EVBS Eastern Virginia Bankshares, Inc.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

Below is a discussion of the philosophy, the strategy and the major details of our approach to compensating executive management. This approach has been developed under the direction and oversight of the Compensation Committee, with assistance from an independent compensation consultant and with input from management.

Our executive management is expected to design and execute our business plan that emphasizes prudent risk and asset quality management to lead to superior returns for our shareholders. Following this discussion, you will find tables containing detailed information concerning compensation earned or paid for 2016 and prior years to our “named executive officers,” who are the following:

The Company had three other executive officers, Bruce T. Brockwell, Executive Vice President and Chief Banking Officer of the Bank, Dianna B. Emery, Executive Vice President and Chief Operations Officer of the Bank and Ann-Cabell Williams, Executive Vice President and Chief Channel Distribution Officer of the Bank, during 2016. The discussion below is intended to help you understand the information provided in tables that follow and provide context for our overall executive compensation program.

Objective

The primary objective of our executive compensation program, as stated by our Executive Compensation Philosophy and Strategy, as reviewed, revised and restated in 2014, is to assure that we have competent and motivated executive management to lead the Company. To accomplish this objective, we must provide competitive levels of compensation to attract, retain and reward outstanding executives. The banking industry is very competitive, and excellent leadership is vital to design and execute our business plan. To that end, we believe that:

Discussion of Our Approach

Our general approach is to provide executive compensation consistent with promoting shareholder value, with an emphasis on prudent risk and asset quality management. To this end, the Compensation Committee designs compensation plans and incentives to link the financial interests of the Company’s executive officers to the interests of shareholders, to support the Company’s long-term goals, to tie compensation to the Company’s performance and to attract, retain and motivate talented leadership. The Committee has retained CT Executive Benefits Group (“CTEBG”), formerly an affiliate of the Titan Group, LLC (“Titan”), as an independent compensation consultant, to assist it in developing and administering its executive compensation program. CTEBG also provides consulting services to the Bank related to the Bank’s bank-owned life insurance policies, for which the Bank typically pays less than $6,000 annually. The Compensation Committee has assessed the independence of CTEBG under applicable SEC and NASDAQ rules and concluded that the advice it receives from CTEBG is objective and not influenced by other relationships that could be viewed as conflicts of interest.

The Compensation Committee operates under a Charter which was updated and adopted in 2014 by the Boards of Directors of the Company and the Bank, which outlines the Committee’s duties and authority, and is guided by an Executive Compensation Philosophy and Strategy statement which provides an overall blueprint for developing and administering executive compensation programs. In addition, beginning in 2009 and continuing until October 21, 2013, as a result of the Company’s participation in the United States Department of the Treasury’s Capital Purchase Program, commonly known as “TARP,” the Committee and the Company had to comply with legal and contractual terms affecting the executive compensation process (the “TARP Regulations”). The TARP Regulations generally ceased to apply following the termination of the Company’s participation in TARP in October 2013, except that compensation paid during the TARP period to certain executives and highly compensated employees remains subject to a “clawback” or repayment requirement in certain circumstances and the Company must continue to apply the TARP $500,000 federal income tax deduction limitation to compensation attributable to services provided by certain executives during the TARP period until all such compensation has been completely paid out to the executive.

Consideration of Shareholder Advisory Vote on Executive Compensation

When reviewing executive compensation policies and setting compensation, the Compensation Committee pays close attention to advisory votes by shareholders to approve the compensation of our named executive officers. At last year’s annual meeting, approximately 91% of shares voted were cast in favor of our approach to executive compensation. The Compensation Committee acknowledges the broad support of our shareholders and continues to apply the principles described above and below in pursuit of a pay-for-performance culture.

At the Company’s 2014 Annual Meeting of Shareholders, approximately 95% of shares voted were cast in favor of a frequency of “every one year” for conducting an advisory vote on our executive compensation. The Company, therefore, has decided to include an advisory vote on executive compensation every year. The Company does not anticipate holding any future advisory votes to approve the Company’s executive compensation due to the pending merger with Southern National Bancorp of Virginia, Inc., pursuant to which, if consummated, Southern National Bancorp of Virginia, Inc. will be the surviving entity (the “Pending Merger”). However, if the Company does hold another annual meeting, it would anticipate holding an advisory vote on executive compensation at such annual meeting.

Principles that Guide Executive Compensation

We rely upon the following principles in structuring compensation arrangements for our executive officers:

American National Bankshares Inc.

C & F Financial Corporation

Community Bankers Trust Corporation

Middleburg Financial Corporation

Monarch Financial Holdings, Inc.

National Bankshares, Inc.

Old Point Financial Corporation

Southern National Bancorp of Virginia, Inc.

WashingtonFirst Bankshares, Inc.

Hampton Roads Bankshares, Inc.

Xenith Bankshares, Inc.

For 2017, Monarch Financial Holdings, Inc., Middleburg Financial Corporation and Hampton Roads Bankshares, Inc. have been removed from the peer group due to mergers, and Access National Corporation has been added because it has a similar size and business model to the Company.

For our executive management, we believe that total compensation should be near the 50 ^th percentile of our peer group.

