EDGAR 10-K Filing

Company CIK: 880641
Filing Year: 2021
Filename: 880641_10-K_2021_0001564590-21-016594.json

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ITEM 1. BUSINESS
Item 1. Business
General
Eagle Financial Services, Inc. (the “Company”) is a bank holding company that was incorporated in 1991. The company is headquartered in Berryville, Virginia and conducts its operations through its subsidiary, Bank of Clarke County (the “Bank”). The Bank is chartered under Virginia law.
The Bank has twelve full-service branches, one loan production office and one drive-through only facility. The Bank’s main office is located at 2 East Main Street in Berryville, Virginia. The Bank opened for business on April 1, 1881. The Bank has offices located in Clarke County, Frederick County, Loudoun County and Fairfax County, as well as the Towns of Leesburg and Purcellville and the City of Winchester. This market area is located in the Shenandoah Valley and Northern Virginia.
The Bank offers a wide range of retail and commercial banking services, including demand, savings and time deposits and consumer, mortgage and commercial loans. The Bank has thirteen ATM locations in its trade area and issues both ATM cards and Debit cards to deposit customers. These cards can be used to withdraw cash at most ATM’s through the Bank’s membership in both regional and national networks. These cards can also be used to make purchases at retailers who accept transactions through the same regional and national networks. The Bank offers telephone banking, internet banking, and mobile banking to its customers. Internet banking also offers online bill payment to consumer and commercial customers. The Bank offers other commercial deposit account services such as ACH origination and remote deposit capture.
Eagle Investment Group (“EIG”), a division of the Bank, offers both a trust department and investment services. The trust services division of EIG offers a full range of personal and retirement plan services, which include serving as agent for bill paying and custody of assets, as investment manager with full authority or advisor, as trustee or co-trustee for trusts under will or under agreement, as trustee of life insurance trusts, as guardian or committee, as agent under a power of attorney, as executor or co-executor for estates, as custodian or investment advisor for individual retirement plans, and as trustee or trust advisor for corporate retirement plans such as profit sharing and 401(k) plans. The brokerage division of EIG offers a full range of investment services, which include tax-deferred annuities, IRAs and rollovers, mutual funds, retirement plans, 529 college savings plans, life insurance, long term care insurance, fixed income investing, brokerage CDs, and full service or discount brokerage services. Non-deposit investment products are offered through a third party provider.
The Bank of Clarke County, is a partner in Bankers Title Shenandoah, LLC, which sells title insurance and is an investor in Virginia Bankers Insurance Center, LLC, which serves as the broker for insurance sales through its member banks. Bank of Clarke County is also an investor in building rehabilitation projects in surrounding states. These investments generate tax credits for the Bank.
Employees
The Company, including the Bank, had 66 officers, 120 other full-time and 18 part-time employees (or 195 full-time equivalent employees) at December 31, 2020. None of the Company’s employees are represented by a union or covered under a collective bargaining agreement. The Company considers relations with its employees to be excellent.
Securities and Exchange Commission Filings
The Company maintains an internet website at www.bankofclarke.bank. Shareholders of the Company and the public may access, free of charge, the Company’s periodic and current reports (including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports) filed with or furnished to the Securities and Exchange Commission (the "SEC"), through the “Investor Relations” section of the Company’s website. The reports are made available on this website as soon as practicable following the filing of the reports with the SEC. In addition, certain committee charters and the Company's Code of Ethics are available on the Company's website. The information is free of charge and may be reviewed, downloaded and printed from the website at any time. The information on the Company's website is not a part of, and is not incorporated into, this Annual Report on Form 10-K.
Competition
There is significant competition for both loans and deposits within the Company’s trade area. Competition for loans comes from other commercial banks, savings banks, credit unions, mortgage brokers, finance companies, financial technology firms, insurance companies, and other institutional lenders. Competition for deposits comes from other commercial banks, savings banks, credit unions, brokerage firms, and other financial institutions. Based on total deposits at June 30, 2020 as reported to the FDIC, the Company has 7.93% of the total deposits in its market area. The Company’s market area includes Clarke County, Frederick County, Loudoun County and the City of Winchester.
Supervision and Regulation
General. As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended, and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve"). As a state-chartered commercial bank, the Bank is subject to regulation, supervision and examination by the Virginia State Corporation Commission’s Bureau of Financial Institutions. It is also subject to regulation, supervision and examination by the Federal Reserve. Other federal and state laws, including various consumer and compliance laws, govern the activities of the Bank, the investments that it makes and the aggregate amount of loans that it may grant to one borrower.
