indicator at March 31, 2016 and December 31, 2015 (dollars in thousands):

	March 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	185,005	$	7,127	$	5,205	$	—	$	197,337
Commercial		313,959		3,115		3,399		—		320,473
Construction and land development		66,587		1,799		4,496		—		72,882
Second mortgages		7,368		654		148		—		8,170
Multifamily		47,852		—		—		—		47,852
Agriculture		5,946		122		—		—		6,068
Total real estate loans		626,717		12,817		13,248		—		652,782
Commercial loans		102,465		3,793		96		—		106,354
Consumer installment loans		4,895		31		81		—		5,007
All other loans		1,342		—		—		—		1,342
Total loans	$	735,419	$	16,641	$	13,425	$	—	$	765,485

	December 31, 2015
	Pass		Special Mention		Substandard		Doubtful		Total
Mortgage loans on real estate:
Residential 1-4 family	$	182,394	$	6,612	$	5,570	$	—	$	194,576
Commercial		306,267		8,520		3,168		—		317,955
Construction and land development		62,391		434		4,583		—		67,408
Second mortgages		7,126		1,239		13		—		8,378
Multifamily		45,389		—		—		—		45,389
Agriculture		6,113		125		—		—		6,238
Total real estate loans		609,680		16,930		13,334		—		639,944
Commercial loans		98,159		4,290		58		—		102,507
Consumer installment loans		4,593		256		79		—		4,928
All other loans		1,345		—		—		—		1,345
Total loans	$	713,777	$	21,476	$	13,471	$	—	$	748,724

In accordance with FASB ASU 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 17 and 18 loans that met the definition of a TDR at March 30, 2016 and 2015, respectively.

During the three months ended March 31, 2016, the Company modified one consumer installment loan that was considered to be a TDR. The Company extended the terms and lowered the interest rate for this loan, which had a pre- and post-modification balance of $248,000. During the three months ended March 31, 2015, the Company modified one residential 1-4 family loan that was considered to be a TDR. The Company extended the terms and lowered the interest rate for this loan, which had a pre- and post-modification balance of $68,000.

A loan is considered to be in default if it is 90 days or more past due. There were no TDRs that had been restructured during the previous 12 months that resulted in default during either of the three months ended March 31, 2016 and 2015.

In the determination of the allowance for loan losses, management considers TDRs and subsequent defaults in these restructures by reviewing for impairment in accordance with FASB ASC 310-10-35, Receivables, Subsequent Measurement.

At March 31, 2016, the Company had 1-4 family mortgages in the amount of $140.4 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $125.1 million.

Note 4. PCI Loans and Related Allowance for Loan Losses

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits and certain other liabilities and acquire substantially all assets of Suburban Federal Savings Bank (SFSB). The Company is applying the provisions of FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, to all loans acquired in the SFSB transaction (the “PCI loans”). Of the total $198.3 million in loans acquired, $49.1 million met the criteria of FASB ASC 310-30. These loans, consisting mainly of construction loans, were deemed impaired at the acquisition date. The remaining $149.1 million of loans acquired, comprised mainly of residential 1-4 family, were analogized to meet the criteria of FASB ASC 310-30. Analysis of this portfolio revealed that SFSB utilized weak underwriting and documentation standards, which led the Company to believe that significant losses were probable given the economic environment at the time.

As of March 31, 2016 and December 31, 2015, the outstanding contractual balance of the PCI loans was $88.1 million and $91.3 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

	March 31, 2016					December 31, 2015
	Amount		% of PCI Loans			Amount		% of PCI Loans
Mortgage loans on real estate:
Residential 1-4 family	$	50,772		89.55	%	$	52,696		89.38	%
Commercial		822		1.45			850		1.44
Construction and land development		2,186		3.86			2,310		3.92
Second mortgages		2,639		4.65			2,822		4.79
Multifamily		277		0.49			277		0.47
Total real estate loans		56,696		100.00			58,955		100.00
Total PCI loans	$	56,696		100.00	%	$	58,955		100.00	%

There was no activity in the allowance for loan losses on PCI loans for the three months ended March 31, 2016 and 2015.

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses at March 31, 2016 and December 31, 2015 (dollars in thousands):

	March 31, 2016				December 31, 2015
	Allowance for loan losses		Recorded investment in loans		Allowance for loan losses		Recorded investment in loans
Mortgage loans on real estate:
Residential 1-4 family	$	484	$	50,772	$	484	$	52,696
Commercial		—		822		—		850
Construction and land development		—		2,186		—		2,310
Second mortgages		—		2,639		—		2,822
Multifamily		—		277		—		277
Total real estate loans		484		56,696		484		58,955
Total PCI loans	$	484	$	56,696	$	484	$	58,955

The change in the accretable yield balance for the three months ended March 31, 2016 and the year ended December 31, 2015, is as follows (dollars in thousands):

Balance, January 1, 2015	$	51,082
Accretion		(7,811	)
Reclassification to nonaccretable yield		5,857
Balance, December 31, 2015	$	49,128
Accretion		(1,576	)
Reclassification from nonaccretable yield		2,140
Balance, March 31, 2016	$	49,692

The PCI loans were not classified as nonperforming assets as of March 31, 2016, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all PCI loans.

