The Bank of Fincastle Post Office Box 107 Fincastle, Virginia 24090 Telephone 540-473-2761 Facsimile 540-473-7136 July 26, 2017 Dear Fellow Shareholder: You are cordially invited to attend The Bank of Fincastle s Annual Shareholders Meeting at 9:00 a.m. on Tuesday, August 15, 2017, at The Glebe located at 200 The Glebe Blvd in Daleville, Virginia 24083. The enclosed Notice of the 2017 Annual Meeting of Shareholders and Proxy Statement describes the matters to be presented at the Annual Meeting. Also enclosed is a President s Message, along with our balance sheet and income statement for the fiscal year ended December 31, 2016 which will be reviewed as well. Please give them your prompt and careful attention. Because we want to keep our shareholder s informed, we will post our annual and quarterly reports and other important information on the Bank s website under Shareholder Relations at www.bankoffincastle.com. You may also request a complete set of the Bank s audited consolidated financial statements for the year ended December 31, 2016 by calling Michael Jasper at 540-473-2761. Our common stock is traded on the OTC Pink marketplace maintained by OTC Markets Group Inc. under the trading symbol BFTL. You may vote by mail, fax, internet or phone as indicated on the enclosed proxy. Regardless of whether you will be able to attend the Annual Shareholders Meeting, it is important that your shares be represented and your vote recorded. We appreciate your continued loyalty and support of The Bank of Fincastle and hope you will be able to attend the Annual Shareholders Meeting, either in person or by proxy. Sincerely, George E. Holt, III Chairman GH/mpf Enclosure
PRESIDENT S MESSAGE This past year s numbers are as disappointing to us as they are to you. We are not accustomed to facing losses, as we are historically a strong performing financial institution. On the surface the numbers are very disappointing, but the numbers don t tell the whole story. They reflect only a snapshot in time of an institution with a heritage of uninterrupted service to our community that dates back to 1875. To understand the numbers of 2016, we must go back several years. Much of our performance over the past fiscal year is the result of loans made in the real estate market years ago. We must now face the financial consequences of borrowers who have failed to repay their loans. Total assets have declined $10,442,959 or 5%. Loans decreased $23,754,682 or 16% due to the problem loans in our portfolio. Total deposits decreased by $2,748,861 as we made a strategic move to sell our Bedford Branch, which we evaluated to be operationally unprofitable and outside of our target market area. Losses in our loan portfolio led to a decrease in our net interest income by 4% from $6,316,088 to $6,073,289. Our noninterest income decreased by $21,873 or 2% and our non interest expense decreased by $242,543 or 3%. Overall, for the second straight year the bank lost money finishing 2016 with a net loss of $6,877,804. As difficult as the numbers are, we made the painful but necessary move to address the problems of our past headon so that we could clear the way for a brighter future. We have a strategic plan in place, and I am confident that we will continue to be what we have always been, a vital and positive partner in our community s prosperity. I am not making any excuses for the numbers. The numbers are what they are and accurately reflect the financial condition of the bank. I assure you that everyone here is working hard for our customers and shareholders by putting in place new policies and processes that will allow us to move forward. From a personal standpoint, I came to The Bank of Fincastle believing in the bank, the staff and this community. Nothing has changed in my perspective. I believe in our ability to turn things around. We have the right people and the right locations. We are working to stay at the forefront of banking services and technology. We are part of a growing community and are committed to getting our fair share of new business opportunities through exceptional personal service, local-decision making, and accountability. Our legacy as the preferred banking institution will continue. We appreciate your continued commitment. Sincerely, Scott Steele President & CEO
THE BANK OF FINCASTLE AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 2016 and 2015 ASSETS 2016 2015 Cash and due from banks $ 5,034,365 $ 5,025,316 Interest-bearing deposits with banks 4,606,719 620,880 Federal funds sold 80,000 - Investment securites held to maturity 51,201,570 42,067,174 Restricted investment securities 250,950 252,350 Loans held for sale 734,701 982,609 Loans, net of allowance for loan losses 120,948,482 144,703,164 of $3,419,535 at 2016 and $2,912,112 at 2015 Premises and equipment, net 6,487,849 7,593,774 Accrued interest receivable 409,675 394,766 Other real estate owned 5,801,416 4,277,579 Other assets 10,844,292 10,925,366 Total assets $ 206,400,019 $ 216,842,978 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing demand deposits $ 63,883,927 $ 60,779,347 Interest-bearing deposits 126,435,669 132,289,110 Total deposits 190,319,596 193,068,457 Accrued interest payable 61,069 67,430 Federal funds purchased - 783,000 Other liabilities 863,147 890,080 Total liabilities 191,243,812 194,808,967 Stockholders' equity Common stock, $0.04 par value; 10,000,000 shares authorized, 2,281,915 shares issued and outstanding 91,277 91,277 Surplus 5,057,723 5,057,723 Retained earnings 10,007,207 16,885,011 Total stockholders' equity 15,156,207 22,034,011 Total liabilities and stockholders' equity $ 206,400,019 $ 216,842,978