Elements of Compensation

The Company uses the following elements of compensation and benefits to recruit, retain and reward its key executives:

As a result of improving financial performance and to recognize the contributions of executive management for this improvement, the Committee accepted Mr. Shearin’s recommendation for a 2% merit increase and various market adjustments for salaries of executive management (other than himself) in 2016. The Committee also recommended and the Board of Directors in executive session approved a 5% combined market and merit increase to Mr. Shearin’s salary for 2016. These base salary increases became effective March 1, 2016.

At the beginning of the year, the target amount of bonus for each executive officer under the Annual Bonus Plan is set by the Committee for the CEO, and recommended by the CEO and approved by the Committee for other members of executive management. Also at the beginning of the year, the performance metrics and the weighting for each such metric is set by the Committee for the CEO, and recommended by the CEO and approved by the Committee for other members of executive management. As approved by the Committee for 2016, the Annual Bonus Plan incorporates the following performance metrics and establishes performance objectives for these metrics: risk management, financial reporting, budget compliance, asset quality, asset growth, net income growth and critical factors. The weighting of the performance metrics, as approved by the Committee, varies among members of executive management.

After each completed year, performance against the Annual Bonus Plan’s performance metrics and objectives is evaluated by the Committee for the CEO’s performance, and by the CEO for performance of all other participants. The CEO proposes bonus payments under the Annual Bonus Plan for all participants other than himself, and the Committee reviews the performance of each participant and determines and approves all bonus payments under the Annual Bonus Plan. Although the calculation of a bonus is based on analysis of performance against the specific goals under the Annual Bonus Plan, the Committee retains ultimate discretion to pay higher or lower bonuses than what would be earned based on performance with regard to the performance objectives, or to pay no bonuses to participants for a particular performance year.

As described below under the heading “Employment Agreements,” in connection with his hiring, Mr. Hanna received a cash retention bonus of $150,000, payable in three annual installments of $50,000 on each of November 15, 2015, 2016, and 2017, provided that Mr. Hanna remains an employee of the Company on the applicable payment date for each installment.  Mr. Hanna is not eligible to participate in the Annual Bonus Plan until after the final installment of the cash retention bonus has been paid.   

The table below presents the target bonus amount for each named executive officer other than Mr. Hanna under the Annual Bonus Plan as approved by the Committee for 2016.

*Base salary as of March 1, 2016 is used to calculate the named executive officer’s target bonus amount.

The table below presents the performance metrics for each named executive officer that were approved by the Committee for 2016. Under the Annual Bonus Plan, an executive’s performance may result in partial credit for a particular performance metric if a target performance objective is not met, or may result in more than 100% credit for a particular performance metric in the case of superior performance that exceeds the relevant target performance objective (subject to the Annual Bonus Plan’s maximum cap on bonus amounts to any participant of 25% (or, 35% in the case of Mr. Shearin) of the participant’s salary).

Target performance objectives for 2016 for each of the performance metrics listed above were:

After reviewing 2016 performance against the performance objectives and analyzing achievement levels for the relevant performance metrics, including considering Mr. Shearin’s recommendations for the other participants in the Annual Bonus Plan, the Compensation Committee awarded bonuses to our named executive officers that approached each such executive’s target or maximum bonus opportunity for 2016. Additionally, Mr. Shearin received an extraordinary achievement bonus of $53 thousand related to his involvement in facilitating the Pending Merger. For more information on amounts paid for 2016 performance pursuant to the Annual Bonus Plan and Mr. Shearin’s additional bonus, see the Summary Compensation Table below.

The bonuses are subject to clawback by the Company, in accordance with any Company clawback policy that may be adopted from time to time or any applicable law.

In 2007, our shareholders approved the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the “2007 Equity Compensation Plan”) which authorized the granting of up to 400,000 shares of Company common stock pursuant to grants of stock options, stock appreciation rights, common stock, restricted stock, performance shares, incentive awards and stock units.

In 2016, our shareholders approved the Eastern Virginia Bankshares, Inc. 2016 Equity Compensation Plan (the “2016 Equity Compensation Plan”) which authorizes the granting of up to 500,000 shares of the Company’s common stock pursuant to grants of stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards, performance units and performance cash awards. No additional awards may be granted under the 2007 Equity Compensation Plan, but our named executive officers are eligible to receive awards under the 2016 Equity Compensation Plan going forward.

For 2016, the Committee awarded restricted stock grants that are 50% based on time vesting and 50% based on performance vesting, in each case subject to earlier forfeiture or accelerated vesting under circumstances described in the award agreement. The Committee awarded Mr. Shearin a grant of 30,000 shares of restricted stock and grants of 5,000 shares of restricted stock as recommended by Mr. Shearin for each member of the executive management team in accordance with the terms described below.

The Committee will determine the extent to which the performance for calendar year 2018 is achieved. If any financial institution included in the peer group is acquired or otherwise changes its structure or business prior to December 31, 2018 such that it is no longer reasonably comparable to the Company (as determined by the Committee), the Committee may eliminate such financial institution from the peer group in determining performance. In the case of any such elimination, the Committee may, but is not required to, replace the eliminated financial institution with another financial institution which it considers reasonably comparable to the Company.

As noted below, with respect to the performance-based portion of the restricted shares granted in 2014, in light of the Pending Merger and the difficulty of comparison to the peer group as a result of recent merger activity within the peer group, in March 2017, the Compensation Committee converted these shares into time-based restricted stock that will vest upon consummation of the Pending Merger.