Note 5. Other Real Estate Owned

The following table presents the balances of other real estate owned at March 31, 2016 and December 31, 2015 (dollars in thousands):

	March 31, 2016		December 31, 2015

Residential 1-4 family	$	1,076	$	1,407
Commercial		634		634
Construction and land development		3,385		3,449
Total other real estate owned	$	5,095	$	5,490

At March 31, 2016, the Company had $1.9 million in residential 1-4 family loans and PCI loans that were in the process of foreclosure.

Note 6. Deposits

The following table provides interest bearing deposit information, by type, as of March 31, 2016 and December 31, 2015 (dollars in thousands):

	March 31, 2016		December 31, 2015

NOW	$	119,130	$	128,761
MMDA		105,044		108,810
Savings		82,793		84,047
Time deposits less than or equal to $250,000		404,578		409,085
Time deposits over $250,000		118,341		118,600
Total interest bearing deposits	$	829,886	$	849,303

Note 7. Accumulated Other Comprehensive Income

The following tables present activity net of tax in accumulated other comprehensive income (AOCI) for the three months ended March 31, 2016 and 2015 (dollars in thousands):

	Three months ended March 31, 2016
	Unrealized Gain on Securities			Defined Benefit Pension Plan			Gain/Loss on Cash Flow Hedge			Total Accumulated Other Comprehensive Income (Loss)

Beginning balance	$	443		$	(901	)	$	(131	)	$	(589	)
Other comprehensive income before reclassifications		2,345			-			(362	)		1,983
Amounts reclassified from AOCI		(171	)		-			-			(171	)
Net current period other comprehensive income (loss)		2,174			-			(362	)		1,812
Ending balance	$	2,617		$	(901	)	$	(493	)	$	1,223

	Three months ended March 31, 2015
	Unrealized Gain on Securities			Defined Benefit Pension Plan			Gain/Loss on Cash Flow Hedge			Total Accumulated Other Comprehensive Income (Loss)

Beginning balance	$	1,452		$	(811	)	$	23		$	664
Other comprehensive income before reclassifications		1,171			-			(249	)		922
Amounts reclassified from AOCI		(196	)		-			-			(196	)
Net current period other comprehensive income (loss)		975			-			(249	)		726
Ending balance	$	2,427		$	(811	)	$	(226	)	$	1,390

The following table presents the effects of reclassifications out of AOCI on line items of consolidated income for the three months ended March 31, 2016 and 2015 (dollars in thousands):

Details about AOCI Components	Amount Reclassified from AOCI						Affected Line Item in the Unaudited Consolidated Statement of Income
	Three months ended
	March 31, 2016			March 31, 2015
Unrealized gains on securities available for sale	$	(259	)	$	(297	)	Gain on securities transactions, net
		88			101		Income tax expense
	$	(171	)	$	(196	)	Net of tax

Note 8. Fair Values of Assets and Liabilities

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that prioritizes the valuation inputs into three broad levels. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

• Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.

• Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3—Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

FASB ASC 825, Financial Instruments, allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any material FASB ASC 825 elections as of March 31, 2016.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The Company utilizes fair value measurements to record adjustments to certain assets to determine fair value disclosures. Securities available for sale and loans held for sale are recorded at fair value on a recurring basis. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

	March 31, 2016
	Total			Level 1		Level 2			Level 3
Investment securities available for sale
U.S. Treasury issue and other U.S. Gov’t agencies	$	39,705		$	29,589	$	10,116		$	-
U.S. Gov’t sponsored agencies		769			-		769			-
State, county and municipal		131,551			497		131,054			-
Corporate and other bonds		15,052			-		15,052			-
Mortgage backed – U.S. Gov’t agencies		6,657			-		6,657			-
Mortgage backed – U.S. Gov’t sponsored agencies		12,870			2,588		10,282			-
Total investment securities available for sale		206,604			32,674		173,930			-
Total assets at fair value	$	206,604		$	32,674	$	173,930		$	-
Cash flow hedge	$	(747	)	$	-	$	(747	)	$	-
Total liabilities at fair value	$	(747	)	$	-	$	(747	)	$	-

	December 31, 2015
	Total			Level 1		Level 2			Level 3
Investment securities available for sale
U.S. Treasury issue and other U.S. Gov’t agencies	$	49,941		$	39,748	$	10,193		$	-
U.S. Gov’t sponsored agencies		742			-		742			-
State, county and municipal		141,498			687		140,811			-
Corporate and other bonds		14,296			-		14,296			-
Mortgage backed – U.S. Gov’t agencies		8,496			-		8,496			-
Mortgage backed – U.S. Gov’t sponsored agencies		28,297			-		28,297			-
Total investment securities available for sale		243,270			40,435		202,835			-
Total assets at fair value	$	243,270		$	40,435	$	202,835		$	-
Cash flow hedge	$	(199	)	$	-	$	(199	)	$	-
Total liabilities at fair value	$	(199	)	$	-	$	(199	)	$	-

Investment securities available for sale

Investment securities available for sale are recorded at fair value each reporting period. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses a reputable pricing company for security market data. The third party vendor has controls and edits in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 16 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities.

