Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2011

or

 

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

For the transition period from              to             

Commission File Number: 001-32590

 

 

COMMUNITY BANKERS TRUST CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-2652949

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4235 Innslake Drive, Suite 200

Glen Allen, Virginia

  23060
(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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

At March 31, 2011, there were 21,468,455 shares of the Company’s common stock outstanding.

 

 

 


Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

TABLE OF CONTENTS

FORM 10-Q

March 31, 2011

 

PART I — FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Consolidated Statements of Financial Condition (Unaudited)

     3   

Consolidated Statements of Operations (Unaudited)

     4   

Consolidated Statements of Stockholders’ Equity (Unaudited)

     5   

Consolidated Statements of Cash Flows (Unaudited)

     6   

Notes to Unaudited Consolidated Financial Statements

     7   

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

     30   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     44   

Item 4. Controls and Procedures

     46   

PART II — OTHER INFORMATION

  

Item 1. Legal Proceedings

     48   

Item 1A. Risk Factors

     48   

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

     48   

Item 3. Defaults upon Senior Securities

     48   

Item 4. (Removed and Reserved)

     48   

Item 5. Other Information

     48   

Item 6. Exhibits

     48   

SIGNATURES

     49   

 

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Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF MARCH 31, 2011 AND DECEMBER 31, 2010

(dollars in thousands)

 

     March 31, 2011     December 31, 2010  
     (Unaudited)     (Audited)  

ASSETS

    

Cash and due from banks

   $ 18,147      $ 8,604   

Interest-bearing bank deposits

     13,600        22,777   

Federal funds sold

     5,000        2,000   
                

Total cash and cash equivalents

     36,747        33,381   

Securities available for sale, at fair value

     213,347        215,560   

Securities held to maturity, at cost (fair value of $81,857 and $89,026, respectively)

     77,793        84,771   

Equity securities, restricted, at cost

     7,119        7,170   
                

Total securities

     298,259        307,501   

Loans not covered by FDIC shared loss agreement

     514,276        525,548   

Loans covered by FDIC shared loss agreement

     108,329        115,537   
                

Total loans

     622,605        641,085   

Allowance for loan losses (non-covered loans of $21,542 and $25,543, respectively; covered loans of $829 and $829, respectively)

     (22,371     (26,372
                

Net loans

     600,234        614,713   

FDIC indemnification asset

     55,535        58,369   

Bank premises and equipment, net

     35,206        35,587   

Other real estate owned, covered by FDIC shared loss agreement

     9,116        9,889   

Other real estate owned, non-covered

     7,332        5,928   

Bank owned life insurance

     6,895        6,829   

FDIC receivable under shared loss agreement

     1,398        7,250   

Core deposit intangibles, net

     14,254        14,819   

Other assets

     20,517        21,328   
                

Total assets

   $ 1,085,493      $ 1,115,594   
                

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 64,128      $ 62,359   

Interest-bearing

     865,413        899,366   
                

Total deposits

     929,541        961,725   

Federal Home Loan Bank advances

     37,000        37,000   

Trust preferred capital notes

     4,124        4,124   

Other liabilities

     8,968        5,618   
                

Total liabilities

     979,633        1,008,467   
                

STOCKHOLDERS’ EQUITY

    

Preferred stock (5,000,000 shares authorized, $0.01 par value; 17,680 shares issued and outstanding)

     17,680        17,680   

Warrants on preferred stock

     1,037        1,037   

Discount on preferred stock

     (609     (660

Common stock (200,000,000 shares authorized, $0.01 par value; 21,468,455 shares issued and outstanding)

     215        215   

Additional paid in capital

     143,999        143,999   

Retained deficit

     (56,244     (54,999

Accumulated other comprehensive income

     (218     (145
                

Total stockholders’ equity

     105,860        107,127   
                

Total liabilities and stockholders’ equity

   $ 1,085,493      $ 1,115,594   
                

See accompanying notes to unaudited consolidated financial statements

 

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Table of Contents

COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

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

 

     March 31, 2011     March 31, 2010  

Interest and dividend income

    

Interest and fees on non-covered loans

   $ 7,234      $ 8,723   

Interest and fees on FDIC covered loans

     3,820        3,593   

Interest on federal funds sold

     2        1   

Interest on deposits in other banks

     14        30   

Interest and dividends on securities

    

Taxable

     1,912        2,005   

Nontaxable

     412        894   
                

Total interest and dividend income

     13,394        15,246   

Interest expense

    

Interest on deposits

     2,979        4,857   

Interest on other borrowed funds

     332        331   
                

Total interest expense

     3,311        5,188   
                

Net interest income

     10,083        10,058   

Provision for loan losses

     1,498        5,042   
                

Net interest income after provision for loan losses

     8,585        5,016   
                

Noninterest income

    

Service charges on deposit accounts

     576        565   

FDIC indemnification asset amortization

     (2,745     (377

Gain on securities transactions, net

     661        354   

Loss on sale of other real estate, net

     (612     (2,377

Other

     714        2,250   
                

Total noninterest income

     (1,406     415   
                

Noninterest expense

    

Salaries and employee benefits

     4,204        5,131   

Occupancy expenses

     814        739   

Equipment expenses

     330        412   

Legal fees

     105        46   

Professional fees

     191        334   

FDIC assessment

     872        605   

Data processing fees

     452        506   

Amortization of intangibles

     565        565   

Other operating expenses

     1,678        1,522   
                

Total noninterest expense

     9,211        9,860   
                

Loss before income taxes

     (2,032     (4,429

Income tax benefit

     838        1,665   
                

Net loss

   $ (1,194   $ (2,764

Dividends accrued on preferred stock

     —          221   

Accretion of discount on preferred stock

     51        48   

Accumulated preferred dividends

     221        —     
                

Net loss available to common stockholders

   $ (1,466   $ (3,033
                

Net loss per share — basic

   $ (0.07   $ (0.14
                

Net loss per share — diluted

   $ (0.07   $ (0.14
                

Weighted average number of shares outstanding

    

basic

     21,468        21,468   

diluted

     21,468        21,468   

See accompanying notes to unaudited consolidated financial statements

 

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COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND

THE YEAR ENDED DECEMBER 31, 2010

(dollars and shares in thousands)

 

     Preferred
Stock
     Warrants      Discount
on Preferred
Stock
   

 

Common Stock

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

Balance January 1, 2010

   $ 17,680       $ 1,037       $ (854     21,468       $ 215       $ 143,999       $ (32,511   $ 1,536      $ 131,102   

Amortization of preferred stock warrants

     —           —           194        —           —           —           (194     —          —     

Dividends paid on preferred stock

     —           —           —          —           —           —           (442     —          (442

Comprehensive income:

                       

Net loss

     —           —           —          —           —           —           (20,993     —          (20,993

Change in unrealized gain/loss in equity securities

     —           —           —          —           —           —           —          (6     (6

Change in unrealized gain/loss in investment securities, net of tax of $2,338

     —           —           —          —           —           —           —          (4,539     (4,539

Less: Reclassification adjustment for gain on securities sold, net of tax of $1,064

     —           —           —          —           —           —           —          2,065        2,065   

Less: Reclassification adjustment for loss on securities available for sale related to other than temporary impairments, net of tax of $156

     —           —           —          —           —           —           —          303        303   

Change in funded status of pension plan, net of tax of $256

     —           —           —          —           —           —           —          496        496   
                             

Total comprehensive loss

                          (22,674

Dividends paid on common stock ($.04 per share)

     —           —           —          —           —           —           (859     —          (859
                                                                             

Balance December 31, 2010 (Audited)

   $ 17,680       $ 1,037       $ (660     21,468       $ 215       $ 143,999       $ (54,999   $ (145   $ 107,127   

Amortization of preferred stock warrants

     —           —           51        —           —           —           (51     —          —     

Comprehensive income:

                       

Net loss

     —           —           —          —           —           —           (1,194     —          (1,194

Change in unrealized gain/loss in investment securities, net of tax of $187

     —           —           —          —           —           —           —          363        363   

Less: Reclassification adjustment for gain on securities sold, net of tax of $225

     —           —           —          —           —           —           —          (436     (436
                             

Total comprehensive loss

                          (1,267
                                                                             

Balance March 31, 2011 (Unaudited)

   $ 17,680       $ 1,037       $ (609     21,468       $ 215       $ 143,999       $ (56,244   $ (218   $ 105,860   
                                                                             

See accompanying notes to unaudited consolidated financial statements

 

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COMMUNITY BANKERS TRUST CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(dollars in thousands)

 

     March 31, 2011     March 31, 2010  

Operating activities:

    

Net loss

   $ (1,194   $ (2,764

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and intangibles amortization

     1,023        1,090   

Provision for loan losses

     1,498        5,042   

Amortization of security premiums and accretion of discounts, net

     403        423   

Net gain on sale of securities

     (661     (354

Net loss on sale and valuation of other real estate

     612        2,377   

Changes in assets and liabilities:

    

Decrease (increase) in other assets

     9,468        (2,576

Increase (decrease) in accrued expenses and other liabilities

     3,350        (3,316
                

Net cash provided by (used in) operating activities

     14,499        (78
                

Investing activities:

    

Proceeds from securities sales, calls, maturities, and paydowns

     43,188        31,340   

Purchase of securities

     (33,800     (33,004

Proceeds from sale of other real estate

     927        1,212   

Net decrease (increase) in loans, excluding covered loans

     3,724        (4,573

Net decrease in loans, covered by FDIC shared loss agreement

     6,952        7,601   

Principal recoveries of loans previously charged off

     135        65   

Purchase of premises and equipment, net

     (76     (90
                

Net cash provided by investing activities

     21,050        2,551   
                

Financing activities:

    

Net (decrease) increase in noninterest-bearing and interest-bearing demand deposits

     (32,183     12,886   

Net decrease in federal funds purchased

     —          (8,999

Cash dividends paid

     —          (1,080
                

Net cash (used in) provided by financing activities

     (32,183     2,807   
                

Net increase in cash and cash equivalents

     3,366        5,280   

Cash and cash equivalents:

    

Beginning of the period

   $ 33,381      $ 32,235   
                

End of the period

   $ 36,747      $ 37,515   
                

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 3,550      $ 5,763   

Income taxes paid

     —          —     

Transfers of OREO property

     2,170        40   

See accompanying notes to unaudited consolidated financial statement

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

1. Nature of Banking Activities and Significant Accounting Policies

Organization

Community Bankers Trust Corporation (the “Company”) is a bank holding company that was incorporated under Delaware law on April 6, 2005. The Company is headquartered in Glen Allen, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 24 full-service offices in Virginia, Maryland and Georgia, as of April 30, 2011.