As noted below, in connection with his hiring, Mr. Hanna received a restricted stock award of 3,242 shares of restricted stock under the 2007 Equity Compensation Plan on November 20, 2014, which vested 50% on November 15, 2015, and 50% on November 15, 2016.

Subject to accelerated vesting under circumstances described in each award agreement, the shares subject to grants will be forfeited, to the extent not yet vested, if the executive’s employment terminates prior to a vesting date. If consummated, the Pending Merger will constitute a change of control under all outstanding equity awards, resulting in accelerated vesting of all then outstanding equity awards in accordance with their terms.

For awards granted to the Company’s named executive officers in 2012 and 2013, accelerated vesting will occur in the event of an executive’s retirement at or after age 65 with the consent of the Board of Directors (or its delegee) when “cause” for termination is not present or in the event of a “change of control” provided the executive has remained employed through the date of the change of control.

For awards granted to the Company’s named executive officers in 2014, 2015 and 2016, accelerated vesting will occur in the event of an executive’s retirement at or after age 65 with the consent of the Board of Directors (or its delegee) when “cause” for termination is not present, in the event of a “change of control” provided the executive has remained employed through the date of the change of control, or in the event of termination of employment due to the executive’s death or “disability.” The precise definitions of the terms “cause”, “change of control” and “disability” are set forth in each respective award agreement. For the Company’s named executive officers who have employment agreements, the term “cause” as used in an award agreement has the meaning set forth in the executive’s employment agreement. For the Company’s named executive officers who do not have employment agreements, the term “cause” as used in an award agreement would generally include the executive’s personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or a final cease-and-desist order, conviction of a felony or of a misdemeanor involving moral turpitude or misappropriation of the Company’s assets (determined on a reasonable basis) or those of its subsidiaries or other affiliates.

For all outstanding restricted stock awards to the Company’s named executive officers, a change of control would generally occur if certain individuals, entities or groups gain control of 50% or more of the Company’s outstanding voting securities, or if the composition of the Company’s Board of Directors changes during any period of two consecutive years such that the individuals constituting a majority of the Board of Directors at the beginning of the period no longer constitute the majority of the Board of Directors at the end of the period, unless each new director was approved by at least two-thirds of the incumbent directors.

For the Company’s named executive officers who have employment agreements, the term “disability” as used in an award agreement has the meaning set forth in the executive’s employment agreement. For the Company’s named executive officers who do not have employment agreements, the term “disability” as used in an award agreement has the meaning set forth for purposes of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), which generally includes a serious medical condition that prevents an individual from engaging in any substantial gainful activity.

The 2014, 2015 and 2016 restricted stock grants are subject to clawback by the Company, in accordance with any Company clawback policy that may be adopted from time to time or any applicable law.

Stock Ownership and Retention Policy. The Committee has approved and adopted a Stock Ownership and Retention Policy under which senior executives of the Company (Executive Vice Presidents or higher) are expected to hold shares of Company stock at least equal in value to their base salaries from time to time. The purpose of the Policy is to assure that senior executives are “invested” in the Company and that their financial interests align with those of non-employee shareholders. Generally, stock purchased in the open market or held in a brokerage account, shares held in trust for or owned by an executive, his or her spouse or dependent children, shares resulting from the exercise of options and vested, as well as unvested, shares that were awarded under a time-vesting schedule will count as being held under the Policy. Unexercised stock options and grants of performance-based shares that have not vested will not count as being held.

The Policy does not establish a time period for attaining these guidelines but does require that until the designated ownership level is met, all net shares resulting from the exercise of options, restricted or performance stock or other equity grants received from the Company shall be retained by the covered executive.

The Company has entered into an employment agreement with each of Joe A. Shearin, James S. Thomas and Mark C. Hanna. The Company has no other employment agreements with its named executive officers.

Employment Agreement with Mr. Shearin . The Company and Mr. Shearin are parties to an amended and restated employment agreement effective January 1, 2008, which was further amended on March 19, 2015. Mr. Shearin’s employment agreement provides for him to serve as our President and Chief Executive Officer and provides for a base salary, which may be increased by the Board of Directors in its discretion, and such other bonuses as are approved by the Board of Directors in its discretion. Mr. Shearin’s employment agreement provides for a rolling three-year term, unless either party provides written notice that the employment term should not be renewed and extended.

Under his employment agreement, Mr. Shearin’s employment may be terminated by the Company with or without cause. If Mr. Shearin resigns for “good reason” or his employment is terminated without “cause”, as those terms are defined in his employment agreement, however, he is entitled to receive a monthly payment equal to one-twelfth his rate of annual base salary in effect immediately preceding such termination for 36 months, to receive out-placement services for up to two years, including job search services, paid for by the Company up to a total of $10,000, and to receive continuing health insurance benefits for himself and his dependents for 36 months following termination, with such premiums paid by the Company (the “health insurance continuation benefit”).

If Mr. Shearin resigns for good reason or his employment is terminated without cause within one year after a “change of control” (as defined in the employment agreement), he will also be entitled to a lump sum severance payment approximately equal to the excess, if any, of 299% of his annualized cash compensation for a period that precedes the change of control as determined under the Code, over the total amount of his termination compensation described above. Under Mr. Shearin’s employment agreement, the Company can terminate the agreement unilaterally in connection with a change of control and pay out the value of all benefits under the employment agreement in a lump sum, as allowed by Section 409A of the Code.