Cash flow hedge

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following tables present assets measured at fair value on a nonrecurring basis as of March 31, 2016 and December 31, 2015 (dollars in thousands):

	March 31, 2016
	Total		Level 1		Level 2		Level 3
Impaired loans	$	8,667	$	—	$	1,468	$	7,199
Other real estate owned		5,095		—		31		5,064
Total assets at fair value	$	13,762	$	—	$	1,499	$	12,263
Total liabilities at fair value	$	—	$	—	$	—	$	—

	December 31, 2015
	Total		Level 1		Level 2		Level 3
Impaired loans	$	8,737	$	—	$	1,982	$	6,755
Bank premises held for sale		110		—		—		110
Other real estate owned		5,490		—		31		5,459
Total assets at fair value	$	14,337	$	—	$	2,013	$	12,324
Total liabilities at fair value	$	—	$	—	$	—	$	—

Impaired loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310, Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At March 31, 2016 and December 31, 2015, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 18 months old and/or deemed to be invalid. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan within Level 2.

The Company may also identify collateral deterioration based on current market sales data, including price and absorption, as well as input from real estate sales professionals and developers, county or city tax assessments, market data and on-site inspections by Company personnel. Internally prepared estimates generally result from current market data and actual sales data related to the Company’s collateral or where the collateral is located. When management determines that the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. In instances where an appraisal received subsequent to an internally prepared estimate reflects a higher collateral value, management does not revise the carrying amount. Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest rate is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Reviews of classified loans are performed by management on a quarterly basis.

Bank premises and equipment held for sale

The fair value of bank premises and equipment held for sale was determined using the adjusted appraisal methodology described in the other real estate owned (OREO) asset section below.

Other real estate owned

OREO assets are adjusted to fair value less estimated selling costs upon transfer of the related loans to OREO property. Subsequent to the transfer, valuations are periodically performed by management and the assets are carried at the lower of carrying value or fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset within Level 2. When an appraised value is not available or management determines that the fair value of the collateral is further impaired below the appraised value due to such things as absorption rates and market conditions, the Company records the foreclosed asset within Level 3 of the fair value hierarchy.

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following reflects the fair value of financial instruments, whether or not recognized on the consolidated balance sheet, at fair value measures by level of valuation assumptions used for those assets. These tables exclude financial instruments for which the carrying value approximates fair value (dollars in thousands):

	March 31, 2016
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	44,298	$	45,874	$	—	$	45,874	$	—
Loans, net of allowance		755,891		758,400		—		751,201		7,199
PCI loans, net of allowance		56,212		63,722		—		—		63,722

Financial liabilities:
Interest bearing deposits		829,886		831,688		—		831,688		—
Long-term borrowings		100,464		100,615		—		100,615		—

	December 31, 2015
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Securities held to maturity	$	36,478	$	37,611	$	—	$	37,611	$	—
Loans, net of allowance		739,165		739,367		—		733,026		6,341
PCI loans, net of allowance		58,471		62,902		—		—		62,902

Financial liabilities:
Interest bearing deposits		849,303		850,770		—		850,770		—
Long-term borrowings		105,455		105,476		—		105,476		—

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value as of March 31, 2016. The Company applied the provisions of FASB ASC 820 to the fair value measurements of financial instruments not recognized on the consolidated balance sheet at fair value. The provisions requiring the Company to maximize the use of observable inputs and to measure fair value using a notion of exit price were factored into the Company’s selection of inputs into its established valuation techniques.

Financial Assets

Cash and cash equivalents

The carrying amounts of cash and due from banks, interest bearing bank deposits, and federal funds sold approximate fair value (Level 1).

Securities held for investment

For securities held for investment, fair values are based on quoted market prices or dealer quotes (Level 1 and 2).

Restricted securities

The carrying value of restricted securities approximates their fair value based on the redemption provisions of the respective issuer (Level 2).

Loans held for sale

The carrying amounts of loans held for sale approximate fair value (Level 2).

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans is consistent with the methodology used for the FASB ASC 820 disclosure for assets recorded at fair value on a nonrecurring basis presented above.