The Company was initially formed as a special purpose acquisition company to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the banking industry. Prior to its acquisition of two bank holding companies in 2008, the Company’s activities were limited to organizational matters, completing its initial public offering and seeking and evaluating possible business combination opportunities. On May 31, 2008, the Company acquired each of TransCommunity Financial Corporation, a Virginia corporation (“TFC”), and BOE Financial Services of Virginia, Inc., a Virginia corporation (“BOE”). The Company changed its corporate name in connection with the acquisitions. On November 21, 2008, the Bank acquired certain assets and assumed all deposit liabilities relating to four former branch offices of The Community Bank (“TCB”) in Georgia. On January 30, 2009, the Bank acquired substantially all assets and assumed all deposit and certain other liabilities relating to seven former branch offices of Suburban Federal Savings Bank (“SFSB”) in Maryland.

The Bank was established in 1926 and is headquartered in Tappahannock, Virginia. The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals and small businesses, including individual and commercial demand and time deposit accounts, commercial and consumer loans, travelers checks, safe deposit box facilities, investment services and fixed rate residential mortgages. Thirteen branches are located in Virginia, primarily from the Chesapeake Bay to just west of Richmond, seven are located in Maryland along the Baltimore-Washington corridor and four are located in the Atlanta, Georgia metropolitan market. The Bank closed its office in Rockbridge County, Virginia in April 2011.

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, 2010. In the opinion of management, all adjustments, consisting of normal accruals, were made that are necessary to present fairly the financial position of the Company at March 31, 2011, and the results of its operations, changes in stockholders’ equity, and its cash flows for the three months ended March 31, 2011.

The accounting and reporting policies of the Company conform to 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 only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial statements have been included. Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011.

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 either when 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.

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

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

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 April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The FASB believes the guidance in this ASU will improve financial reporting by creating greater consistency in the way GAAP is applied for various types of debt restructurings. The ASU clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The amendments to FASB Accounting Standards Codification™ (Codification) Topic 310, Receivables, clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

2. SECURITIES

Amortized costs and fair values of securities available for sale and held to maturity at March 31, 2011 and December 31, 2010 were as follows:

 

     March 31, 2011  
(dollars in thousands)           Gross Unrealized        
     Amortized
Cost
     Gains      Losses     Fair Value  

Securities Available for Sale

          

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

   $ 78,933       $ 195       $ (1,397   $ 77,731   

State, county and municipal

     49,698         583         (624     49,657   

Corporate and other bonds

     5,076         34         (16     5,094   

Mortgage backed securities

     79,971         895         (1     80,865   
                                  

Total Securities Available for Sale

   $ 213,678       $ 1,707       $ (2,038   $ 213,347   
                                  

Securities Held to Maturity

          

State, county and municipal

   $ 13,063       $ 745       $ —        $ 13,808   

Mortgage backed securities

     64,730         3,319         —          68,049   
                                  

Total Securities Held to Maturity

   $ 77,793       $ 4,064       $ —        $ 81,857   
                                  
     December 31, 2010  
            Gross Unrealized        
     Amortized
Cost
     Gains      Losses     Fair Value  

Securities Available for Sale

          

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

   $ 90,849       $ 246       $ (1,521   $ 89,574   

State, county and municipal

     69,865         1,219         (749     70,335   

Corporate and other bonds

     3,576         14         (17     3,573   

Mortgage backed securities

     51,489         610         (21     52,078   
                                  

Total Securities Available for Sale

   $ 215,779       $ 2,089       $ (2,308   $ 215,560   
                                  

Securities Held to Maturity

          

State, county and municipal

   $ 13,070       $ 693       $ —        $ 13,763   

Corporate and other bonds

     1,002         3         —          1,005   

Mortgage backed securities

     70,699         3,559         —          74,258   
                                  

Total Securities Held to Maturity

   $ 84,771       $ 4,255       $ —        $ 89,026   
                                  

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

Included in other U.S. Government agencies are U.S. Government sponsored agency securities of $4.5 million with an amortized cost of $4.5 million as of March 31, 2011 and $5.8 million with an amortized cost of $5.8 million as of December 31, 2010. U.S. Government sponsored agency securities included in mortgage backed securities available for sale totaled $11.5 million with an amortized cost of $11.5 million as of March 31, 2011 and $3.9 million with an amortized cost of $4.0 million as of December 31, 2010. U.S. Government sponsored agency securities included in mortgage backed securities held to maturity totaled $49.4 million with a fair value of $51.9 million as of March 31, 2011 and $54.3 million with a fair value of $57.0 million as of December 31, 2010.

The amortized cost and fair value of securities as of March 31, 2011 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

   $ 4,126       $ 4,232       $ 9,864       $ 10,024   

Due after one year through five years

     43,053         45,109         121,305         120,319   

Due after five years through ten years

     29,142         30,945         68,827         69,481   

Due after ten years

     1,472         1,571         13,682         13,523   
                                   

Total securities

   $ 77,793       $ 81,857       $ 213,678       $ 213,347   
                                   

Gains and losses on the sale of securities are recorded on the settlement date and are determined using the specific identification method. Gross realized gains and losses on sales of securities available for sale during the periods were as follows:

 

(dollars in thousands)    Three Months Ended March 31  
     2011      2010  

Gross realized gains

   $ 661       $ 358   

Gross realized losses

     —           (4
                 

Net securities gain (loss)

   $ 661       $ 354   
                 

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, 2011 and December 31, 2010 were as follows:

 

     March 31, 2011  
(dollars in thousands)    Less than 12 Months     12 Months or More     Total  
     Fair Value      Unrealized Loss     Fair Value      Unrealized Loss     Fair Value      Unrealized Loss  

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

   $ 73,586       $ (1,397   $ —         $ —        $ 73,586       $ (1,397

State, county and municipal

     17,890         (527     824         (97     18,714         (624

Corporate and other bonds

     1,342         (16     —           —          1,342         (16

Mortgage backed securities

     3,362         (1     —           —          3,362         (1
                                                   

Total

   $ 96,180       $ (1,941   $ 824       $ (97   $ 97,004       $ (2,038
                                                   

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

     December 31, 2010  
     Less than 12 Months     12 Months or More     Total  
     Fair Value      Unrealized Loss     Fair Value      Unrealized Loss     Fair Value      Unrealized Loss  

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

   $ 83,989       $ (1,521   $ —         $ —        $ 83,989       $ (1,521

State, county and municipal

     19,103         (644     818         (105     19,921         (749

Corporate and other bonds

     3,059         (17     —           —          3,059         (17

Mortgage backed securities

     3,695         (21     —           —          3,695         (21
                                                   

Total

   $ 109,846       $ (2,203   $ 818       $ (105   $ 110,664       $ (2,308
                                                   

The unrealized losses (impairments) in the investment portfolio as of March 31, 2011 and December 31, 2010 are generally a result of market fluctuations that occur daily. The unrealized losses are from 55 securities at March 31, 2011 that are all of investment grade, backed by insurance, U.S. government agency guarantees, or the full faith and credit of local municipalities throughout the United States. The Company considers the reason for impairment, length of impairment and ability 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.

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 $33.7 million and $36.6 million at March 31, 2011 and December 31, 2010, respectively, were pledged to secure deposits and for other purposes required or permitted by law.

3. LOANS NOT COVERED BY FDIC SHARED LOSS AGREEMENT (NON-COVERED LOANS)

The Company’s non-covered loans at March 31, 2011 and December 31, 2010 were comprised of the following:

 

(dollars in thousands)    March 31, 2011     December 31, 2010  
     Amount     % of Non-Covered
Loans
    Amount     % of Non-Covered
Loans
 

Mortgage loans on real estate:

        

Residential 1-4 family

   $ 133,327        25.91   $ 137,552        26.15

Commercial

     201,017        39.07        205,034        38.99   

Construction and land development

     95,286        18.52        103,763        19.73   

Second mortgages

     8,429        1.64        9,680        1.84   

Multifamily

     15,356        2.98        9,831        1.87   

Agriculture

     3,020        0.59        3,820        0.73   
                                

Total real estate loans

     456,435        88.71        469,650        89.31   

Commercial loans

     47,092        9.15        44,368        8.44   

Consumer installment loans

     8,706        1.69        9,811        1.87   

All other loans

     2,245        0.45        1,993        0.38   
                                

Gross loans

     514,478        100.00     525,822        100.00
                                

Less unearned income on loans

     (202       (274  
                    

Non-covered loans, net of unearned income

   $ 514,276        $ 525,548     
                    

At March 31, 2011 and December 31, 2010, the Company’s allowance for credit losses was comprised of the following: (i) specific valuation allowances calculated in accordance with FASB ASC 310, Receivables, (ii) general valuation allowances calculated in accordance with FASB ASC 450, Contingencies, based on economic conditions and other qualitative risk factors, and (iii) historical valuation allowances calculated using historical loan loss experience. Management identified loans subject to impairment in accordance with ASC 310.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

At March 31, 2011 and December 31, 2010, a portion of the construction and land development loans presented above contain interest reserve provisions. The Company follows standard industry practice to include interest reserves and capitalized interest in a construction loan. This practice recognizes interest as an additional cost of the project and, as a result, requires the borrower to put additional equity into the project. In order to monitor the project throughout its life to make sure the property is moving along as planned to ensure appropriateness of continuing to capitalize interest, the Company coordinates an independent property inspection in connection with each disbursement of loan funds. Until completion, there is generally no cash flow from which to make the interest payment. The Company does not advance additional interest reserves to keep a loan from becoming nonperforming.

For the three months ended March 31, 2011, there were no interest reserves recognized as interest income on construction loans with interest reserves. There were no construction loans with interest reserves that were nonperforming at March 31, 2011.