If Mr. Shearin’s employment terminates due to his death, the Company will pay to his estate the compensation, including salary and any accrued bonus, that otherwise would have been payable to Mr. Shearin through the end of the month in which his death occurs. If Mr. Shearin’s employment is terminated due to “disability” (as defined in the employment agreement) or for cause, he is not entitled to receive compensation or other benefits under his employment agreement.

Mr. Shearin’s employment agreement also contains a confidentiality provision without a time limit and a covenant not to compete that is in effect during his employment and for twelve months after the termination of his employment, provided that the covenant not to compete ceases to apply in the event of a change of control. If Mr. Shearin breaches the confidentiality provision or the covenant not to compete, or engages in a competitive business at any time while he is receiving the salary continuation benefit, he will have no right to further post-termination payments or benefits provided by his employment agreement.

Employment Agreement with Mr. Thomas . The Company and Mr. Thomas are parties to an amended and restated employment agreement effective January 1, 2008. Mr. Thomas’ employment agreement provides for him to serve as an executive officer and provides for a base salary, which may be increased by the Board of Directors in its discretion, and such other bonuses as are approved by the Board of Directors in its discretion. Mr. Thomas’ employment agreement provides for a one-year term, with an automatic one-year extension each December 31, unless either party provides prior written notice that the employment term should not be renewed and extended.

Under his employment agreement, Mr. Thomas’ employment may be terminated by the Company with or without cause. If Mr. Thomas resigns for “good reason” or his employment is terminated without “cause”, as those terms are defined in his employment agreement, however, he is entitled to receive termination compensation equal to one-twelfth of his annual base salary then in effect in each month for the remainder of the term of his employment agreement.

If Mr. Thomas resigns for good reason or his employment is terminated without cause within one year after a “change of control” (as defined in the employment agreement), he will also be entitled to a lump sum severance payment approximately equal to the excess, if any, of 299% of his annualized cash compensation for a period that precedes the change of control as determined under the Code, over the total amount of his termination compensation described above.

If Mr. Thomas’ employment terminates due to his death, the Company will pay to his estate the compensation, including salary and any accrued bonus, that otherwise would have been payable to Mr. Thomas through the end of the month in which his death occurs. If Mr. Thomas’ employment is terminated due to “disability” (as defined in the employment agreement) or for cause, he is not entitled to receive compensation or other benefits under his employment agreement.

Mr. Thomas’ employment agreement also contains a confidentiality provision without a time limit and a covenant not to compete that is in effect during his employment and for twelve months after the termination of his employment, provided that the covenant not to compete ceases to apply in the event of a change of control. If Mr. Thomas breaches the confidentiality provision or the covenant not to compete, or engages in a competitive business at any time while he is receiving the termination compensation, he will have no right to further post-termination payments provided by his employment agreement.

Employment Agreement with Mr. Hanna. The Company and Mr. Hanna are parties to an employment agreement effective November 20, 2014. Mr. Hanna’s employment agreement provides for him to serve as our Executive Vice President and Regional Executive and provides for a base salary, which may be increased by the Board of Directors in its discretion. The initial term of Mr. Hanna’s employment agreement ended December 31, 2016, with an automatic one-year extension each December 31 beginning December 31, 2016, unless either party provides written notice at least 30 days prior to the end of the term that the employment term should not be renewed and extended.

As provided in Mr. Hanna’s employment agreement, the Company amended its supplemental retirement plan, effective November 20, 2014, to include Mr. Hanna as a participant on the terms described in Mr. Hanna’s employment agreement. The supplemental retirement plan and the benefits thereunder are described further below under the heading “Supplemental Retirement Benefit.”

Mr. Hanna’s employment agreement provides for an equity award bonus and a cash retention bonus. As provided in Mr. Hanna’s employment agreement, the Company granted to Mr. Hanna a restricted stock award in the amount of 3,242 shares of restricted stock under the 2007 Equity Compensation Plan on November 20, 2014. Of the 3,242 shares granted, 50% vested on November 15, 2015, and the remaining 50% vested on November 15, 2016. Mr. Hanna is also entitled to a cash retention bonus equal to $150,000, payable in three equal annual installments of $50,000 on each of November 15, 2015, 2016 and 2017, provided that Mr. Hanna remains an employee of the Company on the applicable payment date for each installment. The first two installments of the retention bonus were paid to Mr. Hanna on November 15, 2015 and November 15, 2016, with the third installment due November 15, 2017. Mr. Hanna is entitled to such other bonuses as are approved by the Board of Directors in its discretion.

Mr. Hanna’s employment agreement also provides that the Company will reimburse him for annual membership dues at a golf and country club.

Under his employment agreement, Mr. Hanna’s employment may be terminated by the Company with or without cause. If Mr. Hanna resigns for “good reason” or his employment is terminated without “cause”, as those terms are defined in his employment agreement, however, he is entitled to receive termination compensation equal to one-twelfth of his annual base salary then in effect in each month for the remainder of the term of his employment agreement. The calculation of Mr. Hanna’s termination compensation may also include bonus amounts, if any, only if the Company includes such bonus amounts for other members of executive management at the time of termination.

If Mr. Hanna resigns for good reason or his employment is terminated without cause within one year after a “change of control” (as defined in the employment agreement), instead of the termination compensation described above, he will be entitled to a lump sum severance payment equal to two times the total of his annual base salary and most recent annual bonus, if any, on the date of termination, or, if higher, on the date immediately prior to the change of control, provided, however, that the calculation of Mr. Hanna’s severance payment will include bonus amounts, if any, only if the Company includes such bonus amounts for other members of executive management at the time of a change of control.