PCI loans

Fair values for PCI loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, term of loan and whether or not the loans are amortizing. Loans were pooled together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on the rates used at acquisition (which were based on market rates for new originations of comparable loans) adjusted for any material changes in interest rates since acquisition. Increases in cash flow expectations since acquisition resulted in estimated fair value being higher than carrying value. The increase in cash flows is also reflected in a transfer from unaccretable yield to accretable yield as disclosed in Note 4.

Accrued interest receivable

The carrying amounts of accrued interest receivable approximate fair value (Level 2).

Financial Liabilities

Noninterest bearing deposits

The carrying amount of noninterest bearing deposits approximates fair value (Level 2).

Interest bearing deposits

The fair value of NOW accounts, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Federal funds purchased

The carrying amount of federal funds purchased approximates fair value (Level 2).

Long-term borrowings

The fair values of the Company’s long-term borrowings, such as FHLB advances and long-term debt, are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued interest payable

The carrying amounts of accrued interest payable approximate fair value (Level 2).

Off-balance sheet financial instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The Company’s off-balance sheet commitments are funded at current market rates at the date they are drawn upon. It is management’s opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 9. Earnings Per Common Share

Basic earnings per common share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of all potentially dilutive common shares outstanding attributable to stock instruments. The following table presents basic and diluted EPS for the three months ended March 31, 2016 and 2015 (dollars and shares in thousands, except per share data):

	Net Income (Numerator)		Weighted Average Common Shares (Denominator)		Per Common Share Amount
For the three months ended March 31, 2016
Basic EPS	$	2,420		21,873	$	0.11
Effect of dilutive stock awards		—		192		—
Diluted EPS	$	2,420		22,065	$	0.11

For the three months ended March 31, 2015
Basic EPS	$	1,312		21,799	$	0.06
Effect of dilutive stock awards		—		164		—
Diluted EPS	$	1,312		21,963	$	0.06

Antidilutive common shares issuable under awards or options of 263,000 were excluded from the computation of diluted earnings per common share for the three months ended March 31, 2016. There were no antidilutive exclusions from the computation of diluted earnings per common share for the three months ended March 31, 2015.

Note 10. Employee Benefit Plan

The Company adopted the Bank of Essex noncontributory, defined benefit pension plan for all full-time pre-merger Bank of Essex employees over 21 years of age. Benefits are generally based upon years of service and the employees’ compensation. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.

The Company has frozen the plan benefits for all the defined benefit plan participants effective December 31, 2010.

The following table provides the components of net periodic benefit cost for the plan for the three months ended March 31, 2016 and 2015 (dollars in thousands):

	Three months ended
	March 31, 2016			March 31, 2015
Interest cost	$	48		$	47
Expected return on plan assets		(82	)		(88	)
Amortization of prior service cost		1			1
Recognized net actuarial loss		13			11
Recognized net loss due to settlement		13			—
Net periodic benefit cost	$	(7	)	$	(29	)

Note 11. Cash Flow Hedge

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.

The swap was entered into with a counterparty that met the Company’s credit standards, and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant. The Company had $710,000 and $440,000 of cash pledged as collateral as of March 31, 2016 and December 31, 2015, respectively.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with FASB ASC 815, Derivatives and Hedging, the Company has designated the swap as a cash flow hedge, with the effective portions of the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. The ineffective portions of the unrealized gains or losses, if any, would be recorded in other operating expense. The Company has assessed the effectiveness of the hedging relationship by comparing the changes in cash flows on the designated hedged item. The Company’s cash flow hedge was deemed to be effective for the three months ended March 31, 2016 and 2015. The fair value of the Company’s cash flow hedge was an unrealized loss of $747,000 and $199,000 at March 31, 2016 and December 31, 2015, respectively, and was recorded in other liabilities. The loss was recorded as a component of other comprehensive income net of the associated tax effect.

Note 12. Branch Sale

On March 18, 2016, the Company sold its branch office in Catonsville, Maryland to JP Properties for a purchase price of $160,000. The Company closed the office on March 4, 2016. Loans and deposits are being serviced by the Company’s Rosedale branch office.

The Catonsville branch office was classified as held for sale at December 31, 2015 at an estimated fair market value of $110,000. After closing costs of $14,000, the Company recognized a gain of $37,000.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition at March 31, 2016 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three months ended March 31, 2016 should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

OVERVIEW

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, gains from loan sales, transactions involving bank-owned property, and income from Bank Owned Life Insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and employee benefits, occupancy and equipment costs, professional fees, the amortization of intangible assets and other operational expenses. The provision for loan losses and income taxes may materially affect net income.

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, future 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and other reports filed from time to time by the Company with the Securities and Exchange Commission.

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 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. 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 Bank’s allowance for loan losses, and may require the Bank 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 is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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 on a loan by loan basis for commercial and construction loans 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 or Debt Securities Acquired in a Transfer

FASB 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.