Average investment in impaired loans was $48.3 million and $67.5 million for the three months ended March 31, 2011 and March 31, 2010, respectively. Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There were no significant amounts recognized during the three months ended March 31, 2011 and 2010. For the three months ended March 31, 2011 and 2010, estimated interest income of $996,000 and $511,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

The following table summarizes information related to impaired loans as of March 31, 2011 (dollars in thousands):

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Interest
Income
Recognized
 

With an allowance recorded:

           

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 5,035       $ 5,032       $ 1,535       $ 3   

Commercial

     8,277         8,220         2,091         57   

Construction and land development

     11,468         11,454         2,313         14   

Second mortgages

     272         271         236         1   

Multifamily

     —           —           —           —     

Agriculture

     —           —           —           —     
                                   

Total real estate loans

     25,052         24,977         6,175         75   

Commercial loans

     1,740         1,740         852         —     

Consumer installment loans

     141        141        75        —     

All other loans

     —           —           —           —     
                                   

Subtotal impaired loans with valuation allowance

   $ 26,933       $ 26,858       $ 7,102       $ 75   
                                   

With no related allowance recorded:

           

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 4,888       $ 4,868       $ —         $ 20   

Commercial

     6,627         6,588         —           39   

Construction and land development

     13,152         13,144         —           8   

Second mortgages

     74         74         —           —     

Multifamily

     —           —           —           —     

Agriculture

     53        53        —           —     
                                   

Total real estate loans

     24,794         24,727         —           67   

Commercial loans

     14         14         —           —     

Consumer installment loans

     15         15         —           —     

All other loans

     —           —           —           —     
                                   

Subtotal impaired loans without valuation allowance

   $ 24,823       $ 24,756       $ —         $ 67   
                                   

Total:

           

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 9,923       $ 9,900       $ 1,535       $ 23   

Commercial

     14,904         14,808         2,091         96   

Construction and land development

     24,620         24,598         2,313         22   

Second mortgages

     346         345         236         1   

Multifamily

     —           —           —           —     

Agriculture

     53         53         —           —     
                                   

Total real estate loans

     49,846         49,704         6,175         142   

Commercial loans

     1,754         1,754         852         —     

Consumer installment loans

     156         156         75        —     

All other loans

     —           —           —           —     
                                   

Total impaired loans

   $ 51,756       $ 51,614       $ 7,102       $ 142   
                                   

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

The following table summarizes information related to impaired loans as of December 31, 2010 (dollars in thousands):

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Interest
Income
Recognized
 

With an allowance recorded:

           

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 5,886       $ 5,858       $ 1,558       $ 28   

Commercial

     3,314         3,314         901         —     

Construction and land development

     9,189         9,094         3,605         95   

Second mortgages

     165         161         161         4   

Multifamily

     —           —           —           —     

Agriculture

     294         288         100         6   
                                   

Total real estate loans

     18,848         18,715         6,325         133   

Commercial loans

     1,741         1,741         1,341         —     

Consumer installment loans

     —           —           —           —     

All other loans

     —           —           —           —     
                                   

Subtotal impaired loans with valuation allowance

   $ 20,589       $ 20,456       $ 7,666       $ 133   
                                   

With no related allowance recorded:

           

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 5,666       $ 5,662       $ —         $ 4   

Commercial

     3,867         3,867         —           —     

Construction and land development

     13,776         13,774         —           2   

Second mortgages

     218         218         —           —     

Multifamily

     —           —           —           —     

Agriculture

     —           —           —           —     
                                   

Total real estate loans

     23,527         23,521         —           6   

Commercial loans

     909         907         —           2   

Consumer installment loans

     91         90         —           1   

All other loans

     —           —           —           —     
                                   

Subtotal impaired loans without valuation allowance

   $ 24,527       $ 24,518       $ —         $ 9   
                                   

Total:

           

Mortgage loans on real estate:

           

Residential 1-4 family

   $ 11,552       $ 11,520       $ 1,558       $ 32   

Commercial

     7,181         7,181         901         —     

Construction and land development

     22,965         22,868         3,605         97   

Second mortgages

     383         379         161         4   

Multifamily

     —           —           —           —     

Agriculture

     294         288         100         6   
                                   

Total real estate loans

     42,375         42,236         6,325         139   

Commercial loans

     2,650         2,648         1,341         2   

Consumer installment loans

     91         90         —           1   

All other loans

     —           —           —           —     
                                   

Total impaired loans

   $ 45,116       $ 44,974       $ 7,666       $ 142   
                                   

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

The following table represents non-covered nonaccruals by loan category as of March 31, 2011 and December 31, 2010 (dollars in thousands):

 

     March 31, 2011      December 31, 2010  

Mortgage loans on real estate:

     

Residential 1-4 family

   $ 8,421       $ 9,600   

Commercial

     8,589         7,181   

Construction and land development

     22,804         16,854   

Second mortgages

     289         218   

Multifamily

     0         —     

Agriculture

     53         —     
                 

Total real estate loans

     40,156         33,853   

Commercial loans

     1,734         2,619   

Consumer installment loans

     0         60   

All other loans

     139         —     
                 

Total loans

   $ 42,029       $ 36,532   
                 

Substandard and doubtful loans still accruing interest are loans that management expects to ultimately collect all principal and interest due, but not under the terms of the original contract. A reconciliation of impaired loans to nonaccrual loans at March 31, 2011 and December 31, 2010 is set forth in the table below (dollars in thousands):

 

     March 31, 2011      December 31, 2010  

Nonaccruals

   $ 42,029       $ 36,532   

Substandard and still accruing

     9,585         8,088   

Doubtful and still accruing

     —           354   
                 

Total impaired

   $ 51,614       $ 44,974   
                 

The following table presents an age analysis of past due status of loans by category as of March 31, 2011 and December 31, 2010 (dollars in thousands):

 

     March 31, 2011  
     30-89
Days
Past
Due
     Greater
than 90
Days
     Total
Past

Due
     Current      Total
Loans
Receivable
     Recorded
Investment
> 90 Days
and
Accruing
 

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 2,591       $ 8,421       $ 11,012       $ 122,315       $ 133,327       $ —     

Commercial

     740         8,681         9,421         191,596         201,017         92   

Construction and land development

     116         22,804         22,920         72,366         95,286         —     

Second mortgages

     138         289         427         8,002         8,429         —     

Multifamily

     603        —           603        14,753        15,356         —     

Agriculture

     —           53        53         2,967         3,020         —     
                                                     

Total real estate loans

     4,188         40,248         44,436         411,999         456,435         92   

Commercial loans

     357         1,924         2,281         44,811         47,092         190   

Consumer installment loans

     49         139         188        8,518         8,706         —     

All other loans

     —           —           —           2,245        2,245         —     
                                                     

Total loans

   $ 4,594       $ 42,311       $ 46,905       $ 467,573       $ 514,478       $ 282   
                                                     

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

     December 31, 2010  
     30-89
Days
Past

Due
     Greater
than 90
Days
     Total
Past

Due
     Current      Total
Loans
Receivable
     Recorded
Investment
> 90 Days
and
Accruing
 

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 3,444       $ 9,989       $ 13,433       $ 124,089       $ 137,522       $ 389   

Commercial

     1,711         7,181         8,892         196,142         205,034         —     

Construction and land development

     8,241         16,854         25,095         78,668         103,763         —     

Second mortgages

     194         218         412         9,268         9,680         —     

Multifamily

     —           —           —           9,831        9,831         —     

Agriculture

     288         —           288         3,532         3,820         —     
                                                     

Total real estate loans

     13,878         34,242         48,120         421,530         469,650         389   

Commercial loans

     610         2,619         3,229         41,139         44,368         —     

Consumer installment loans

     121         60         181        9,630         9,811         —     

All other loans

     —           —           —           1,993        1,993         —     
                                                     

Total loans

   $ 14,609       $ 36,921       $ 51,530       $ 474,292       $ 525,822       $ 389   
                                                     

Activity in the allowance for loan losses on non-covered loans for the three months ended March 31, 2011 and the year ended December 31, 2010 was comprised of the following (dollars in thousands):

 

     Three months ended
March  31, 2011
    Year ended
December 31, 2010
 

Beginning allowance

   $ 25,543      $ 18,169   

Provision for loan losses

     1,498        26,483   

Recoveries of loans charged off

     135        951   

Loans charged off

     (5,634     (20,060
                

Allowance at end of period

   $ 21,542      $ 25,543   
                

The following table presents activity in the allowance for loan losses on non-covered loans by loan category for the three months ended March 31, 2011 (dollars in thousands):

 

     Year ended
December 31, 2010
     Provision
Allocation
    Charge
offs
    Recoveries      Three months ended
March 31, 2011
 

Mortgage loans on real estate:

            

Residential 1-4 family

   $ 6,262       $ (2,251   $ (322   $ 16       $ 3,705   

Commercial

     5,287         2,107        (1,489     4         5,909   

Construction and land development

     10,039         37        (1,767     —           8,309   

Second mortgages

     406         (9     —          1         398   

Multifamily

     260        12       —          —           272   

Agriculture

     266         (195 )     —          —           71   
                                          

Total real estate loans

     22,520         (299     (3,578     21         18,664   

Commercial loans

     2,691         1,920        (2,003     19         2,627   

Consumer installment loans

     257         (102     (7 )     63         211   

All other loans

     75        (21 )     (46 )     32        40   
                                          

Total non-covered loans

   $ 25,543       $ 1,498      $ (5,634   $ 135       $ 21,542   
                                          

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

The following table presents charge-offs and recoveries for non-covered loans by loan category for the year ended December 31, 2010 (dollars in thousands):

 

     Year ended December 31, 2010  
     Charge-offs      Recoveries     Net
Charge-offs
 

Mortgage loans on real estate:

       

Residential 1-4 family

   $ 2,461       $ (1   $ 2,460   

Commercial

     1,352         (508     844   

Construction and land development

     12,759         (103     12,656   

Second mortgages

     360         (79     281   

Multifamily

     375         —          375   

Agriculture

     —           —          —     
                         

Total real estate loans

     17,307         (691     16,616   

Commercial loans

     2,125         (178     1,947   

Consumer installment loans

     497         (19     478   

All other loans

     131         (63     68   
                         

Total non-covered loans

   $ 20,060       $ (951   $ 19,109   
                         

The following table presents information on the non-covered loans evaluated for impairment in the allowance for loan losses as of March 31, 2011 and December 31, 2010 (dollars in thousands):