If Mr. Hanna’s employment terminates due to his death, the Company will pay to his estate the compensation, including salary and any accrued bonus, that otherwise would have been payable to Mr. Hanna through the end of the month in which his death occurs. If Mr. Hanna’s employment is terminated due to “disability” (as defined in the employment agreement) or for cause, he is not entitled to receive compensation or other benefits under his employment agreement.

Mr. Hanna’s employment agreement also contains a confidentiality provision that is in effect for five years after termination ceases, or for such longer period, if any, as the information is entitled to protection as a trade secret, and a covenant not to compete that is in effect during his employment and for twelve months after the termination of his employment, provided that the covenant not to compete ceases to apply in the event of a change of control. If Mr. Hanna breaches the confidentiality provision or the covenant not to compete, or engages in a competitive business at any time while he is receiving the termination compensation, he will have no right to further post-termination payments provided by his employment agreement.

The employment agreement for each executive provides that, in all circumstances, any amounts paid by the Company pursuant to the employment agreement will be limited to one dollar less than the maximum amount deductible under Section 280G of the Code.  Please see additional information set forth below under the heading “Potential Payments Upon Termination or Change of Control.”

The precise definitions of the terms “good reason”, “cause”, “change of control” and “disability” are set forth in the employment agreement for each executive.

An executive will generally have good reason to terminate his employment under his employment agreement if the Company (or any successor) negatively changes certain important aspects of the executive’s employment without his consent, including his authority, responsibility or salary, moves the executive’s principal office outside certain geographical areas, or fails to comply with any material term of the employment agreement. Mr. Shearin would also have good reason to terminate his employment if the Company removes him from or fails to re-elect him to the position of President and Chief Executive Officer of the Company, reduces his fringe benefits, or fails to require any successor to the Company to expressly assume and agree to perform the obligations under Mr. Shearin’s employment agreement.

Termination for cause under each employment agreement would generally include the executive’s personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or a final cease-and-desist order, conviction of a felony or of a misdemeanor involving moral turpitude, misappropriation of the Company’s assets (determined on a reasonable basis) or those of its subsidiaries or other affiliates, or material breach by the executive of any other provision of the employment agreement.

A change of control under each employment agreement would generally occur if certain individuals, entities or groups gain control of 50% or more of the Company’s outstanding voting securities, except as a result of certain transactions initiated by the Company or approved by the Company’s Board of Directors, or if the composition of the Company’s Board of Directors changes as a result of certain transactions or business combinations such that the individuals constituting a majority of the Board of Directors before the transaction or business combination no longer constitute the majority of the Board of Directors of the Company or its successor within a certain period after the transaction or business combination.

Under each employment agreement, an executive would be determined to be disabled if the condition satisfies the definition of disability in the disability insurance policy maintained by the Company for the executive’s benefit or if a physician determines that the condition constitutes a total and permanent disability, whichever is more favorable to the executive. The Company may terminate the executive’s employment 90 days after giving notice to the executive that the Company has determined the executive is disabled for purposes of the employment agreement and intends to terminate his employment for reason of disability, unless the executive returns to the full-time performance of his essential job functions within the 90-day period.

Pending Merger. In connection with the Pending Merger, Southern National Bancorp, Inc. is expected to enter into new employment agreements with Messrs. Shearin and Sothen, to be effective upon completion of the merger, and is expected to assume the existing employment agreements for Messrs. Hanna and Thomas.

We amended the supplemental retirement plan in 2014 to include Mr. Hanna, who was a participant in a similar plan sponsored by Virginia Company Bank before we acquired that bank in 2014. For Mr. Hanna, the plan provides for a benefit of $3,333 per month for 200 months beginning on the first day of the month following a termination of employment at or after age 65. Full vesting occurs only at age 65, with graduated vesting of approximately 5% for each year of service after age 46. If Mr. Hanna terminates employment at or after age 62 but before age 65, he will receive the vested percentage of his normal retirement benefit paid in equal monthly installments for 200 months beginning on the first day of the month following his termination of employment. If Mr. Hanna terminates employment before age 62, he will receive the vested percentage of his normal retirement benefit paid in a lump sum on the first day of the month following his attainment of age 62. There is no pre-retirement death benefit, but a beneficiary can be named to receive a lump sum payment after Mr. Hanna’s death equal to the value of the remaining amounts payable under the plan.

In the event an executive becomes “disabled” (as defined in the plan) while employed by the Company, the supplemental retirement plan provides that the executive will receive the vested percentage of his normal retirement benefit based on his age on the date he becomes disabled. For Mr. Shearin, the disability benefit will be paid in equal monthly installments over a 15-year period beginning on the first day of the month following the date he becomes disabled. For Mr. Hanna, the disability benefit will be paid in equal monthly installments for 200 months beginning on the first day of the month following the date he becomes disabled. A participant in the plan would be determined to be disabled if he cannot engage in any substantial gainful activity due to a serious medical condition, or if the executive has been receiving benefits as a result of such serious medical condition for at least three months under an accident and health plan maintained by the Company.