The Company’s acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the “PCI loans”), subject to FASB ASC Topic 805, Business Combinations, are 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 credit 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 losses. 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 Intangible Assets

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 three months ended March 31, 2016 and 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.

The Company and its subsidiaries are subject to U. S. federal income tax as well as Virginia and Maryland state income taxes. All years from 2012 through 2015 are open to examination by the respective tax authorities.

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.

RESULTS OF OPERATIONS

Overview

Net income was $2.4 million for the first quarter of 2016, compared with $1.3 million in the first quarter of 2015. Earnings per common share, basic and fully diluted, were $0.11 per share and $0.06 per share for the three months ended March 31, 2016 and 2015, respectively.

The increase in net income when comparing the first quarter of 2016 with the same period in 2015 was the result of a $1.5 million decline in total noninterest expense combined with a $328,000 increase in net interest income after provision for loan losses. The 15.6% decline in total noninterest expense was primarily due to a reduction of $1.2 million in FDIC indemnification amortization expense. In September 2015, the Company and the FDIC mutually terminated their shared-loss agreements, which resulted in the elimination of this expense in future periods. Also, other real estate expense and other operating expenses declined $187,000 and $117,000, respectively, year over year. Partially offsetting these decreases was an increase of $116,000 in salaries and employee benefits due to an increase in the number of full-time equivalent employees.

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.”

Net interest income increased $328,000, or 3.4%, from the first quarter of 2015 to the first quarter of 2016. Interest income increased $388,000, or 3.3%, over this time period. The average balance of loans, excluding PCI loans, increased $86.2 million, or 12.9%, from $667.5 million in the first quarter of 2015 to $753.6 million in the first quarter of 2016. Interest income on securities on a tax equivalent basis increased by $130,000, year-over-year, from $2.0 million in the first quarter of 2015 to $2.2 million in the first quarter of 2016. These increases to interest income were offset by a year-over-year decline in interest and fees on PCI loans of $474,000, which were $1.6 million for the first quarter of 2016. The yield on the PCI portfolio was 11.1% in the first quarter of 2016, down from 12.5% in the first quarter of 2015. The average balance of the PCI portfolio declined $9.2 million during the year-over-year comparison period.

Interest expense increased $60,000, or 3.2%, when comparing the first quarter of 2015 and the first quarter of 2016. Interest expense on deposits increased $103,000, or 7.1%, as the average balance of interest bearing deposits increased $12.5 million, or 1.5%. The increase in deposit cost was driven by higher cost time deposits to fund loan growth. Overall the Bank’s cost of interest bearing liabilities remained the same as the first quarter of 2015. While average interest bearing deposit costs increased from 0.71% in the first quarter of 2015 to 0.74% in the first quarter of 2016, a decline in the cost of FHLB and other borrowings from 1.30% to 1.18% occurred, thus offsetting higher deposit costs.

The tax equivalent net interest margin declined seven basis points from 3.90% in the first quarter of 2015 to 3.83% in the first quarter of 2016. Likewise, the interest spread decreased from 3.82% to 3.72% over the same time period. The decline in the margin was precipitated by a reduction in earning asset yields of 10 basis points.

The following table sets forth, for each category of interest-earning assets and interest bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the three months ended March 31, 2016 and 2015. The table also sets forth the average rate paid on total interest bearing liabilities, and the net interest margin on average total interest earning assets for the same periods. Except as indicated in the footnotes, no tax equivalent adjustments were made and all average balances are daily average balances. Any nonaccruing loans have been included in the table, as loans carrying a zero yield.

NET INTEREST MARGIN ANALYSIS

AVERAGE BALANCE SHEETS

(Dollars in thousands)

	Three months ended March 31, 2016								Three months ended March 31, 2015
						Average								Average
	Average			Interest		Rates			Average			Interest		Rates
	Balance			Income/		Earned/			Balance			Income/		Earned/
	Sheet			Expense		Paid			Sheet			Expense		Paid
ASSETS
Loans	$	753,632		$	8,553		4.55	%	$	667,467		$	7,747		4.71	%
Purchased credit impaired (PCI) loans		57,861			1,599		11.08			67,092			2,073		12.53
Total loans		811,493			10,152		5.02			734,559			9,820		5.42
Interest bearing bank balances		9,993			21		0.85			15,368			17		0.45
Federal funds sold		-			-		-			4,000			1		0.10
Securities (taxable)		184,661			1,271		2.75			226,014			1,368		2.42
Securities (tax exempt)		86,057			900		4.19			61,519			673		4.38
Total earning assets		1,092,204			12,344		4.53			1,041,460			11,879		4.63
Allowance for loan losses		(10,078	)							(9,693	)
Non-earning assets		81,829								102,757
Total assets	$	1,163,955							$	1,134,524