 

     March 31, 2011  
     Allowance for Loan Losses      Recorded Investment in Loans  
     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Total      Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Total  

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 1,802      $ 1,903      $ 3,705       $ 13,582       $ 119,745       $ 133,327   

Commercial

     3,016        2,893        5,909         48,371         152,646         201,017  

Construction and land development

     4,957        3,352        8,309         40,961         54,325         95,286  

Second mortgages

     249        149        398         498         7,931         8,429  

Multifamily

     —           272        272         —           15,356         15,356  

Agriculture

     18        53        71         251         2,769         3,020  
                                                     

Total real estate loans

     10,042        8,622        18,664         103,663         352,772         456,435   

Commercial loans

     1,068        1,559        2,627         4,098         42,994         47,092   

Consumer installment loans

     85        126        211        296         8,410         8,706  

All other loans

     —           40        40        —           2,245         2,245  
                                                     

Total loans

   $ 11,195      $ 10,347       $ 21,542       $ 108,057       $ 406,421       $ 514,478   
                                                     

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

     December 31, 2010  
     Allowance for Loan Losses      Recorded Investment in Loans  
     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Total      Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Total  

Mortgage loans on real estate:

                 

Residential 1-4 family

   $ 2,753      $ 3,509      $ 6,262       $ 14,347       $ 123,175       $ 137,522   

Commercial

     2,967        2,320        5,287         48,552         156,482         205,034  

Construction and land development

     5,392        4,647        10,039         39,712         64,051         103,763  

Second mortgages

     179        227        406         339         9,341         9,680  

Multifamily

     —           260        260         —           9,831         9,831  

Agriculture

     174        92        266         1,027         2,793         3,820  
                                                     

Total real estate loans

     11,465        11,055        22,520         103,977         365,673         469,650   

Commercial loans

     1,347        1,344        2,691         4,975         39,393         44,368   

Consumer installment loans

     30        227        257        209         9,602         9,811  

All other loans

     —           75        75        —           1,993         1,993  
                                                     

Total loans

   $ 12,842      $ 12,701       $ 25,543       $ 109,161       $ 416,661       $ 525,822   
                                                     

 

Loans individually evaluated for impairment include all loans reviewed regardless of whether or not they were deemed impaired.

Non-covered loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows:

Pass - A pass related loan is not adversely classified, as it does not display any of the characteristics for adverse classification.

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.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

The following tables present the composition of non-covered loans by credit quality indicator at March 31, 2011 and December 31, 2010 (dollars in thousands):

 

     March 31, 2011  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 109,298       $ 10,568       $ 11,194       $ 2,267       $ 133,327   

Commercial

     133,932         18,714         47,871         500         201,017   

Construction and land development

     40,746         13,580         40,480         480         95,286   

Second mortgages

     7,195         735         336         163         8,429   

Multifamily

     11,768        3,588        —           —           15,356   

Agriculture

     2,429         340        251         —           3,020   
                                            

Total real estate loans

     305,368         47,525         100,132         3,410         456,435   

Commercial loans

     41,055         1,944         3,161         932         47,092   

Consumer installment loans

     7,794         639         262        11         8,706   

All other loans

     1,888        357        —           —           2,245   
                                            

Total loans

   $ 356,105       $ 50,465       $ 103,555       $ 4,353       $ 514,478   
                                            
     December 31, 2010  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Mortgage loans on real estate:

              

Residential 1-4 family

   $ 112,595       $ 8,444       $ 13,839       $ 2,644       $ 137,522   

Commercial

     140,064         15,619         48,816         535         205,034   

Construction and land development

     45,448         17,156         39,183         1,976         103,763   

Second mortgages

     8,615         550         352         163         9,680   

Multifamily

     6,726        3,105        —           —           9,831   

Agriculture

     2,440         345        1,035         —           3,820   
                                            

Total real estate loans

     315,888         45,219         103,225         5,318         469,650   

Commercial loans

     36,452         1,506         4,604         1,806         44,368   

Consumer installment loans

     9,028         471         278        34         9,811   

All other loans

     1,993        —           —           —           1,993   
                                            

Total loans

   $ 363,361       $ 47,196       $ 108,107       $ 7,158       $ 525,822   
                                            

At March 31, 2011, the Company had 1-4 family mortgages in the amount $183.4 million pledged as collateral to the FHLB for a total borrowing capacity of $129.7 million.

4. LOANS COVERED BY FDIC SHARED LOSS AGREEMENT (COVERED LOANS)

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 acquisition (the “covered loans”). Of the total $198.3 million in loans acquired, $49.1 million met the criteria of 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 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.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

As of March 31, 2011 and December 31, 2010, the outstanding balance of the covered loans was $182.3 million and $191.5 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

 

     March 31, 2011     December 31, 2010  
     Amount      % of
Covered
Loans
    Amount      % of
Covered
Loans
 

Mortgage loans on real estate:

          

Residential 1-4 family

   $ 93,726         86.52   $ 99,313         85.96

Commercial

     2,700         2.49        2,800         2.42   

Construction and land development

     4,756         4.39        5,751         4.98   

Second mortgages

     6,946         6.41        7,541         6.53   

Multifamily

     32         0.03        38         0.03   

Agriculture

     —           —          —           —     
                                  

Total real estate loans

     108,160         99.84        115,443         99.92   

Commercial loans

     —           —          —           —     

Consumer installment loans

     169         0.16        94         0.08   

All other loans

     —           —          —           —     
                                  

Gross covered loans

   $ 108,329         100.00   $ 115,537         100.00
                                  

Activity in the allowance for loan losses on covered loans for the three months ended March 31, 2011 and the year ended December 31, 2010 was comprised of the following the following (dollars in thousands):

 

     Three months ended
March  31, 2011
     Year ended
December 31, 2010
 

Beginning allowance

   $ 829       $ —     

Provision for loan losses

     —           880   

Recoveries of loans charged off

     —           205   

Loans charged off

     —           (256
                 

Allowance at end of period

   $ 829       $ 829   
                 

The following table presents information on the covered loans collectively evaluated for impairment in the allowance for loan losses at March 31, 2011 and December 31, 2010 (dollars in thousands):

 

     March 31, 2011      December 31, 2010  
     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

   $ 526       $ 93,726       $ 526       $ 99,313   

Commercial

     303         2,700         303         2,800   

Construction and land development

     —           4,756         —           5,751   

Second mortgages

     —           6,946         —           7,541   

Multifamily

     —           32         —           38   

Agriculture

     —           —           —           —     
                                   

Total real estate loans

     829         108,160         829         115,443   

Commercial loans

     —           —           —           —     

Consumer installment loans

     —           169         —           94   

All other loans

     —           —           —           —     
                                   

Gross covered loans

   $ 829       $ 108,329       $ 829       $ 115,537   
                                   

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

The change in the accretable yield balance for the three months ended March 31, 2011 and the year ended December 31, 2010 is as follows (dollars in thousands):

 

Balance, January 1, 2010

   $ 56,792   

Accretion

     (13,759

Reclassification from (to) Non-accretable Yield

     32,685   
        

Balance, December 31, 2010

     75,718   

Accretion

     (3,820

Reclassification from (to) Non-accretable Yield

     (102
        

Balance, March 31, 2011

   $ 71,796   
        

The covered loans are not classified as nonperforming assets as of March 31, 2011, 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 purchased loans. As of March 31, 2011, there was an allowance for loan losses recorded on covered loans of $829,000. This allowance is the result of a change in the timing of expected cash flows for one of the covered loan pools.

At December 31, 2010, the acquisition, construction and development (ADC) pool originally purchased from the FDIC in 2009 had a carrying value of $410,000 in accordance with FASB Accounting Standards Codification (ASC) 310-30 (originally issued as AICPA Statement of Position No. 03-3, Loans and Debt Securities Acquired with Deteriorated Credit Quality). The amount and timing of future cash flows on the ADC pool, based on an analysis of the loans in the pool, were determined to be not reasonably estimatable. As a result, during the quarter ended March 31, 2011, management applied the cost recovery method to the ADC loan pool, which requires that all cash payments first be applied to principal. During the first quarter of 2011, sufficient cash payments were received on the ADC pool to lower the carrying value to $0, with excess payments being applied to interest income. Any subsequent payments will now be recognized as interest income.

5. FDIC AGREEMENTS AND FDIC INDEMNIFICATION ASSET

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the FDIC to assume all of the deposits and certain other liabilities and acquire substantially all of the assets of SFSB. Under the shared loss agreements that are part of that agreement, the FDIC will reimburse the Bank for 80% of losses arising from covered loans and foreclosed real estate assets on the first $118 million in losses of such covered loans and foreclosed real estate assets and for 95% of losses on covered loans and foreclosed real estate assets thereafter. Under the shared loss agreements, a “loss” on a covered loan or foreclosed real estate is defined generally as a realized loss incurred through a permitted disposition, foreclosure, short-sale or restructuring of the covered loan or foreclosed real estate. The reimbursements for losses on single family one-to-four residential mortgage loans are to be made monthly until the end of the month in which the tenth anniversary of the closing of the SFSB transaction occurs, and the reimbursements for losses on other covered assets are to be made quarterly until the end of the quarter in which the eighth anniversary of the closing of the SFSB transaction occurs. The shared loss agreements provide for indemnification from the first dollar of losses without any threshold requirement. The reimbursable losses from the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the SFSB transaction. New loans made after that date are not covered by the shared loss agreements. The carrying value of the shared loss agreements is detailed below.

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

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

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

In addition to the premium amortization, the balance of the FDIC indemnification asset is affected by expected payments from the FDIC. Under the terms of the shared loss agreements, the FDIC will reimburse the Company for loss events incurred related to the covered loan portfolio. These events include such things as future writedowns due to decreases in the fair market value of other real estate owned (OREO), net loan charge-offs and recoveries, and net gains and losses on OREO sales.