THE BANK OF FINCASTLE AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (LOSS) Years Ended December 31, 2016 and 2015 2016 2015 INTEREST INCOME Interest and fees on loans $ 6,349,906 $ 6,836,944 Interest on investment securities, taxable 310,708 268,194 Interest on investment securities, tax-exempt 8,948 9,425 Interest - other 102,712 46,451 Total interest income 6,772,274 7,161,014 INTEREST EXPENSE Interest on deposits 698,985 844,926 Net interest income 6,073,289 6,316,088 PROVISION FOR LOAN LOSSES 8,091,000 5,147,000 Net interest income (loss) after provision for loan losses (2,017,711) 1,169,088 NONINTEREST INCOME Service fees 228,535 306,062 Rental income 211,170 234,236 Bank card and credit card interchange fees 318,460 283,269 Other income 510,751 467,222 Total noninterest income 1,268,916 1,290,789 NONINTEREST EXPENSE Salaries and employee benefits 3,080,757 3,063,388 Occupancy and equipment 717,800 851,687 Data processing expenses 694,852 660,565 Legal and professional fees 207,233 234,073 Postage, stationery and supplies 106,545 105,228 Bank franchise tax 8,470 79,091 FDIC insurance assessment 304,170 299,668 Losses on other real estate owned 1,299,825 1,971,267 Expenses of other real estate owned 374,653 96,910 Other expenses 1,107,114 782,085 Total noninterest expense 7,901,419 8,143,962 LOSS BEFORE INCOME TAXES (8,650,214) (5,684,085) INCOME TAX (EXPENSE) BENEFIT Current (12,892) 1,129,682 Deferred 1,785,302 881,035 Total income tax benefit 1,772,410 2,010,717 NET LOSS $ (6,877,804) $ (3,673,368) Per share data: Loss per share $ (3.01) $ (1.61)
NOTICE OF THE 2017 ANNUAL MEETING OF STOCKHOLDERS TO THE STOCKHOLDERS OF THE BANK OF FINCASTLE: NOTICE is hereby given that the 2017 Annual Meeting of Stockholders of The Bank of Fincastle (the "Bank") will be held at 9:00 a.m. on Tuesday, August 15, 2017, at The Glebe, 200 The Glebe Blvd, Daleville, Virginia 24083, for the following purposes: 1. To amend the Articles of Incorporation of the Bank by adding the following: ARTICLE V BOARD OF DIRECTORS The management, control and government of the Bank shall be vested in the Board of Directors, which shall be composed of no less than 5 nor more than 9 directors which minimum and maximum number of directors may not be changed except by amendment to the Articles of Incorporation. The Directors shall be divided into (3) groups, Group I, Group II, and Group III, as nearly equal in number as possible. At the Annual Meeting of the Bank, Directors of Group I shall be elected for a term of one year, Directors of Group II shall be elected for a term of two years, and Directors of Group III shall be elected for a term of three years. After the expiration of their initial term of office, Directors of each group shall be elected for three (3) year terms. All directors shall remain in office until their successors have been duly elected by the shareholders and qualified. 2. If the amendment to the Articles of Incorporation described in Item 1 above is approved, to elect the seven directors described in the Proxy Statement dated July 26, 2017 to the staggered terms set forth below to serve until the expiration of their term and his/her successor (if any) shall have been duly elected and qualified. Group I Term ending 2018 John W. Rader, Jr. Group II Term ending in 2019 J. Allen Layman Steven W. Sonny Spickard C. Ray Sprinkle Group III Term ending in 2020 Charles Scott Steele George E. Holt, III Jean R. Craft 3. If the amendment to the Articles of Incorporation described in Item 1 above is not approved, to elect the seven directors described in the Proxy Statement dated July 26, 2017 and as set out below to a one year term to serve until the expiration of their term and his/her successor (if any) shall have been duly elected and qualified. John W. Rader, Jr. J. Allen Layman Steven W. Sonny Spickard C. Ray Sprinkle Charles Scott Steele George E. Holt, III Jean R. Craft
4. To transact such other business as may properly come before the Meeting. Your attention is directed to the Proxy Statement accompanying this Notice for a more complete statement regarding the matters proposed to be acted upon at the Meeting. Only those stockholders of record as of the close of business on July 17, 2017, shall be entitled to vote at the Annual Meeting. To assure that your shares are represented at the Annual Meeting, you may also vote by mail, fax, internet or phone as indicated on the enclosed proxy. By Order of the Board of Directors. July 26, 2017 George E. Holt, III Chairman