LIABILITIES AND SHAREHOLDERS' EQUITY

Demand - interest bearing	$	230,660		$	173		0.30	%	$	221,368		$	154		0.28	%
Savings		83,129			63		0.30			79,629			60		0.31
Time deposits		526,468			1,315		1.00			526,719			1,234		0.95
Total deposits		840,257			1,551		0.74			827,716			1,448		0.71
Short-term borrowings		2,798			5		0.75			1,533			2		0.52
FHLB and other borrowings		104,016			307		1.18			100,509			323		1.30
Long-term debt		5,666			62		4.36			9,057			92		4.07
Total interest bearing liabilities		952,737			1,925		0.81			938,815			1,865		0.81
Noninterest bearing deposits		98,792								82,446
Other liabilities		5,053								4,244
Total liabilities		1,056,582								1,025,505
Shareholders' equity		107,373								109,019

Total liabilities and shareholders' equity	$	1,163,955							$	1,134,524
Net interest earnings				$	10,419							$	10,014
Interest spread							3.72	%							3.82	%
Net interest margin							3.83	%							3.90	%

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

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 these loans may be necessary due to a change in expected cash flows or an increase in expected losses within a pool of loans.

The Company did not record a provision for loan losses in either of the three months ended March 31, 2016 or 2015 with respect to either its loan portfolio or its PCI loan portfolio. With respect to the loan portfolio, this was the direct result of nominal charge-offs and the ongoing stabilization of asset quality.

There were net recoveries of $35,000 in the first quarter of 2016, compared with net charge-offs of $256,000 in the first quarter of 2015. Total charge-offs for the first quarter of 2016 were $138,000 compared with $362,000 in the first quarter of 2015. Recoveries of previously charged-off loans were $173,000 for the first quarter of 2016 compared with $106,000 in the first quarter of 2015.

Noninterest Income

Noninterest income decreased $76,000, or 5.4%, from the first quarter of 2015 to the first quarter of 2016. Other income decreased $60,000 year-over-year, or 31.3%, to $132,000 for the first quarter of 2016. Miscellaneous income, which is within other income, decreased by $56,000 year-over-year as there were reimbursements received from the FDIC in the first quarter of 2015. Also decreasing year-over-year were gain on sale of other loans, by $46,000, and gain on sale of securities, by $38,000. Offsetting these decreases were an increase of $41,000 in service charge income, which was $569,000 in the first quarter of 2016, and an increase of $25,000 in mortgage loan fees, which were $173,000 in the first quarter of 2016.

Noninterest Expense

Noninterest expenses decreased $1.5 million, or 15.6%, when comparing the first quarter of 2016 to the same period in 2015. In September 2015, the Bank and the FDIC mutually agreed to terminate the shared-loss agreements, which resulted in the elimination of the FDIC indemnification asset and the corresponding amortization expense, which was $1.2 million in the first quarter of 2015. OREO expense decreased $187,000 and was a credit of $102,000 in the first quarter of 2016, the result of a gain of $150,000 in bank owned property sales. Other notable decreases year-over-year were occupancy expenses, which decreased $47,000, and professional fees, which decreased by $40,000. The only meaningful dollar increase was to salaries and employee benefits, which increased $116,000, or 2.6%, year-over-year due to an increase in the number of full-time equivalent employees.

Income Taxes

Income tax expense was $983,000 for the three months ended March 31, 2016, compared with income tax expense of $351,000 for first quarter of 2015. The effective tax rate for the first quarter of 2016 was 28.9% versus 21.1% for the first quarter of 2015, reflecting a lower proportion of tax except bank qualified municipal interest income in the first quarter of 2016.

FINANCIAL CONDITION

General

Total assets declined $20.5 million, or 1.7%, to $1.160 billion at March 31, 2016 as compared to December 31, 2015. Total loans, excluding PCI loans, were $765.5 million at March 31, 2016, increasing $16.8 million, or 2.2%, from year end 2015. Total PCI loans were $56.7 million at March 31, 2016 versus $59.0 million at year end 2015.

The Company’s securities portfolio, excluding equity securities, declined $28.8 million, or 10.3%, from $279.7 million at December 31, 2015 to $250.9 million at March 31, 2016. The decline in the volume of securities was a strategic decision by management to let brokered funding mature and fund solid loan growth with 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 $206.6 million at March 31, 2016 and $243.3 million at December 31, 2015. At March 31, 2016, the Company had a net unrealized gain on the AFS portfolio of $4.0 million compared with a net unrealized gain of $671,000 at December 31, 2015. Municipal securities comprised 63.7% of the total AFS portfolio at March 31, 2016. These securities exhibit more price volatility in a changing interest rate environment because of their longer weighted average life, as compared to other categories contained within the rest of the portfolio.

The Company had cash and cash equivalents of $14.2 million and $17.0 million at March 31, 2016 and December 31, 2015, respectively. There were federal funds purchased of $11.0 million at March 31, 2016 versus $18.9 million at December 31, 2015.