The following table presents the balances of the FDIC indemnification asset related to the SFSB transaction at March 31, 2011 and December 31, 2010 (dollars in thousands):

 

     Anticipated
Expected
Losses
    Estimated
Loss
Sharing
Value
    Amortizable
Premium
(Discount)
at PV
    FDIC
Indemnification
Asset

Total
 

January 1, 2010

   $ 88,943      $ 71,090      $ 5,017      $ 76,107   

Increases:

        

Writedown of OREO property to FMV

     3,028        2,422          2,422   

Decreases:

        

Net amortization of premium

         (3,165     (3,165

Reclassifications to FDIC receivable:

        

Net loan charge-offs and recoveries

     (8,521     (6,817       (6,817

OREO sales

     (8,858     (7,086       (7,086

Reimbursements requested from FDIC

     (3,865     (3,092       (3,092

Reforecasted Change in Anticipated Expected Losses

     (24,477     (19,517     19,517        —     
                                

December 31, 2010

     46,250        37,000        21,369        58,369   

Increases:

        

Writedown of OREO property to FMV

     875        700          700   

Decreases:

        

Net amortization of premium

         (2,745     (2,745

Reclassifications to FDIC receivable:

        

Net loan charge-offs and recoveries

     (650     (520       (520

OREO sales

     (12     (10       (10

Reimbursements requested from FDIC

     (324     (259       (259

Reforecasted Change in Anticipated Expected Losses

     (4,693     (3,754     3,754        —     
                                

March 31, 2011

   $ 41,446      $ 33,157      $ 22,378      $ 55,535   
                                

6. OTHER INTANGIBLES

Core deposit intangible assets are amortized over the period of expected benefit, ranging from 2.6 to 9 years. Core deposit intangibles are recognized, amortized and evaluated for impairment as required by ASC 350. As a result of the mergers with TFC and BOE, the Company recorded $15.0 million in core deposit intangible assets. Core deposit intangibles resulting from the Georgia and Maryland transactions equaled $3.2 million and $2.2 million, respectively, and will be amortized over approximately 9 years.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

Other intangible assets are presented in the following table (dollars in thousands):

 

     Core Deposit
Intangibles
 

Balance January 1, 2010

   $ 17,080  

Amortization

     (2,261
        

Balance December 31, 2010

     14,819   

Amortization

     (565
        

Balance March 31, 2011

   $ 14,254   
        

7. DEPOSITS

The following table provides interest-bearing deposit information, by type, as of March 31, 2011 and December 31, 2010 (dollars in thousands):

 

     March 31, 2011      December 31, 2010  

NOW

   $ 105,870       $ 106,248  

MMDA

     127,284        127,594   

Savings

     66,733         64,121   

Time deposits less than $100,000

     346,018         367,333   

Time deposits $100,000 and over

     219,508         234,070   
                 

Total interest-bearing deposits

   $ 865,413       $ 899,366   
                 

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. 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 ASC 825 elections as of March 31, 2011.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

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 are recorded at fair value on a recurring basis. The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis (dollars in thousands).

 

     March 31, 2011  
     Total      Level 1      Level 2      Level 3  

Investment securities available for sale

           

U.S. Treasury issue and U.S. government agencies

   $ 77,731       $ 2,580       $ 75,151       $ —     

State, county, and municipal

     49,657         282         49,375         —     

Corporate and other bonds

     5,094         —           5,094         —     

Mortgage backed securities

     80,865         30,921         49,944         —     
                                   

Total investment securities available for sale

     213,347         33,783         179,564         —     
                                   

Total assets at fair value

   $ 213,347       $ 33,783       $ 179,564       $ —     
                                   

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
                                   
     December 31, 2010  
     Total      Level 1      Level 2      Level 3  

Investment securities available for sale

           

U.S. Treasury issue and U.S. government agencies

   $ 89,574       $ 3,254       $ 86,320       $ —     

State, county, and municipal

     70,335         —           70,335         —     

Corporate and other bonds

     3,573         —           3,573         —     

Mortgage backed securities

     52,078         —           52,078         —     
                                   

Total investment securities available for sale

     215,560         3,254         212,306         —     
                                   

Total assets at fair value

   $ 215,560       $ 3,254       $ 212,306       $ —     
                                   

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
                                   

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 an AICPA Statement on Auditing Standard Number 70 (SAS 70) 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. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

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. For assets measured at fair value on a nonrecurring basis in 2010 and still held on the consolidated balance sheet at March 31, 2011, the following table provides the fair value measures by level of valuation assumptions used for those assets.

 

     March 31, 2011  
     Total      Level 1      Level 2      Level 3  

Impaired loans, non-covered

   $ 30,294       $ —         $ 24,443       $ 5,851   

Other real estate owned (OREO), non-covered

     7,332         —           —           7,332   

Other real estate owned (OREO), covered

     9,116         —           1,060         8,056   
                                   

Total assets at fair value

   $ 46,742       $ —         $ 25,503       $ 21,239   
                                   

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
                                   
     December 31, 2010  
     Total      Level 1      Level 2      Level 3  

Impaired loans, non-covered

   $ 14,083       $ —         $ 8,741       $ 5,342   

Other real estate owned (OREO), non-covered

     5,928         —           —           5,928   

Other real estate owned (OREO), covered

     9,889         —           1,060         8,829   
                                   

Total assets at fair value

   $ 29,900       $ —         $ 9,801       $ 20,099   
                                   

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
                                   

Impaired loans, non-covered

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, market value of similar debt, enterprise value, liquidation 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. The Bank frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 12 months old. The appraisal, based on the date of preparation, becomes only a part of the determination of the amount of any loan write-off, with current market conditions and the collateral’s location being other determinants. 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. Reviews of classified loans are performed by management on a quarterly basis.

Other real estate owned, covered and non-covered

Other real estate owned (OREO) assets are adjusted to fair value 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. 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 and there is no observable market price, the Company records the foreclosed asset within Level 3 of the fair value hierarchy.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

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 (dollars in thousands).

 

     March 31, 2011      December 31, 2010  
     Carrying Value      Estimated  Fair
Value
     Carrying Value      Estimated  Fair
Value
 

Financial assets:

           

Cash and cash equivalents

   $ 36,747       $ 36,747       $ 33,381       $ 33,381   

Securities available for sale

     213,347         213,347         215,560         215,560   

Securities held to maturity

     77,793         81,857         84,771         89,027   

Equity securities, restricted

     7,119         7,119         7,170         7,170   

Loans, non-covered

     492,734         485,505         500,005         491,621   

Loans, covered

     107,500         127,389         114,708         139,952   

FDIC indemnification asset

     55,535         31,799         58,369         49,765   

Accrued interest receivable

     3,655         3,655         3,826         3,826   

Financial liabilities:

           

Noninterest-bearing deposits

     64,128         64,128         62,359         62,359   

Interest-bearing deposits

     865,413         867,850         899,366         898,508   

Borrowings

     41,124         44,734         41,124         45,210   

Accrued interest payable

     1,318         1,318         1,557         1,557   

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, 2011. The Company applied the provisions of ASC 820 to the fair value measurements of financial instruments not recognized on the consolidated balance sheet at fair value, which include unimpaired non-covered loans, interest receivable, noninterest-bearing and interest-bearing deposits, other borrowings, and interest payable. 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.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

Securities held for investment

For securities held for investment, fair values are based on quoted market prices or dealer quotes.

Restricted securities

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

Loans not covered by FDIC shared loss agreement (non-covered loans)

For certain homogeneous categories of loans, such as some residential mortgages and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types 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.

Loans covered by FDIC shared loss agreement (covered loans)

Fair values for covered 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.

FDIC indemnification asset

Loss sharing assets are measured separately from the related covered assets as they are not contractually embedded in the covered assets and are not transferable with the assets should the Company choose to dispose of them. Fair value is estimated using projected cash flows related to the obligations under the shared loss agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These expected reimbursements do not include reimbursable amounts related to future covered expenditures. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. A reduction in loss expectations has resulted in the estimated fair value of the FDIC indemnification asset being lower than its carrying value. This creates a premium that is amortized over the life of the asset and is reflected in Note 5.

Accrued interest receivable

The carrying amounts of accrued interest receivable approximate fair value.

Financial Liabilities

Noninterest-bearing deposits

The carrying amount approximates fair value.

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.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

Long-term borrowings

The fair values of the Company’s long-term borrowings, such as FHLB advances, 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.

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.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

9. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income or loss available to common stockholders 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.

 

 

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

   Income
(Numerator)
    Weighted
Average
Shares
(Denominator)
     Per Common  Share
Amount
 

For the three months ended March 31, 2011

       

Basic EPS

   $ (1,466     21,468       $ (0.07

Effect of dilutive stock awards

     —          —           —     
                         

Diluted EPS

   $ (1,466     21,468       $ (0.07
                         

For the three months ended March 31, 2010

       

Basic EPS

   $ (3,033     21,468       $ (0.14

Effect of dilutive stock awards

     —          —           —     
                         

Diluted EPS

   $ (3,033     21,468       $ (0.14
                         

Excluded from the computation of diluted earnings per share were approximately 5.1 million and 5.2 million of awards, options or warrants, during the three months ended March 31, 2011 and 2010, respectively, because their inclusion would be anti-dilutive.

The Company has deferred the August and November 2010 and February 2011 payments of its regular quarterly cash dividend with respect to its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, which the Company issued to the United States Department of Treasury in connection with the Company’s participation in the Treasury’s TARP Capital Purchase Program in December 2008. The Company will also defer the May 2011 dividend payment. The total amount of accumulated dividends was $663,000 as of March 31, 2011, and that amount will increase to $884,000 with the deferral of the May payment.

10. DEFINED 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 participants effective December 31, 2010, resulting in a curtailment gain included in pension expense of $210,000 in 2010.

Components of Net Periodic Benefit Cost

 

     Three months ended  
(In thousands)    March 31, 2011     March 31, 2010  

Service cost

   $  —        $ 92   

Interest cost

     65        91   

Expected return on plan assets

     (75     (71

Amortization of prior service cost

     —          1   

Amortization of net obligation at transition

     —          (1

Amortization of net loss

     —          15   
                

Net periodic benefit cost

   $ (10   $ 127   
                

At March 31, 2011, employer contributions totalled $105,000 for the plan year. The Company is considering terminating the pension plan in the future. No determination has been made and the Company has not determined the financial impact of the termination of the plan.