The following sections summarize the significant federal and state laws applicable to the Company and its subsidiary. To the extent that statutory or regulatory provisions are described, the description is qualified in its entirety by reference to that particular statutory or regulatory provision.
The Bank Holding Company Act. Under the Bank Holding Company Act, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports regarding its operations and any additional information that the Federal Reserve may require. Activities at the bank holding company level are limited to the following:
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banking, managing or controlling banks;
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furnishing services to or performing services for its subsidiaries; and
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engaging in other activities that the Federal Reserve has determined by regulation or order to be so closely related to banking as to be a proper incident to these activities.
Some of the activities that the Federal Reserve has determined by regulation to be closely related to the business of a banking include making or servicing loans and specific types of leases, performing specific data processing services and acting in some circumstances as a fiduciary or investment or financial adviser.
With some limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:
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acquiring substantially all the assets of any bank;
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acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares); or
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merging or consolidating with another bank holding company.
In addition, and subject to some exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with their regulations, require Federal Reserve approval prior to any person or company acquiring 25% or more of any class of voting securities of the bank holding company. Prior notice to the Federal Reserve is required if a person acquires 10% or more, but less than 25%, of any class of voting securities of a bank or bank holding company and either the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities immediately after the transaction.
In November 1999, Congress enacted the Gramm-Leach-Bliley Act (“GLBA”), which made substantial revisions to the statutory restrictions separating banking activities from other financial activities. Under the GLBA, bank holding companies that are well-capitalized and well-managed and meet other conditions can elect to become “financial holding companies.” As financial holding companies, they and their subsidiaries are permitted to acquire or engage in previously impermissible activities such as insurance underwriting, securities underwriting and distribution, travel agency activities, insurance agency activities, merchant banking and other activities that the Federal Reserve determines to be financial in nature or complementary to these activities. Financial holding companies continue to be subject to the overall oversight and supervision of the Federal Reserve, but the GLBA applies the concept of functional regulation to the activities conducted by subsidiaries. For example, insurance activities would be subject to supervision and regulation by state insurance authorities. Although the Company has not elected to become a financial holding company in order to exercise the broader activity powers provided by the GLBA, the Company may elect do so in the future.
Payment of Dividends. The Company is organized under the Virginia Stock Corporation Act, which prohibits the payment of a dividend if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders. In addition, the Federal Reserve has indicated that a bank holding company should generally pay dividends only if its current earnings are sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.
The Company is a legal entity separate and distinct from its subsidiary. Its ability to distribute cash dividends will depend primarily on the ability of the Bank to pay dividends to it, and the Bank is subject to laws and regulations that limit the amount of dividends that it can pay. As a state member bank, the Bank is subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations. Under Virginia law, a bank may not declare a dividend in excess of its undivided profits. Additionally, the Bank may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by it in any calendar year exceeds the total of its retained net income of that year to date, combined with its retained net income of the two preceding years, unless the dividend is approved by the Federal Reserve.
The Federal Reserve, the FDIC and the state of Virginia have the general authority to limit the dividends paid by insured banks if the payment is deemed an unsafe and unsound practice. These regulators have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice. The Bank may also not declare or pay a dividend without the approval of its board and two-thirds of its shareholders if the dividend would exceed its undivided profits, as reported to the Federal Reserve.
The Company does not expect that any of these laws, regulations or policies will materially affect the Bank's ability to pay dividends to the Company. Refer to Item 5 for additional information on dividend restrictions. During the year ended December 31, 2020, the Bank paid $4.3 million in dividends to the Company. The Company paid cash dividends of $3.2 million and total dividends of $3.6 million, including cash dividends that were reinvested in Company stock.
Insurance of Accounts, Assessments and Regulation by the FDIC. The Bank’s deposits are insured up to applicable limits by the FDIC. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") permanently raised the standard maximum deposit insurance amount to $250,000. The FDIC has implemented a risk-based assessment system in which assessment rates for insured institutions with under $10 billion in assets are calculated based on supervisory evaluations and certain other financial measures. The assessment base is an institution’s average consolidated total assets less average tangible equity, and the initial base assessment rates are currently between 3 and 30 basis points depending on the institution's composite rating, and subject to potential adjustment based on certain long-term unsecured debt. Once the reserve ratio reaches 2.0% or greater, initial base assessment rates will range from 2 to 28 basis points and, once the reserve ratio reaches 2.5% or greater, the initial base assessment rate will range from 1 to 25 basis points.