Interest bearing deposits at March 31, 2016 were $829.9 million, a decline of $19.4 million, or 2.3%, from December 31, 2015. NOW account balances declined $9.6 million, or 7.5%, from December 31, 2015, while time deposits less than or equal to $250,000 decreased $4.5 million, MMDA balances declined $3.8 million and savings account balances declined $1.3 million.

FHLB advances were $91.5 million at March 31, 2016, compared with $95.7 million at December 31, 2015. Long term debt totaled $4.9 million at March 31, 2016, declining by $801,000, or 14.1%, since December 31, 2015. 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 has amortized this debt $5.8 million within two years and anticipates that the loan will be fully paid in April 2017.

Shareholders’ equity was $108.9 million at March 31, 2016 and $104.5 million at December 31, 2015. Shareholders’ equity increased $4.4 million, or 4.2%, from year end 2015 due to an increase in other comprehensive income related to net gains in the investment portfolio of $1.8 million and net income of $2.4 million in the first quarter of 2016.

Asset Quality – excluding PCI 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.

The Company maintains a list of loans that have potential weaknesses and thus may need special attention. This loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. Nonperforming assets totaled $16.0 million at March 31, 2016 and net recoveries were $35,000 for the three months ended March 31, 2016. This compares with nonperforming assets of $16.2 million and net recoveries of $292,000 at and for the year ended December 31, 2015.

Nonperforming loans were $10.9 million at March 31, 2016, a slight increase from $10.7 million at December 31, 2015. The $262,000 increase in nonperforming loans since December 31, 2015 was the net result of $712,000 in additions to nonperforming loans and $450,000 in reductions. With respect to the reductions to nonperforming loans, $239,000 were payments to existing credits, $56,000 were charge-offs, and $155,000 were loans returned to accruing status.

The allowance for loan losses equaled 87.76% of nonaccrual loans at March 31, 2016 compared with 89.59% at December 31, 2015. The ratio of the allowance for loan losses to total nonperforming assets was 62.88% at March 31, 2016, compared with 62.15% at December 31, 2015. The ratio of nonperforming assets to loans and OREO continued to decline. The ratio was 2.08% at March 31, 2016 versus 2.14% at December 31, 2015.

In accordance with GAAP, an individual loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due in accordance with contractual terms of the loan agreement. The Company considers all troubled debt restructured and nonaccrual loans to be impaired loans. In addition, the Company reviews all substandard and doubtful loans that are not on nonaccrual status, as well as loans with other risk characteristics, pursuant to and specifically for compliance with the accounting definition of impairment as described above. These impaired loans have been determined through analysis, appraisals, or other methods used by management.

See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At March 31, 2016 and December 31, 2015, total impaired loans, excluding PCI loans, equaled $10.9 million and $10.7 million, respectively.

The following table sets forth selected asset quality data, excluding PCI loans, and ratios for the dates indicated (dollars in thousands):

	March 31, 2016			December 31, 2015
Nonaccrual loans	$	10,932		$	10,670
Loans past due 90 days and accruing interest		—			—
Total nonperforming loans		10,932			10,670
OREO		5,095			5,490
Total nonperforming assets	$	16,027		$	16,160

Accruing troubled debt restructure loans	$	4,694		$	4,596

Balances
Specific reserve on impaired loans		998			1,039
General reserve related to unimpaired loans		8,596			8,520
Total allowance for loan losses		9,594			9,559

Average loans during the period, net of unearned income		753,632			687,463

Impaired loans		10,932			10,670
Non-impaired loans		754,553			738,054
Total loans, net of unearned income		765,485			748,742

Ratios
Allowance for loan losses, excluding PCI loans, to loans		1.25	%		1.28	%
Allowance for loan losses to nonperforming assets		62.88			62.15
Allowance for loan losses, excluding PCI loans, to nonaccrual loans		87.76			89.59
General reserve to non-impaired loans		1.14			1.15
Nonaccrual loans to loans		1.43			1.43
Nonperforming assets to loans and OREO		2.08			2.14
Net recoveries to average loans		(0.02	)		(0.04	)

The Company performs troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be restructured into multiple new loans. At March 31, 2016, the Company had 17 loans 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. Four of these loans were restructured using multiple new loans. The aggregated outstanding principal of all TDR loans at March 31, 2016 was $6.5 million, of which $1.8 million 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 note 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.

A further breakout of nonaccrual loans, excluding PCI loans, at March 31, 2016 and December 31, 2015 is below (dollars in thousands):

	March 31, 2016		December 31, 2015
Mortgage loans on real estate:
Residential 1-4 family	$	4,355	$	4,562
Commercial		1,799		1,508
Construction and land development		4,496		4,509
Second mortgages		148		13
Total real estate loans		10,798		10,592
Commercial loans		54		—
Consumer installment loans		80		78
Total loans	$	10,932	$	10,670

At March 31, 2016, the Company had five 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 are in the Company’s central Virginia market. The total amount of the credit exposure outstanding at March 31, 2016 was $4.5 million. These loans have either been charged-down or sufficiently reserved against to equal the current expected realizable value.