 

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COMMUNITY BANKERS TRUST CORPORATION

Notes to Consolidated Financial Statements

 

11. CONTINGENCIES

See the Annual Report on Form 10-K for the period ended December 31, 2010 for information with respect to transaction-based bonus awards that the Company approved for the Company’s then chief strategic officer in the first quarter of 2010 and paid in the first and second quarters of 2010. There have been no developments to the issues disclosed in the 2010 Form 10-K and, as of May 13, 2011, these issues remain open.

 

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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, 2011 and results of operations of Community Bankers Trust Corporation (the “Company”) for the three months ended March 31, 2011 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, 2010.

OVERVIEW

The Company is a bank holding company that was incorporated under Delaware law on April 6, 2005. The Company is headquartered in Glen Allen, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 24 full-service offices in Virginia, Maryland and Georgia, as of April 30, 2011.

The Bank was established in 1926 and is headquartered in Tappahannock, Virginia. The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals and small businesses, including individual and commercial demand and time deposit accounts, commercial and consumer loans, travelers checks, safe deposit box facilities, investment services and fixed rate residential mortgages. Thirteen branches are located in Virginia, primarily from the Chesapeake Bay to just west of Richmond, seven are located in Maryland along the Baltimore-Washington corridor and four are located in the Atlanta, Georgia metropolitan market. The Bank closed its office in Rockbridge County, Virginia in April 2011.

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 loans 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 goodwill impairment and other charges, salaries and benefits, occupancy and equipment costs, professional fees, and other operational expenses. The provision for loan losses and income taxes materially affect income.

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

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

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

 

   

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

 

   

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

 

   

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

 

   

the ability of the Company to comply with regulatory actions, and the costs associated with doing so;

 

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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 Company’s compliance with, and the timing of future reimbursements from the FDIC to the Company under, the shared loss agreements;

 

   

assumptions and estimates that underlie the accounting for loan pools under the shared loss agreements;

 

   

consumer profiles and spending and savings habits;

 

   

the securities and credit markets;

 

   

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

 

   

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

 

   

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

 

   

inflation;

 

   

technology; and

 

   

legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 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 either when 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

 

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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 Non-covered 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 quarterly 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 of the allowance 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, management believes that it is more likely than not that the Bank 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, availability of current financial information, 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.

Allowance for Loan Losses on Covered Loans

The assets acquired in the Suburban Federal Savings Bank (SFSB) acquisition are covered by shared loss agreements with the FDIC. Under the shared loss agreements, the FDIC will reimburse the Bank for 80% of losses arising from covered loans and foreclosed real estate assets, on the first $118 million in losses of such covered loans and foreclosed real estate assets, and for 95% of losses on covered loans and foreclosed real estate assets thereafter. Under the shared loss agreements, a “loss” on a covered loan or foreclosed real estate is defined generally as a realized loss incurred through a permitted disposition, foreclosure, short-sale or restructuring of the covered loan or foreclosed real estate. The reimbursements for losses on single family one-to-four residential mortgage loans are to be made monthly until the end of the month in which the tenth anniversary of the closing of the transaction occurs,

 

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

The Company evaluated the acquired covered loans and has elected to account for them under ASC 310-30.

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

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

In the Company’s acquisition of TFC and BOE, the fair value of ASC 310 loans was determined based on assigned risk ratings, expected cash flows and the fair value of the collateral. The fair value of non ASC 310 loans was determined based on preliminary estimates of default probabilities. The Company determined which purchased loans were impaired at the time of the acquisition and considered those loans for ASC 310 application. Those loans that were not considered impaired at the time of acquisition were not considered for ASC 310.

As a result of the acquisitions of TFC and BOE, the Company had loans of $5.0 million at December 31, 2008 that met the criteria of ASC 310. Due to the immateriality of these loans in relation to the overall financial condition of the Company, detailed disclosures have not been included in the financial statements.

The covered loans from the SFSB transaction, subject to FASB ASC Topic 805, Business Combinations, were recorded at fair value and no separate valuation allowance was recorded at the date of acquisition. FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. The Company is applying the provisions of 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 Company has made an estimate of the total cash flows it expects to collect from a 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.

 

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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.

FDIC Indemnification Asset

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

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

Other Intangible Assets

FASB ASC 805, Business Combinations, requires that the purchase method of accounting be used for all business combinations after June 30, 2001. With purchase acquisitions, the Company is required to record assets acquired, including any intangible assets, and liabilities assumed at fair value, which involves relying on estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation methods. The Company records other intangibles per ASC 350, Intangibles-Goodwill and Others., Under ASC 350, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. ASC 350 discontinues any amortization of goodwill and other intangible assets with indefinite lives, but requires an impairment review at least annually or more often if certain conditions exist. The Company followed ASC 350 and determined that any core deposit intangibles will be amortized over the estimated useful life.

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.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-

 

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than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income.

As of March 31, 2011, the Company did not have any tax benefit disallowed 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 which 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. Included in deferred tax assets are the tax benefits derived from net operating loss carryforwards totaling $6.6 million. Management expects to utilize all of these carryforward amounts prior to expiration.

The Company and its subsidiaries are subject to U. S. federal income tax as well as various state income taxes. All years from 2006 through 2010 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

Net loss available to common stockholders was $1.5 million, or $0.07 per common share on a diluted basis, for the quarter ended March 31, 2011 compared with a net loss available to common stockholders of $3.0 million, or $0.14 per common share on a diluted basis, for the quarter ended March 31, 2010. The change in earnings performance was primarily driven by a reduction in the level of provision for loan losses. Provision for loan losses were $5.0 million in the first quarter of 2010 compared to $1.5 million in the first quarter of 2011. Also positively influencing the reduction in net loss for the first quarter of 2011 compared to the first quarter of 2010 was a $649,000, or 6.6%, improvement in noninterest expenses. Noninterest expenses declined from $9.9 million in the first quarter of 2010 to $9.2 million in the first quarter of 2011. Offsetting these improvements was a decline in total noninterest income, from $415,000 in the first quarter of 2010 to negative $1.4 million in the first quarter of 2011. This was due to the recognition of $2.7 million in FDIC indemnification asset amortization, which resulted in a reduction in the amount carried on the balance sheet that the Company anticipates it will collect from the FDIC on the loans covered by shared loss agreements.

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.”

 

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Net interest income was $10.1 million for the quarter ended March 31, 2011, compared with $10.1 million for the first quarter of 2010. The stable level of net interest income over these time frames is the result of a balance between decreases in total interest income of $1.9 million offset by a like decrease of $1.9 million in total interest expense. Loan interest income was adversely affected by declining loan balances as well as an increase in nonperforming loans. Continued aggressive deposit pricing strategies with respect to all deposit categories have resulted in the decreased interest expense.

The net interest margin on a tax equivalent basis for the quarter ended March 31, 2011 increased 29 basis points to 4.33% compared with 4.04% for the quarter ended March 31, 2010. The primary component influencing the net interest margin, was a lower overall interest expense relative to the deposit base. Management proactively lowered rates on virtually all deposits during 2010 in an effort to increase earnings. The average cost of time deposits declined 63 basis points, from 1.99% for the quarter ended March 31, 2010 to 1.36% for the quarter ended March 31, 2011.

An additional benefit to the net interest margin was the improved yield on FDIC covered loans. The yield on covered loans equaled 13.59% for the quarter ended March 31, 2011, an improvement of 378 basis points from the quarter ended March 31, 2010. This is primarily the result of better than expected performance on these loans since the forecast at the acquisition date. FDIC covered loans are held on the balance sheet at carrying value.

At December 31, 2010, the acquisition, construction and development (ADC) pool originally purchased from the FDIC in 2009 had a carrying value of $410,000 in accordance with FASB Accounting Standards Codification (ASC) 310-30 (originally issued as AICPA Statement of Position No. 03-3, Loans and Debt Securities Acquired with Deteriorated Credit Quality). The amount and timing of future cash flows on the ADC pool, based on an analysis of the loans in the pool, were determined to be not reasonably estimatable. As a result, during the quarter ended March 31, 2011, management applied the cost recovery method to the ADC loan pool, which requires that all cash payments first be applied to principal. During the first quarter of 2011, sufficient cash payments were received on the ADC pool to lower the carrying value to $0, with excess payments being applied to interest income. Any subsequent payments will now be recognized as interest income.

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 quarters ended March 31, 2011 and 2010. The tables also set 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.

 

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COMMUNITY BANKERS TRUST CORPORATION

NET INTEREST MARGIN ANALYSIS

AVERAGE BALANCE SHEETS

 

     Three months ended March 31, 2011     Three months ended March 31, 2010  

(dollars in thousands)

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

ASSETS:

              

Loans non covered, including fees

   $ 517,805      $ 7,234         5.59   $ 577,715      $ 8,723         6.04

FDIC covered loans, including fees

     112,463        3,820         13.59        146,460        3,593         9.81   
                                                  

Total loans

     630,268        11,054         7.02        724,175        12,316         6.80   

Interest-bearing bank balances

     14,681        14         0.39        22,614        30         0.53   

Federal funds sold

     4,611        2         0.19        1,696        1         0.16   

Securities (taxable)

     257,244        1,912         2.97        201,166        2,005         3.99   

Securities (tax exempt)(1)

     43,874        624         5.69        92,355        1,355         5.87   
                                                  

Total earning assets

     950,678        13,606         5.73        1,042,006        15,707         6.03   

Allowance for loan losses

     (24,918          (18,647     

Non-earning assets

     169,080             200,668        
                          

Total assets

   $ 1,094,840           $ 1,224,027        
                          

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Demand - interest-bearing

   $ 232,483      $ 346         0.60      $ 211,845      $ 400         0.76   

Savings

     64,958        85         0.52        60,339        93         0.62   

Time deposits

     580,509        2,548         1.76        705,658        4,364         2.47   
                                                  

Total deposits

     877,950        2,979         1.36        977,842        4,857         1.99   

Federal funds purchased

     140        1         0.61        537        —           0.14   

FHLB and other borrowings

     41,124        331         3.22        41,124        331         3.22   
                                                  

Total interest-bearing liabilities

     919,214        3,311         1.44        1,019,503        5,188         2.04   

Noninterest-bearing deposits

     62,459             60,746        

Other liabilities

     5,548             11,817        
                          

Total liabilities

     987,221             1,092,066        

Stockholders’ equity

     107,619             131,961        
                          

Total liabilities and stockholders’ equity

   $ 1,094,840           $ 1,224,027        
                          

Net interest earnings

     $ 10,295           $ 10,519      
                          

Net interest spread

          4.28          3.99
                          

Net interest margin

          4.33          4.04
                          

 

(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 Non-covered 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.