PROXY STATEMENT OF THE BANK OF FINCASTLE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD AUGUST 15, 2017 This Proxy Statement is furnished on July 26, 2017 in connection with the solicitation of proxies to be used at the Annual Meeting of Stockholders of The Bank of Fincastle ( Bank ), to be held on Tuesday, August 15, 2017, at 9:00 a.m., Eastern Standard Time, at The Glebe located at 200 The Glebe Blvd Daleville, Virginia 24083. Proxies in the form enclosed are solicited by management at the direction of the Board of Directors of the Bank. If the enclosed proxy is properly signed and returned to the Bank, the shares represented thereby will be voted at the Annual Meeting in accordance with its terms. Where no instructions are indicated, proxies will be voted for the Amendment to the Articles of Incorporation and if the Amendment is approved for the nominees for directors in the respective classes set forth in Proposal 1A. If the Amendment to the Articles of Incorporation set forth in Proposal 1 is not approved and no instructions are indicated, proxies will be voted for the nominees set forth in Proposal 1B. Any proxy given pursuant to this solicitation may be revoked at any time prior to the vote of the stockholders, and an opportunity will be given to stockholders attending the Meeting to withdraw their proxies and to vote their shares in person. VOTING SECURITIES The close of business on July 17, 2017, has been fixed as the record date for the determination of the stockholders of the Bank entitled to notice of and to vote at the Annual Meeting of Stockholders. As of that date, there were 2,281,915 shares of common stock outstanding, each of which is entitled to one vote. PROPOSAL 1 AMENDMENT TO THE ARTICLES OF INCORPORATION The Board of Directors of the Bank has determined it to be in the best interest of the Bank to amend the Articles of Incorporation of the Bank to create staggered terms of office for the Board of Directors and recommend to the shareholders of the Bank the approval of an amendment to the Articles of Amendment of the Articles of Incorporation reflecting the change by adding the following: ARTICLE V BOARD OF DIRECTORS The management, control and government of the Bank shall be vested in the Board of Directors, which shall be composed of no less than 5 nor more than 9 directors which minimum and maximum number of directors may not be changed except by amendment to the Articles of Incorporation. The Directors shall be divided into (3) groups, Group I, Group II, and Group III, as nearly equal in number as possible. At the Annual Meeting of the Bank, Directors of Group I shall be elected for a term of one year, Directors of Group II shall be elected for a term of two years, and Directors of Group III shall be elected for a term of three years. After the expiration of their initial term of office, Directors of each group shall be elected for three (3) year terms. All directors shall remain in office until their successors have been duly elected by the shareholders and qualified. PROPOSAL 2 ELECTION OF DIRECTORS The person(s) named below in Proposals (A) and (B) have been nominated by the Board of Directors as nominees for election to the Board of Directors of the Bank. Unless authorization is withheld, the person(s) named as proxies will vote for the election of the nominee(s) named below. Each nominee has agreed to serve if elected. In the event
any nominee shall unexpectedly be unable to serve, the proxies will be voted for such other persons as the Board may designate. The present principal occupation or employment and the office, if any, held with the Bank are set forth opposite the name of each nominee. Proxies cannot be voted for a greater number of persons than the number of nominees named below. (A) If the amendment to the Articles of Incorporation described in Proposal 1 above is approved, the election of the seven directors described below to the staggered terms set forth below to serve until the expiration of their term and his/her successor (if any) shall have been duly elected and qualified. The Board of Directors recommends a vote FOR each of the nominees for Director. Group I Term ending 2018 BACKGROUND John W. Rader, Jr. is the Senior Vice President of Investments at Valley Investment Management of Davenport & Company, LLC. He was previously an Investment Advisor with Smith Barney and Wheat First Securities. Rader graduated from The University of Virginia with a bachelor s degree in Commerce with a concentration in Finance from the McIntire School of Commerce. Rader has strong ties to the community and serves on a variety of boards including Chairman of the Botetourt County Electoral Board. John W. Rader, Jr. Director since 2012 1 year term Rader s thirty-four years of experience in investment management and his background in finance and commerce make him a strong candidate to continue as a board member for The Bank of Fincastle. Asset Liability, Chairman; Audit; Succession Management Group II Term ending in 2019 BACKGROUND J. Allen Layman is the retired former Chairman, President and CEO of R&B Communications and the past Chairman of Ntelos Corporation. He is currently involved in several development projects in Botetourt County and serves on the Board of RGC Resources, a Nasdaq traded public corporation. Layman s business leadership and management experience make him an influential member of The Bank of Fincastle Board of Directors. J. Allen Layman Director since 1991 2 year term Nominating and Corporate Governance, Chairman; CRA/Marketing; Succession Management