The normal retirement benefit for each of Mr. Shearin and Mr. Hanna will fully vest on the date of a “change of control” (as defined in the plan). Under the supplemental retirement plan, a change of control would generally occur if certain individuals, entities or groups gain control of 50% or more of the Company’s outstanding voting securities, except as a result of certain transactions initiated by the Company or approved by the Company’s Board of Directors, or if the composition of the Company’s Board of Directors changes as a result of certain transactions or business combinations such that the individuals constituting a majority of the Board of Directors before the transaction or business combination no longer constitute the majority of the Board of Directors of the Company or its successor within a certain period after the transaction or business combination. If consummated, the Pending Merger will constitute a change of control under the supplemental retirement plan, resulting in accelerated vesting (but not accelerated payment) of benefits for each of Mr. Shearin and Mr. Hanna.

The Committee reviewed the supplemental retirement plan in 2016 and made no changes.

The precise definitions of the terms “cause”, “change of control” and “constructive discharge” are set forth in the executive severance plan.

Termination for cause under the executive severance plan would generally include the executive’s personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or a final cease-and-desist order, conviction of a felony or of a misdemeanor involving moral turpitude, misappropriation of the Company’s assets (determined on a reasonable basis) or the Bank’s assets, death, or disability as defined in a long-term disability insurance policy maintained by the Company or the Bank for the executive’s benefit.

Under the executive severance plan, a change of control would generally occur if certain individuals, entities or groups gain control of 50% or more of the Company’s outstanding voting securities, except as a result of certain transactions initiated by the Company or approved by the Company’s Board of Directors, or if the composition of the Company’s Board of Directors changes as a result of certain transactions or business combinations such that the individuals constituting a majority of the Board of Directors before the transaction or business combination no longer constitute the majority of the Board of Directors of the Company or its successor within a certain period after the transaction or business combination.

Under the executive severance plan, a constructive discharge would generally occur if the Company materially reduces the executive’ base compensation, authority, duties or responsibility or materially changes the geographic location of the executive’s office.

Conclusion

During 2017 and until the Pending Merger is consummated, we anticipate that the Compensation Committee, with assistance from its independent consultant, will continue its ongoing administration and evaluation of our executive compensation approach consistent with our philosophy which aligns with our business plan.

Compensation Policies and Practices as They Relate to Risk Management

The Company, under the guidance of the Compensation Committee, has reviewed the compensation policies and practices of the Company as they relate to risk management. This review included both executive officer and non-executive officer compensation policies and practices and factors in place to mitigate risk. In conducting the review, management focused on the risks associated with the Company’s compensation policies and practices and evaluated those risks in light of the Company’s operations and the internal compensation approval and compliance systems. The Company has determined that its policies and practices, including mitigating factors, are not reasonably likely to have a material adverse effect on the Company.

In connection with this risk review, the Compensation Committee meets with the Company’s Chief Risk Officer to discuss, evaluate and review the Company’s compensation plans and the risks these plans pose to the Company. The Compensation Committee will identify and limit or mitigate features in the Company’s compensation plans that could encourage the taking of unnecessary and excessive risks that pose risks to the Company (including behavior focused on short-term results rather than long-term value creation). In addition, the Committee will discuss, evaluate and review employee compensation plans and eliminate or mitigate features that could encourage the manipulation of reported earnings to enhance an employee’s compensation. These reviews are completed at least once a year.

For the review conducted during December 2016, the Committee evaluated the compensation plans discussed in the “Compensation Discussion and Analysis” presented above, as well as several additional employee compensation arrangements that provide for variable cash compensation, bonus, commission or incentive payments to other employees. As a result of the risk and manipulation review, the Compensation Committee concluded that these plans do not encourage unnecessary and excessive risks that threaten the value of the Company or the manipulation of reported earnings to enhance the compensation of any employee and determined that the potential risks arising from these plans are not reasonably likely to have a material adverse effect on the Company.

Compensation

The following table shows, for the fiscal years ended December 31, 2016, 2015 and 2014, the total compensation paid by the Company and its subsidiaries, as well as certain other compensation paid or accrued for those years, to the “named executive officers” in all capacities in which they served.

Material terms of plans that govern awards included in the Summary Compensation Table, the relationship of salary and bonus to total compensation and material terms of certain employment agreements including post-termination payments are discussed in the “Compensation Discussion and Analysis” above.

Stock Incentive Plans

The Company’s 2003 Plan and the 2007 Equity Compensation Plan provided for the granting of both incentive and non-qualified stock options and restricted stock awards to executive officers, key employees and directors of the Company and its subsidiaries. The terms of these plans were disclosed in the Company’s 2003 Proxy Statement for the 2003 Plan as filed with the SEC on March 24, 2003 and the 2007 Proxy Statement for the 2007 Equity Compensation Plan as filed with the SEC on March 21, 2007.

On May 19, 2016, the Company’s shareholders approved the 2016 Equity Compensation Plan to promote the success of the Company by providing incentives to key employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company and with growth in shareholder value consistent with the Company’s risk management practices. The 2016 Equity Compensation Plan authorizes the Company to issue up to 500,000 additional shares of common stock pursuant to stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards, performance units and performance cash awards. There were 484,232 shares still available to be granted as awards under the 2016 Equity Compensation Plan as of December 31, 2016. The terms of the 2016 Equity Compensation Plan were disclosed in the Company’s 2016 Proxy Statement as filed with the SEC on April 21, 2016.