 

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

The provision for loan losses for non-covered loans was $1.5 million for the quarter ended March 31, 2011. This compares with a $5.0 million provision for the quarter ended March 31, 2010. The ratio of the allowance for loan losses to nonperforming assets was 43.39% at March 31, 2011, compared to 59.61% at December 31, 2010. The ratio of allowance for loan losses to total non-covered loans was 4.19% at March 31, 2011 compared with 4.86% at December 31, 2010. The decrease in the allowance for loan losses to total non-covered loans from December to March was mainly the result of aggressive charge-offs for non-performing loans. Net charged-off loans of $5.5 million for the quarter ended March 31, 2011 compared with net charged-off loans of $8.7 million for the quarter ended December 31, 2010.

While the covered loan portfolio contains significant risk, it was considered in determining the initial fair value, which was reflected as the carrying value recorded at the time of the SFSB transaction, less the FDIC guaranteed portion of losses on covered assets. There was no provision expense related to this portfolio in the first quarter of 2011.

Noninterest Income

For the quarter ended March 31, 2011, noninterest income equaled negative $1.4 million versus $415,000 in the first quarter of 2010. This change was due primarily to the increase of the FDIC indemnification asset amortization of $2.4 million and a reduction in other noninterest income of $1.5 million, offset by a $1.8 million reduction in net losses on sales and write-down on other real estate owned, a $307,000 increase in gains on sales of securities and an increase of $11,000 in service charges on deposit accounts.

The increased FDIC indemnification asset amortization is the result of improved forecasted performance from the loan pools acquired from the FDIC. Based on current forecasts, as both projected losses and FDIC reimbursements decline, the FDIC indemnification asset amortization increases to reduce the FDIC indemnification asset over the life of the FDIC shared loss agreements. During the first quarter of 2011, the Company’s projected expected loan pool losses declined by $4.8 million, requiring the Company to increase the rate of FDIC indemnification asset amortization. As a result, the Company’s FDIC indemnification asset amortization totaled $2.7 million for the quarter as compared to $1.2 million for the fourth quarter of 2010. Although loss projections could change, this level of quarterly amortization could continue based on current forecasts. However, lower losses also improve future accretion interest income performance and reduce the losses that the Company must absorb under the FDIC shared loss agreements, which is currently twenty percent.

Noninterest Expense

Noninterest expenses were $9.2 million for the first quarter of 2011 compared with $9.9 million for the first quarter of 2010. This represents a $649,000, or 6.6%, decrease. Salaries and employee benefits for the first quarter of 2011 were $4.2 million or 45.6% of all noninterest expenses, compared with $5.1 million or 52.0% of all noninterest expenses for the first quarter of 2010. This represents a decrease of $927,000, or 18.1%. In late September 2010, the Company announced staffing and management changes that reduced the Company’s work force by approximately ten percent. Professional fees declined $143,000, or 42.8%, from $334,000 in the first quarter of 2010 compared to $191,000 in the first quarter of 2011. Equipment expenses declined $82,000 from the first quarter of 2010 to the same period in 2011. Data processing expenses declined $54,000 during this time frame.

Income Taxes

Income tax benefit was $838,000 for the three months ended March 31, 2011, compared with an income tax benefit of $1.7 million in the first quarter of 2010. This is reflective of the higher losses incurred in the first quarter of 2010.

 

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FINANCIAL CONDITION

At March 31, 2011, the Company had total assets of $1.085 billion, a decrease of $30.1 million, or 2.7%, from total assets of $1.116 billion at December 31, 2010. Total loans, including loans covered by the FDIC shared loss agreements of $108.3 million, were $622.6 million at March 31, 2011, decreasing $18.5 million, or 2.9%, from $641.1 million at December 31, 2010. The carrying value of covered loans declined $7.2 million, or 6.2%, from December 31, 2010. The reduction in the covered loan portfolio was due to the planned disposition of FDIC covered assets and declining balances of FDIC covered loans. Non-covered loans equaled $514.3 million at March 31, 2011, declining $11.3 million, or 2.1%, since December 31, 2010. The decline in loan volume within the non-covered loan portfolio was the direct result of $5.5 million in net loan charge-offs coupled with loan run-off and an overall decrease in loan demand.

The Company’s securities portfolio decreased $9.2 million, or 3.0%, during the first quarter of 2011 to equal $298.3 million. The Company had Federal funds sold of $5.0 million at March 31, 2011 versus $2.0 million at December 31, 2010. Securities balances declined during the first quarter of 2011 to offset declines in deposit balances as well as de-leverage the Company’s balance sheet, which increases the tier 1 leverage capital ratio, and to shorten the duration of the Company’s asset base and make it less vulnerable to an increase in interest rates. The sales also resulted in a gain of $661,000, or $436,000 net of tax effect.

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 $213.3 million at March 31, 2011 and $215.6 million at December 31, 2010. At March 31, 2011, the Company had a net unrealized loss on the AFS portfolio of $331,000 compared with a net unrealized loss of $219,000 at December 31, 2010.

Total deposits at March 31, 2011 were $929.5 million, decreasing $32.2 million from December 31, 2010. Time deposits declined $35.9 million during the first quarter of 2011 as management continued to lower rates among all regions, as loan demand remained weak and covered loans continued to decline in volume. The Company is attempting to restructure the deposit mix away from higher priced time deposits and more into lower cost transactional accounts. The most notable change has been the increase in savings accounts, which increased $2.6 million, or 4.1%, during the first quarter of 2011. The Company’s total loan-to-deposit ratio was 67.0% at March 31, 2011 compared to 66.7% at December 31, 2010.

The Company had Federal Home Loan Bank (FHLB) advances of $37.0 million at each of March 31, 2011 and December 31, 2010.

Stockholders’ equity at March 31, 2010 was $105.9 million and represented 9.8% of total assets. Stockholders’ equity was $107.1 million, or 9.6% of total assets, at December 31, 2010.

Asset Quality – non-covered assets

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

Non-covered loan quality is continually monitored, and the Company’s management has established an allowance for loan losses that it believes is appropriate for the risks inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and appropriateness of collateral and guarantors, non-performing 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 Non-covered loans in the Critical Accounting Policies section above for further discussion.

 

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The Company maintains a list of non-covered 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. Non-covered nonperforming assets totaled $49.6 million at March 31, 2011 and net charge-offs were $5.5 million for the three month period ended March 31, 2011. This compares with nonperforming assets of $42.8 million and net charge-offs of $19.1 million at and for the year ended December 31, 2010.

Nonperforming non-covered loans increased $5.4 million during the first quarter of 2011. Additions to nonaccrual loans totaled $14.4 million, primarily attributable to approximately four relationships relating to loans for construction and land development and income producing commercial property, totaling $11.4 million, which are secured by real estate. The remaining increase related primarily to loans for residential property and commercial real estate, which are also secured by real estate. There were $5.6 million in charge-offs taken during the quarter, of which three commercial loan customers aggregated $1.7 million. The remaining charge-offs were centered in commercial real estate, construction and land development, and residential real estate loans. Foreclosures for the quarter totaled $1.9 million and $1.2 million were reinstated to accruing status.

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 has modified its application of the definition of impaired loans to include all troubled debt restructured and nonaccrual loans. In addition, the Company reviews all substandard and doubtful loans greater than $100,000 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.

The Company has identified a material weakness related to its process of identifying impaired loans. See Item 4 of this report for further discussion.

See Note 3 to the Company’s financial statements for information related to the allowance for loan losses. At March 31, 2011 and December 31, 2010, total impaired non-covered loans equaled $51.6 million and $45.0 million, respectively. Management has adopted a nine point risk rating system for which credits are continually monitored for proper classification. The increase in impaired loans demonstrates weakening economic conditions specifically in the real estate market and management’s determination that these credits warrant substandard or worse classification.

 

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The following table sets forth selected asset quality data, excluding FDIC covered assets, and ratios for the dates indicated:

 

(dollars in thousands)             
     March 31, 2011     December 31, 2010  

Nonaccrual loans

   $ 42,029      $ 36,532   

Loans past due over 90 days and accruing interest

     282        389   
                

Total nonperforming non-covered loans

     42,311        36,921   

Other real estate owned (OREO) – non-covered

     7,332        5,928   
                

Total nonperforming non-covered assets

   $ 49,643      $ 42,849   
                

Accruing troubled debt restructure loans

   $ 4,481      $ 4,007   

Balances

    

Allowance for loan losses

   $ 21,542      $ 25,543   

Average loans during quarter, net of unearned income

     517,805        539,503   

Loans, net of unearned income

     514,276        525,548   

Ratios

    

Allowance for loan losses to loans

     4.19     4.86

Allowance for loan losses to nonperforming assets

     43.39     59.61

Allowance for loan losses to nonaccrual loans

     51.26     69.92

Nonperforming assets to loans and other real estate

     9.52     8.06

Net charge-offs for quarter to average loans, annualized

     4.25     6.47

The Company performs troubled debt restructures and other various loan workouts whereby an existing loan may be restructured into multiple new loans. At March 31, 2011, the Company had 24 loans that met the definition of a troubled debt restructure (“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. Two of these loans were restructured using multiple new loans. The aggregated outstanding principal of TDR loans at March 31, 2011 was $12.0 million, of which $7.5 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 foregoing 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 the time of its 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. Once the A loan has received 12 consecutive payments, it may no longer be reported as a TDR. The B loan is placed on nonaccrual. Under the terms of each loan, the borrower’s payment is contractually due.