BACKGROUND Steven W. Sonny Spickard is the owner of Spickard Contracting and has had success with property development and entrepreneurial endeavors in Botetourt County. Spickard has served on the board of the Roanoke Valley Homebuilders Association and The Botetourt County Educational Foundation. He is also active in his church, serving on the finance committee, and has been a coach for youth sports in Botetourt County. Steven W. Spickard Director since 2001 2 year term Spickard is recognized as a leader among the members of The Bank of Fincastle Board of Directors, as is evidenced by his successful construction business and his expertise in property development and entrepreneurship. IT/Enterprise Risk Management, Chairman; CRA/Marketing, Vice-Chairman; Loan; Audit BACKGROUND C. Ray Sprinkle has been an award-winning Realtor at Re/Max All Stars for 28 years and has received the Hall of Fame Sales Award for being one of the top 100 Roanoke Valley Realtors. He has been a proud supporter of the Botetourt community, serving on the School Board for 21 years, with ten years as Board Chairman. Sprinkle is an outstanding choice for The Bank of Fincastle Board of Directors, bringing strong sales management skills and creativity to the position. C. Ray Sprinkle Director since 1972 Vice-Chairman 2 year term Audit, Chairman; Loan, Vice-Chairman; Asset/Liability; Nominating and Corporate Governance Group III Term ending in 2020 BACKGROUND Charles Scott Steele joined The Bank of Fincastle in June of 2015 and was named President and CEO in July of the same year. Previously he served as Senior Vice President, Chief Lending Officer and Compliance Officer for CornerStone Bank in Lexington, Virginia. A native of White Sulphur Springs, Steele received his bachelor s degree in Business Administration from West Virginia University and earned a diploma from the Graduate School of Banking at Louisiana State University. Charles Scott Steele Director since 2016 3 year term Since joining The Bank of Fincastle, Steele has led the board in developing a new strategic direction for the bank with a strong focus on improving asset quality, operational policies and procedures, internal controls, regulatory relations, enterprise risk management, product diversification and staff development and training. Loan, Chairman; Asset/Liability; IT/Enterprise Risk Management
BACKGROUND Ed Holt grew up in Botetourt County and was educated in the Botetourt public schools before graduating from The College of William and Mary with both BA and MBA degrees. Post-graduate he obtained a certificate in Railroad Market Planning and Analysis from Princeton University. In 2004 he left the employ of larger businesses to found RailCar Interchange where he is currently President. He proudly serves on the Board of Directors of The Bank of Fincastle following in the footsteps of his father and grandfather, as well as serving on the Board of Directors of Missio International, a nonprofit organization that supports humanitarian and Christian missions in Romania. George E. Holt, III Director since 2015 Chairman of the Board 3 year term Holt s extensive experience in successful businesses, along with his educational training in business and his MBA enables him to identify and lead the implementation of successful business practices and strategies to enhance the lending and operational performance of The Bank of Fincastle. Asset/Liability, Vice-Chairman; Audit, Vice-Chairman; Loan; IT/Enterprise Risk Management; Nominating and Corporate Governance BACKGROUND Jean R. Craft retired from The Bank of Fincastle as Executive Vice President with 48 years of service and is our first female board member. She has held many positions within The Bank of Fincastle including teller, common stock clerk, loan officer and positions in human resources. She currently serves as Corporate Secretary. Craft s extensive background knowledge of the Bank s overall operations and its history makes her an invaluable asset to the Board of Directors at The Bank of Fincastle. Jean R. Craft Director since 2005 Corporate Secretary 3 year term Loan; CRA/Marketing, Chairman; Nominating and Corporate Governance, Vice- Chairman (B) If the amendment to the Articles of Incorporation described in Proposal 1 above is not approved, the election of the seven directors named below and as set out below to a one year term to serve until the expiration of their term and his/her successor (if any) shall have been duly elected and qualified. J. Allen Layman John W. Rader, Jr. Steven W. Sonny Spickard C. Ray Sprinkle Charles Scott Steele George E. Holt, III Jean R. Craft