Capital Requirements. The Federal Reserve and the other federal banking agencies have issued risk-based and leverage capital guidelines applicable to U.S. banking organizations. Those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Pursuant to the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the Company, are not subject to consolidated regulatory capital requirements.
Effective January 1, 2015, the Federal Reserve adopted capital rules intended to revise and strengthen its risk-based and leverage capital requirements and its method for calculating risk-weighted assets. The rules implemented the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act.
Under these risk-based capital requirements of the Federal Reserve, the Bank is required to maintain a minimum ratio of total capital (which is defined as core capital and supplementary capital less certain specified deductions from total capital such as reciprocal holdings of depository institution capital instruments and equity investments) to risk-weighted assets of at least 8.0%. At least 6.0% of risk-weighted assets is required to be “Tier 1 capital,” which consists principally of common and certain qualifying preferred shareholders’ equity (including grandfathered trust preferred securities) as well as retained earnings, less certain intangibles and other adjustments. The “Tier 2 capital” consists of cumulative preferred stock, long-term perpetual preferred stock, a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments), and a limited amount of the allowance for loan losses, including reserves for off-balance sheet commitments. A common equity Tier 1 capital ratio of 4.5% of risk-weighted assets also was added with the rules effective January 1, 2015.
Each of the federal bank regulatory agencies also has established a minimum leverage capital ratio of Tier 1 capital to average adjusted assets (“Tier 1 leverage ratio”). The guidelines require a minimum Tier 1 leverage ratio of 3.0% for financial holding companies and banking organizations with the highest supervisory rating. All other banking organizations are required to maintain a minimum Tier 1 leverage ratio of 4.0% unless a different minimum was specified by an appropriate regulatory authority. In addition, for a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 leverage ratio must be at least 5.0%. Banking organizations that have experienced internal growth or made acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve has not advised the Company or the Bank of any specific minimum leverage ratio applicable to either entity.
The capital requirements that became effective January 1, 2015 were phased in over a four-year period. As fully phased in effective January 1, 2019, the rules require the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
The capital conservation buffer requirement was phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until fully implemented at 2.5% effective January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
The Federal Reserve’s final rules also revised the “prompt corrective action” regulations pursuant to Section 38 of the FDIA by (i) introducing a common equity Tier 1 capital ratio requirement at each level (other than critically undercapitalized), with the required ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum ratio for well-capitalized status being 8.0%; and (iii) eliminating the provision that provided that a bank with a composite supervisory rating of 1 may have a 3.0% Tier 1 leverage ratio and still be well-capitalized. These thresholds were effective for the Bank as of January 1, 2015. The minimum total capital to risk-weighted assets ratio (10.0%) and minimum leverage ratio (5.0%) for well-capitalized status were unchanged by the final rules.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the proposed framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing-in through January 1, 2027. Under the current capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Company. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulatory agencies.
As directed by the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”), the federal banking regulators jointly issued a final rule in 2019 that permits qualifying banks that have less than $10 billion in total consolidated assets to elect to be subject to a 9% “community bank leverage ratio.” A qualifying bank that has chosen the proposed framework is not be required to calculate the existing risk-based and leverage capital requirements and would be considered to have met the capital ratio requirements to be “well capitalized” under prompt corrective action rules, provided it has a community bank leverage ratio greater than 9%. The Bank did not opt into the CBLR framework as of December 31, 2020. The community bank leverage ratio rules were temporarily modified in response to COVID-19. See “CARES ACT” below.
Other Safety and Soundness Regulations. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event that the depository institution is insolvent or is in danger of becoming insolvent. For example, under the requirements of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the deposit insurance funds. The FDIC’s claim for reimbursement under the cross guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institutions.
Interstate Banking and Branching. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Effective June 1, 1997, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.
Monetary Policy. The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market transactions in United States government securities, changes in the discount rate on member bank borrowing and changes in reserve requirements against deposits held by all federally insured banks. The Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and international economy and in the money markets, as well as the effect of actions by monetary fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.
Federal Reserve System. In 1980, Congress enacted legislation that imposed reserve requirements on all depository institutions that maintain transaction accounts or nonpersonal time deposits. NOW accounts, money market deposit accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to these reserve requirements, as are any nonpersonal time deposits at an institution.