The total amount of the allowance for loan losses attributed to all five relationships was $560,000 at March 31, 2016, or 12.5% of the total credit exposure outstanding. The Company establishes its reserves as described above in Allowance for Loan Losses on Loans in the Critical Accounting Policies section. In conjunction with the impairment analysis the Company performs as part of its allowance methodology, the Company ordered appraisals for all loans with balances in excess of $250,000 unless there existed an appraisal that was not older than 18 months and/or deemed to be invalid. The Company orders an automated valuation for balances between $100,000 and $250,000 and uses a ratio analysis for balances less than $100,000. The Company maintains detailed analysis and other information for its allowance methodology, both for internal purposes and for review by its regulators.

Asset Quality – PCI loans

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 Company makes an estimate of the total cash flows that it expects to collect from a pool of PCI loans, which include undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairment in the current period through 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.

Capital Requirements

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

Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III 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 loan loss allowance. “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. The leverage ratio is tier 1 capital divided by total average assets.

The Company’s ratio of total risk-based capital was 13.4% at March 31, 2016 compared with 13.2% at December 31, 2015. The tier 1 risk-based capital ratio was 12.3% at March 31, 2016 and 12.1% at December 31, 2015. The Company’s tier 1 leverage ratio was 9.6% at March 31, 2016 and 9.4% at December 31, 2015. All capital ratios exceed regulatory minimums to be considered well capitalized. BASEL III introduced the common equity tier 1 capital ratio, which was 11.8% at March 31, 2016 and 11.6% at December 31, 2015.

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. At March 31, 2016, the Company had a capital conservation buffer of 5.36%, well above the 2016 required buffer of 0.625%.

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 March 31, 2016 and December 31, 2015 was as follows (dollars in thousands):

	March 31, 2016			December 31, 2015
Cash and due from banks	$	8,465		$	7,393
Interest bearing bank deposits		5,774			9,576
Available for sale securities, at fair value, unpledged		159,911			189,692
Total liquid assets	$	174,150		$	206,661

Deposits and other liabilities	$	1,051,159		$	1,076,070
Ratio of liquid assets to deposits and other liabilities		16.57	%		19.21	%

Off-Balance Sheet Arrangements and Contractual Obligations

A summary of the contract amount of the Company’s exposure to off-balance sheet and balance sheet risk as of March 31, 2016 and December 31, 2015, is as follows (dollars in thousands):

	March 31, 2016		December 31, 2015
Commitments with off-balance sheet risk:
Commitments to extend credit	$	115,730	$	106,099
Standby letters of credit		8,045		7,146
Total commitments with off-balance sheet risks	$	123,775	$	113,245

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 clients. 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. For the avoidance of doubt, 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.

The fair value of the Company’s cash flow hedge was an unrealized loss of $747,000 and $199,000 at March 31, 2016 and December 31, 2015, respectively, which was recorded in other liabilities. The Company’s cash flow hedge is deemed to be effective. Therefore, the loss was recorded as a component of other comprehensive income recorded in the Company’s Consolidated Statements of Comprehensive Income.

Item 3. 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 the 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 March 31, 2016 (dollars in thousands):

	March 31, 2016
	%			$
Change in Yield curve
+400 bp		(5.1	)		(2,027	)
+300 bp		(4.2	)		(1,654	)
+200 bp		(2.8	)		(1,095	)
+100 bp		(1.5	)		(588	)
most likely		—			—
-100 bp		2.1			853
-200 bp		1.7			658
-300 bp		1.6			648
-400 bp		1.6			648

At March 31, 2016, 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 decrease by 5.1%. 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 increase by 1.6%. 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.

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 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company’s management, with the participation of the Company’s chief executive officer and its chief financial officer (“the Certifying Officers”), conducted evaluations of the Company’s disclosure controls and procedures. As defined under Section 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

Based on this evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated under it.

Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Certifying Officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company, including its subsidiaries, is a party or of which the property of the Company is subject.

Item 1A. Risk Factors

As of the date of this report, there were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description
31.1		Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer*
31.2		Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer*
32.1		Section 1350 Certifications*
101		Interactive Data File with respect to the following materials from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements*

Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		COMMUNITY BANKERS TRUST CORPORATION
		(Registrant)

		/s/ Rex L. Smith, III
		Rex L. Smith, III
		President and Chief Executive Officer
		(principal executive officer)

Date: May 9, 2016

		/s/ Bruce E. Thomas
		Bruce E. Thomas
		Executive Vice President and Chief Financial Officer
		(principal financial officer)

Date: May 9, 2016