Grants of Plan-Based Awards

The following table presents information regarding possible payouts to each of the named executive officers under the Company’s Annual Bonus Plan for 2016 and grants of equity awards to the named executive officers during 2016. The Company did not make any option grants during 2016, but did grant 50,000 shares of restricted stock under the 2007 Equity Compensation Plan to our named executive officers during 2016.

Option Exercises and Stock Vested

The following table presents information regarding restricted stock that vested during 2016 for each of our named executive officers. None of the named executive officers exercised stock options during 2016.

Pension Plan

The Company had a pension plan provided through the Virginia Bankers Association Insurance Trust. Until December 31, 2011, the plan was a defined benefit pension plan, and benefits were based on an employee’s final five year average salary at the time of retirement, normally at age 65. All active, full-time employees of the Company and its subsidiaries were eligible to participate in the plan through December 31, 2007 at age 21 with one year of service. Employees did not contribute to the plan, and a participant became 100% vested upon completion of five years of service. Employees of predecessor Hanover Bank as well as EVB Investments, Inc. became eligible to participate in the plan as of October 1, 2003. Directors who were full-time employees were eligible for participation. The Company amended the pension plan on January 28, 2008. Under the terms of the amended plan, balances under the plan were frozen on December 31, 2007 for all plan participants except that participants who were then age 55 or greater or had at least 10 years of service with the Company on October 1, 2007 would remain in the existing plan and receive future contributions. The balances for Messrs. Shearin and Thomas were frozen as of December 31, 2007. The plan was further amended February 28, 2011 to freeze the plan with no additional contributions for grandfathered participants. Benefits for all participants have remained frozen in the plan since such action was taken. Effective January 1, 2012, the plan was converted to a cash balance plan. Under a cash balance plan, participant benefits are stated as an account balance. An opening account balance was established for each plan participant based on the lump sum value of his or her accrued benefit as of December 31, 2011 in the original defined benefit pension plan. Each participant’s account will be credited with an “interest” credit each year. The interest rate for each year is determined as the average annual interest rate on the 2 year U.S. Treasury securities for the month of December preceding the plan year. The Company intends to terminate the plan effective May 1, 2017 in connection with the Pending Merger. Following termination and the receipt of a favorable determination letter, all benefits under the plan will be distributed to participants. The present value of the accumulated benefit as listed below was calculated by our pension actuaries Sageview Consulting Group, LLC based on the assumptions listed below:

Supplemental Executive Retirement Plan

The benefits under the supplemental executive retirement plan are discussed under the heading “Elements of Compensation” above.

The table below shows the accumulated benefit as of December 31, 2016 for the named executive officer under the supplemental executive retirement plan.

Potential Payments Upon Termination or Change of Control

Our employment agreements and equity award agreements and certain other plans and programs in which our named executive officers participate provide for benefits or payments upon certain employment termination or change of control events. The benefits and payments payable upon certain termination or change of control events are discussed under the heading “Elements of Compensation” above, except to the extent a benefit or payment is available generally to all salaried employees and in a manner that does not discriminate in favor of our executive officers. We also provide non-discriminatory life insurance benefits and provide disability coverage that all salaried employees can purchase at a group rate. In addition we maintain bank owned life insurance policies with respect to eighteen of our most highly compensated employees, including each named executive officer.

The Board of Directors and Compensation Committee, as applicable, have concluded that these payments are appropriate based on an evaluation of what is customary in the community banking industry with particular focus on competitor banking companies in Virginia. Potential payments upon termination before or after a change of control or upon death or disability do not influence decisions regarding any other element of compensation. There are material conditions and obligations applicable to payments upon termination as outlined above and the payments may also be limited by applicable federal banking regulations.

The table below shows the estimated potential payments to each of our named executive officers upon certain employment termination or change of control events, assuming the scenario were effective as of December 31, 2016. Stock valuations are based on the closing price of our common stock ($10.45 per share) as reported on the NASDAQ Stock Market on December 30, 2016, the last business day of 2016. The table reports only amounts that are increased, accelerated or otherwise paid or payable as a result of the applicable termination or change of control event and, as a result, excludes amounts accrued through December 31, 2016, that would have been paid in the normal course of continued employment (such as accrued but unpaid salary and bonus amounts), equity awards that had vested prior to the termination or change of control, and pension plan and supplemental retirement plan benefits included in the Pension Benefits — Fiscal Year 2016 tables above that had vested based on the executive’s age prior to the termination or change of control. The table also excludes any amounts that are available generally to all salaried employees and in a manner that does not discriminate in favor of our executive officers.

The amounts shown in the table below are only estimates; we cannot determine actual amounts to be paid until an employment termination or change of control occurs.

The amounts shown in the table below do not reflect any payments or benefits that are expected to be received by any of the named executive officers in connection with the Pending Merger.

Compensation Committee Report

The Compensation Committee consists entirely of independent directors. The Compensation Committee is composed of Eric A. Johnson (Chairman), John F. Biagas, W. Rand Cook, F. L. Garrett, III, Boris M. Gutin and Ira C. Harris, Ph.D., CPA. The same individuals served on the Compensation Committee during 2016. The Committee administers the Company’s and the Bank’s executive compensation program, recommends to the Company’s Board of Directors the compensation of the Chief Executive Officer and establishes the compensation of the other executive officers.

The Committee reviewed and discussed the Compensation Discussion and Analysis (“CDA”) with management and based on such review and discussion, the Committee recommended to the Board of Directors that the CDA be included in this Amendment.