The reserve percentages are subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets.
However, in March 2020, in an unprecedented move, the Federal Reserve announced that the banking system had ample reserves, and, as reserve requirements no longer played a significant role in this regime, it reduced all reserve tranches to zero percent, thereby freeing banks from the reserve maintenance requirement. The action permits the Bank to loan or invest funds that were previously unavailable. The Federal Reserve has indicated that it expects to continue to operate in an ample reserves regime for the foreseeable future.
Transactions with Affiliates. Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any bank or entity that controls, is controlled by or is under common control with such bank. Generally, Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the association or subsidiary as those provided to a nonaffiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions.
Transactions with Insiders. The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers and principal shareholders of banks. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a principal shareholder of a bank, and some affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the bank’s loan-to-one borrower limit. Loans in the aggregate to insiders and their related interests as a class may not exceed two times the bank’s unimpaired capital and unimpaired surplus until the bank’s total deposits equal or exceed $100,000,000, at which time the aggregate is limited to the bank’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans, above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and principal shareholders of a bank or bank holding company, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. The FDIC has prescribed the loan amount, which includes all other outstanding loans to such person, as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Section 22(h) requires that loans to directors, executive officers and principal shareholders be made on terms and underwriting standards substantially the same as offered in comparable transactions to other persons.
The Dodd-Frank Act also provides that banks may not “purchase an asset from, or sell an asset to” a bank insider (or their related interests) unless (i) the transaction is conducted on market terms between the parties, and (ii) if the proposed transaction represents more than 10 percent of the capital stock and surplus of the bank, it has been approved in advance by a majority of the bank’s non-interested directors.
Community Reinvestment Act. Under the Community Reinvestment Act and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. The Community Reinvestment Act directs each bank to maintain a public file containing specific information, including all written comments received from the public for the current year and each of the previous two calendar years that specifically relate to the bank’s performance in helping to meet community credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries.
Fair Lending; Consumer Laws. In addition to the Community Reinvestment Act, other federal and state laws regulate various lending and consumer aspects of the banking business. Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice, have become concerned that prospective borrowers experience discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against depository institutions alleging discrimination against borrowers. Many of these suits have been settled, in some cases for material sums, short of a full trial.
These governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a discriminatory effect, unless the practice could be justified as a business necessity.
Banks and other depository institutions are also subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various disclosure requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.
On September 20, 2017, the Consumer Financial Protection Bureau (the "CFPB") issued a final rule that amends Regulation B to permit creditors additional flexibility in complying with Regulation B in order to facilitate compliance with Regulation C, adds certain model forms and removes others from Regulation B, and makes various other amendments to Regulation B and its commentary to facilitate the collection and retention of information about the ethnicity, sex, and race of certain mortgage applicants. The rule was effective on January 1, 2018, except that the amendment to Appendix B removing the existing “Uniform Residential Loan Application” form in amendatory instruction 6 is effective January 1, 2022.
Privacy Regulations. The GLBA contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, both at the inception of the customer relationship and on an annual basis, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The law provides that, except for specific limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The GLBA also provides that the states may adopt customer privacy protections that are more strict than those contained in the act.
Amendment to the Annual Privacy Notice Requirement Under the Gramm-Leach-Bliley Act (Regulation P). In July 2016 the CFPB proposed to update Regulation P to implement a December 2015 statutory amendment to the Gramm-Leach-Bliley Act. The August 10, 2018 rule finalized that proposal. The rule provides an exception under which financial institutions that meet certain conditions are not required to provide annual privacy notices to customers. To qualify for this exception, a financial institution must not share nonpublic personal information about customers except as described in certain statutory exceptions. In addition, the rule requires that the financial institution must not have changed its policies and practices with regard to disclosing nonpublic personal information from those that the institution disclosed in the most recent privacy notice it sent. As part of its implementation, the CFPB also amended Regulation P to provide timing requirements for delivery of annual privacy notices in the event that a financial institution that qualified for this annual notice exception later changes its policies or practices in such a way that it no longer qualifies for the exception. The CFPB further removed the Regulation P provision that allowed for use of the alternative delivery method for annual privacy notices because the CFPB believes the alternative delivery method will no longer be used in light of the annual notice exception.
Anti-Money Laundering Laws and Regulations. The Bank is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities (“AML laws”). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020. The Anti-Money Laundering Act of 2020, the most sweeping anti-money laundering legislation in 20 years, requires various federal agencies to promulgate regulations implementing a number of its provisions.