 

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A further breakout of nonaccrual loans, excluding covered loans, at March 31, 2011 and December 31, 2010 is below (dollars in thousands):

 

     March 31, 2011     December 31, 2010  
     Amount of
Nonaccrual
     % of Non-Covered
Loans
    Amount of
Nonaccrual
     % of Non-Covered
Loans
 

Mortgage loans on real estate:

          

Residential 1-4 family

   $ 8,421         6.32   $ 9,600         6.98

Commercial

     8,589         4.27     7,181         3.50

Construction and land development

     22,804         23.93     16,854         16.24

Second mortgages

     289         3.43     218         2.25

Multifamily

     —           —          —           —     

Agriculture

     53         1.75     —           —     
                      

Total real estate loans

     40,156         8.80     33,853         7.21

Commercial loans

     1,734         3.68     2,619         5.90

Consumer installment loans

     139         1.60     60         0.61

All other loans

     —           —          —           —     
                      

Gross loans

   $ 42,029         8.17   $ 36,532         6.95
                      

At March 31, 2011, the Company had 23 construction and land development credit relationships in nonaccrual status. The borrowers under 16 of these relationships are residential land developers, and the borrowers under the remaining seven are commercial land developers. All of the relationships are secured by the real estate to be developed, and almost all of such projects are in the Company’s central Virginia market. The total amount of the credit exposure outstanding at March 31, 2011 was $22.8 million. These loans have either been charged-down or sufficiently reserved against to equate to the current expected realizable value.

During the first quarter of 2011, the Company charged off $1.8 million with respect to seven of these relationships. The total amount of the allowance for loan losses attributed to all 23 relationships was $8.3 million at March 31, 2011, or 36.4% of the total credit exposure outstanding. The Company establishes its reserves as described above in Allowance for Loan Losses on Non-covered 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 12 months. 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 – covered assets

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

The Company makes an estimate of the total cash flows that it expects to collect from a pool of covered 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.

 

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Covered assets that would normally be considered nonperforming except for the accounting requirements regarding purchased impaired loans and other real estate owned covered by the FDIC shared loss agreements at March 31, 2011 and December 31, 2010 are as follows;

 

(dollars in thousands)             
     March 31, 2011     December 31, 2010  

Nonaccrual covered loans(1)

   $ 18,440      $ 21,986   

Fair value adjustment

     (10,435     (12,430
                

Nonaccrual covered loans at fair value

     8,005        9,556   

Other real estate owned (OREO) - covered

     9,116        9,889   
                

Total nonperforming covered assets

   $ 17,121      $ 19,445   
                

 

(1) 

Amount is based on contractual book value. Contractual book value of total covered loans is $182.3 million and $191.5 million at March 31, 2011 and December 31, 2010, respectively. In accordance with ASC 310, covered loans are recorded at carrying value of $108.3 million and $115.5 million at March 31, 2011 and December 31, 2010, respectively.

Capital Requirements

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

The federal banking regulators have defined three tests for assessing the capital strength and adequacy of banks, based on two definitions of capital. “Tier 1 capital” is defined as common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles. “Tier 2 capital” is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance. “Total capital” is defined as tier 1 capital plus tier 2 capital. Three risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets and are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. “Tier 1 risk-based capital” is tier 1 capital divided by risk-weighted assets. “Total risk-based capital” is total capital divided by risk-weighted assets. The leverage ratio is tier 1 capital divided by total average assets.

Total stockholders’ equity was $105.9 million at March 31, 2011. The Company’s ratio of total risk-based capital was 15.8% at March 31, 2011 compared to 15.6% at December 31, 2010. The tier 1 risk-based capital ratio was 14.7% at March 31, 2011 and 14.4% at December 31, 2010. The Company’s tier 1 leverage ratio was 8.5% at March 31, 2011 and 8.1% at December 31, 2010. All capital ratios exceed regulatory minimums. In the fourth quarter of 2003, BOE issued trust preferred subordinated debt that qualifies as regulatory capital. This trust preferred debt, which has been assumed by the Company, has a 30-year maturity with a 5-year call option and was issued at a rate of three month LIBOR plus 3.0%. The weighted average cost of this instrument was 3.3% during the quarter ended March 31, 2011.

The Company will defer the May 2011 payment of its regular quarterly cash dividend with respect to its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, which the Company issued to the United States Department of Treasury in connection with the Company’s participation in the Treasury’s TARP Capital Purchase Program in December 2008. The Company had previously deferred the August and November 2010 and February 2011 payments. The Company has also deferred, beginning in September 2010, the interest payments that it makes with respect to trust preferred subordinated debt.

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

 

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include cash, interest-bearing deposits with banks, federal funds sold, and certain investment securities. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest-earning assets and interest-bearing liabilities. At each of March 31, 2011 and December 31, 2010, the Company’s interest-earning assets exceeded its interest-bearing liabilities by approximately $32.9 million.

Off-Balance Sheet Arrangements and Contractual Obligations

A summary of the contract amount of the Bank’s exposure to off-balance sheet risk as of March 31, 2011 and December 31, 2010, is as follows (dollars in thousands):

 

     March 31, 2011      December 31, 2010  

Commitments to extend credit

   $ 56,191       $ 63,659   

Standby letters of credit

     11,645         12,114   
                 

Total commitments with off-balance sheet risks

   $ 67,836       $ 75,773   
                 

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 Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

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

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

 

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.

 

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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 updated monthly. 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 200 basis point upward shift and a 200 basis point downward shift in interest rates. 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 and 200 basis points at March 31, 2011:

 

     Change in net interest income  
     %     $  

Change in Yield curve

    

+200 bp

     (1.1 )%    $ (386

+100 bp

     (0.8 )%      (283

most likely

     0     —     

–100 bp

     3.6     1,308   

–200 bp

     3.0     1,084   

At March 31, 2011, the Company’s interest rate risk model indicated that, in a rising rate environment of 200 basis points over a 12 month period, net interest income could decrease by 1.1%. For the same time period, the interest rate risk model indicated that in a declining rate environment of 200 basis points, net interest income could increase by 3.0%. 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.

 

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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 recently selected 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 not 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. The Certifying Officers based this conclusion on the fact that the Company had a material weakness with respect to its process for identifying impaired loans. Additional information with respect to this issue is included in the discussion below.

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 generally accepted accounting principles.

In the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, management’s assessment of the effectiveness of the Company’s internal control over financial reporting cited a material weakness in the Company’s internal controls relating to its process for identifying impaired loans, as described below. A material weakness is a significant deficiency (as defined in the Public Company Accounting Oversight Board’s Auditing Standard No. 5), or combination of deficiencies, such that there is a reasonable possibility that a material misstatement in the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their work. While management is not required to re-assess the effectiveness of internal control over financial reporting during the fiscal year, the Company has concluded that the material weakness continues to exist as of March 31, 2011, as described below.

In the fourth quarter of 2010, the Company determined that, as a result of credit downgrades reported in the second quarter of 2010 due to perceived credit weaknesses, the loans that the Company identified as “impaired” included all loans risk-rated substandard and doubtful and thus included some loans that were not impaired under generally accepted accounting principles (GAAP). The GAAP definition states that 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 the contractual terms of the loan agreement. As a consequence, the Company determined that it inadvertently overstated the total amount of impaired loans during the second and third quarters of 2010, as the substandard and doubtful loans included in the second and third quarters were rated as such due to collateral deficiencies or financial documentation weaknesses but did not necessarily indicate impairment under the GAAP definition. Notwithstanding this situation, the Company does not believe that this overstatement has had any material impact on the allowance for loan losses calculation for any period, as the portion of the allowance that was attributable to loans inaccurately designated as “impaired” would have nevertheless been incorporated in the general component of the allowance

In the first quarter of 2011, the Company modified its application of the definition of impaired loans to include all troubled debt restructured and nonaccrual loans. In addition, the Company reviewed all substandard and doubtful loans greater than $100,000 that were 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. As described in the next section below, the Company has also taken a number of steps to improve its process for identifying impaired loans.

 

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As a result of the magnitude of the changes that the Company made to its level of impaired loans during 2010 and the Company’s continued efforts to appropriately identify loans deemed impaired, the Company has determined that the material weakness continues to exist as of March 31, 2011.

Remediation Steps to Address Material Weakness

To address the issues described above, the Company has taken the remediation steps discussed below.

The Company has centralized key credit administration functions, and these efforts are resulting in a number of improvements in these functions, including the current remediation of the material weakness in the Company’s internal controls relating to its process for identifying impaired loans. During 2010, the Company implemented an entity-wide credit processing program that includes a risk rating tool, requires detailed documentation for use in the underwriting process, enhances management’s ability to measure risk and standardizes underwriting across the Bank. In the first quarter of 2011, the Company hired a new chief credit officer with nearly 40 years of credit experience in the banking industry and appointed a new senior credit officer with 22 years of credit experience in the banking industry. Also, during the first quarter of 2011, the Company enhanced its oversight of potential troubled assets by creating a new internal special assets committee, and oversight at the Board of Directors level has been enhanced by a new credit committee. These actions have resulted in the implementation of key processes and procedures for credit administration, including a clear definition for credits that are deemed to be “impaired”.

Management continues to develop the process and procedures for the actual evaluation of potentially impaired loans on an entity-wide basis, including clear documentation to ensure consistent and accurate assessments. The Company will also conduct appropriate training across the organization on this and related issues, as lenders in the organization must analyze and evaluate key credit issues on a consistent basis. Notwithstanding these additional necessary steps, the restructuring of the credit administration function now provides for the review of all evaluations of impaired loans for accuracy.

 

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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, 2010.

 

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

None.

 

Item 3. Defaults upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

As previously reported, on September 30, 2009, the Company received a comment letter from the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”) with respect to disclosures in certain of its periodic reports filed in 2009, and the Company received follow-up comment letters with respect to disclosures in periodic reports filed in 2009 and 2010. The Staff has notified the Company that it has completed its review of these filings and that it does not have any further comments at this time.

 

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*

 

* Filed herewith.

 

 

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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
     

Executive Vice President

(principal executive officer)

Date: May 13, 2011      
     

/s/ Bruce E. Thomas

      Bruce E. Thomas
     

Executive Vice President and Chief Financial Officer

(principal financial officer)

Date: May 13, 2011      

 

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