The Compensation Committee

Eric A. Johnson, Chairman
John F. Biagas
W. Rand Cook
F. L. Garrett, III
Boris M. Gutin
Ira C. Harris, Ph.D., CPA

Compensation Committee Interlocks and Insider Participation

No member of the Compensation Committee is a current or former officer or employee of the Company or any of our subsidiaries. In addition, there are no Compensation Committee interlocks with other entities with respect to any such member. The CEO attends Compensation Committee meetings that discuss matters not directly related to the CEO, but is not a member of the Compensation Committee.

Director Compensation

The Nominating and Corporate Governance Committee periodically reviews the compensation paid to the Company’s non-employee directors and recommends changes to the full Board of Directors. Directors who are also officers of the Company do not receive any compensation for their Company or Bank Board or committee service. Compensation paid to our non-employee directors for 2016 is disclosed in the table below.

Based on the recommendation of the Nominating and Corporate Governance Committee, the Company’s Board approved changes to non-employee director compensation in 2016. Following a comprehensive analysis of director fees paid by twelve peer banks and discussion of appropriate mix between cash and equity compensation for directors and appropriate retainer amounts for certain committees, as well as review of the Company’s performance in recent years, on the recommendation of the Nominating and Corporate Governance Committee, the Board approved an increase in non-employee director compensation for 2016. The initial change, effective May 19, 2016, increased the meeting fees and monthly retainer amounts paid in cash and established a fixed dollar value for the amount of the annual retainer paid in unrestricted shares of the Company’s common stock. Based on the recommendation of the Nominating and Corporate Governance Committee, the Company’s Board approved a modification to non-employee director compensation, effective June 23, 2016, to permit non-employee directors to receive a portion of their annual retainer in cash.

Director Compensation Prior to May 19, 2016

From January 1, 2016 through May 18, 2016, each non-employee director received $300 for each Company Board meeting attended and $300 for each Company Board committee meeting attended. For joint meetings of the Company’s and the Bank’s Boards, each non-employee director received a fee of $150 in addition to the Bank Board meeting fee. On days when the Company’s and the Bank’s Boards both met but not jointly, the Chairman of the Board of Directors had the discretion to determine to pay each director $300 instead of the $150 fee. In addition to the meeting fees, the Audit and Risk Oversight Committee members received a monthly retainer fee of $200 and the Chairman of that committee received a monthly retainer fee of $300.

Each director of the Company’s Board is also a member of the Bank’s Board. From January 1, 2016 through May 18, 2016, each non-employee director received $500 for each Bank Board meeting attended and $300 for each committee meeting attended. The Chairman of the Bank’s Board, who also serves as the Chairman of the Company’s Board, received an additional $500 per month retainer. Each member of the Bank’s Loan Committee also received $150 for each teleconference of the Loan Committee between regularly scheduled Loan Committee meetings. For meetings of the Company’s Board of Directors and the Bank’s Board of Directors, directors were permitted one paid absence per year. Directors did not receive additional compensation for executive sessions held as part of Company Board or Bank Board meetings.

Prior to May 19, 2016 and including service in 2015, each non-employee director of the Bank Board also received an annual retainer in the form of a grant of 500 unrestricted shares of the Company’s common stock.

Current Director Compensation

Effective May 19, 2016, each non-employee director receives $450 for each Company Board meeting attended and $450 for each Company Board committee meeting attended. For joint meetings of the Company’s and the Bank’s Boards, each non-employee director receives a fee of $225 in addition to the Bank Board meeting fee. On days when the Company’s and the Bank’s Boards meet but not jointly, the Chairman of the Board of Directors has the discretion to determine to pay each director $450 instead of the $225 fee.  In addition to the meeting fees, the Audit and Risk Oversight Committee members receive a monthly retainer fee of $300 and the Chairman of that committee receives a monthly retainer fee of $450.

Effective May 19, 2016, each non-employee director receives $750 for each Bank Board meeting attended and $450 for each committee meeting attended. The Chairman of the Bank’s Board, who also serves as the Chairman of the Company’s Board, receives an additional $750 per month retainer. Each member of the Bank’s Loan Committee receives $225 for each teleconference of the Loan Committee between regularly scheduled Loan Committee meetings. For meetings of the Company’s Board of Directors and the Bank’s Board of Directors, directors continue to be permitted one paid absence per year. Directors do not receive additional compensation for executive sessions held as part of Company Board or Bank Board meetings.

Beginning with the 2016 award, each non-employee director of the Bank’s Board also receives an annual retainer in the form of a grant of unrestricted shares of the Company’s common stock in the amount of approximately $15,000, based on the closing price of the common stock on the date of the grant and prorated to the time served. Each non-employee director may elect in advance whether to have a portion (up to $10,000) of this annual retainer paid in cash rather than equity.

In the event a new non-employee director is elected to the Bank Board during the year, the annual retainer is prorated on a daily basis and paid on July 1. In the event a non-employee director ceases serving on the Bank Board for any reason other than a removal for cause, the annual retainer is prorated on a daily basis and paid within 30 days of the departure from the Bank Board.

In connection with these changes in director compensation, the Company delayed payment of the 2016 annual retainer to September 1, 2016, except for Mr. Lewis, whose term as a director ended on May 19, 2016.

Total director fees paid by the Company were $59,675 in 2016. Total director fees paid by the Bank were $353,407 in 2016.