The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.
Cybersecurity. The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal banking agencies expect financial institutions to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack. If the Bank fails to meet the expectations set forth in this regulatory guidance, it could be subject to various regulatory actions and any remediation efforts may require significant resources of the Bank. In addition, all federal and state bank regulatory agencies continue to increase focus on cybersecurity programs and risks as part of regular supervisory exams.
In December 2020, the federal banking agencies issued a notice of proposed rulemaking that would require banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident” or a “notification incident.” The proposed rule also would require specific and immediate notifications by bank service providers that become aware of similar incidents.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act implemented a number of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act established: (i) requirements for audit committees, including independence, expertise, and responsibilities; (ii) responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) disclosure and reporting obligations for reporting companies and their directors and executive officers; and (v) civil and criminal penalties for violations of the securities laws. Because the Company’s common stock is registered with the SEC, it is currently subject to these requirements.
Incentive Compensation. In June 2010, the Federal Reserve issued a final rule on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. Banking organizations are instructed to review their incentive compensation policies to ensure that they do not encourage excessive risk-taking and implement corrective programs as needed. The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Bank, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.
Dodd-Frank Act. In July 2010, the Dodd-Frank Act was signed into law, incorporating numerous financial institution regulatory reforms. The Dodd-Frank Act implements far-reaching reforms of major elements of the financial landscape, particularly for larger financial institutions. Many of its provisions do not directly impact community-based institutions like the Bank. For instance, provisions that regulate derivative transactions and limit derivatives trading activity of federally-insured institutions, enhance supervision of “systemically significant” institutions, impose new regulatory authority over hedge funds, limit proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1 capital are among the provisions that do not directly impact the Bank either because of exemptions for institutions below a certain asset size or because of the nature of the Bank’s operations. Certain aspects of the Dodd-Frank Act remain subject to rulemaking and interpretation and will take effect over several years, and their impact on the Company or the financial industry is difficult to predict before such regulations or interpretations are adopted.
In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act") was enacted to modify or remove certain regulatory financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, such as the Bank, and for large banks with assets of more than $50 billion.
Among other matters, the Economic Growth Act expands the definition of qualified mortgages which may be held by a financial institution with total consolidated assets of less than $10 billion, exempts community banks from the Volcker Rule, and includes additional regulatory relief regarding regulatory examination cycles, call reports, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z). Pursuant to the Dodd-Frank Act, the CFPB issued a final rule on November 20, 2013 (effective on October 3, 2015), combining certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act. The Bureau amended Regulation X (Real Estate Settlement Procedures Act or RESPA) and Regulation Z (Truth in Lending or TILA) to establish new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property. In addition to combining the existing disclosure requirements and implementing new requirements imposed by the Dodd-Frank Act, the final rule provides extensive guidance regarding compliance with those requirements. The final rule applies to most closed-end consumer mortgages. It does not apply to home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property (in other words, land). The final rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year.
On July 7, 2017, the CFPB modified the Federal mortgage disclosure requirements under the Real Estate Settlement Procedures Act and the Truth in Lending Act that are implemented in Regulation Z. This rule memorializes the CFPB’s informal guidance on various issues and makes additional clarifications and technical amendments. This rule also creates tolerances for the total of payments, adjusts a partial exemption mainly affecting housing finance agencies and nonprofits, extends coverage of the TILA-RESPA integrated disclosure (integrated disclosure) requirements to all cooperative units, and provides guidance on sharing the integrated disclosures with various parties involved in the mortgage origination process.
On October 4, 2017, the CFPB issued an interim final rule amending a provision of the Regulation X mortgage servicing rules issued in 2016 relating to the timing for servicers to provide modified written early intervention notices to borrowers who have invoked their cease communication rights under the Fair Debt Collection Practices Act.
On March 8, 2018, the CFPB issued a rule amending certain aspects of the mortgage servicing rule issued in 2016 relating to periodic statements. These amendments revise the timing requirements for servicers transitioning between modified or unmodified periodic statements and coupon books when consumers enter or exit bankruptcy.
On April 26, 2018, the CFPB amended federal mortgage disclosure requirements under RESPA and TILA that are implemented in Regulation Z. The amendments relate to when a creditor may compare charges paid by or imposed on the consumer to amounts disclosed on a Closing Disclosure, instead of a Loan Estimate, to determine if an estimated closing cost was disclosed in good faith.
Flood Insurance Rule. On July 21, 2015, five federal regulatory agencies announced the approval of a joint final rule that modifies regulations that apply to loans secured by properties located in special flood hazard areas. The final rule implements provisions of the Homeowner Flood Insurance Affordability Act of 2014 relating to the escrowing of flood insurance payments and the exemption of certain detached structures from the mandatory flood insurance purchase requirement. The final rule also implements provisions in the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) relating to the force placement of flood insurance.
On February 20, 2019, an Interagency Final Rule was issued amending regulations regarding loans in areas having special flood hazards to implement the private flood insurance provisions of the Biggert-WatersAct. Specifically, the final rule requires regulated lending institutions to accept policies that meet the statutory definition of "private flood insurance" in the Biggert-Waters Act and permits regulated lending institutions to exercise their discretion to accept flood insurance policies issued by private insurers and plans providing flood coverage issued by mutual aid societies that do not meet the statutory definition of "private flood insurance," subject to certain restrictions.
Home Mortgage Disclosure Act (HMDA) Final Rule. On October 15, 2015, the CFPB issued the final rule aimed at increasing the “quality and type” of HMDA data collected and reported by financial institutions. The HMDA Rule changes: (1) the types of financial institutions that are subject to Regulation C; (2) the types of transactions that are subject to Regulation C; (3) the data that financial institutions are required to collect, record, and report; and (4) the processes for reporting and disclosing HMDA data. On August 24, 2017, the CFPB issued a final rule (2017 HMDA Rule) further amending Regulation C to make technical corrections and to clarify and amend certain requirements adopted by the 2015 HMDA Final Rule. The most significant changes were not effective until January 1, 2018. On or before March 1, 2019, lenders will report the new data they collect in 2018. On October 10, 2019, the CFPB issued a final rule amending Regulation C to adjust the threshold for reporting data about open-end lines of credit by extending to January 1, 2022 the current temporary threshold of 500 open-end lines of credit. The CFPB also incorporated into Regulation C the interpretations and procedures from the interpretive and procedural rule that was issued on August 31, 2018, implementing provisions of the Economic Growth Act.
Regulation CC. On September 17, 2018, the Federal Reserve Board adopted final amendments to Regulation CC (Expedited Funds Availability Act) to address situations where there is a dispute as to whether a check has been altered or was issued with an unauthorized signature, and the original paper check is not available for inspection. The rule adopts a presumption of alteration for disputes between banks over whether a substitute check or electronic check contains an alteration or is derived from an original check that was issued with an unauthorized signature of the drawer.
On June 26, 2019, the agencies finalized changes to Regulation CC to adopt a method for making inflationary adjustments to the dollar amounts in Regulation CC every five years pursuant to the Dodd-Frank Act. The first adjustments are effective July 1, 2020. In addition, the final rule implements a provision of the Economic Growth Act to extend coverage of Regulation CC to American Samoa, the Northern Mariana Islands, and Guam.
Summaries of Rights Under the Fair Credit Reporting Act (Regulation V). The CFPB issued an interim final rule on September 12, 2018 to update the CFPB’s model forms for the Summary of Consumer Identity Theft Rights and the Summary of Consumer Rights in Appendices I and K to Regulation V to incorporate a notice required by new Fair Credit Reporting Act section 605A(i)(5), added by the Economic Growth Act.
Home Mortgage Disclosure Act. The CFPB issued an interpretive and procedural rule on August 31, 2018 to implement and clarify the requirements of section 104(a) of the Economic Growth Act, which amended certain provisions of the Home Mortgage Disclosure Act (HMDA). The rule clarifies that insured depository institutions and insured credit unions covered by a partial exemption under the Economic Growth Act have the option of reporting exempt data fields as long as they report all data fields within any exempt data point for which they report data; clarifies that only loans and lines of credit that are otherwise HMDA reportable count toward the thresholds for the partial exemptions; clarifies which of the data points in Regulation C are covered by the partial exemptions; designates a non-universal loan identifier for partially exempt transactions for institutions that choose not to report a universal loan identifier; and clarifies the Economic Growth Act’s exception to the partial exemptions for negative Community Reinvestment Act examination history.
Real Estate Appraisal Thresholds. On September 27, 2019, the agencies issued a final rule increasing the appraisal threshold for residential real estate transactions from $250,000 to $400,000. The final rule defines residential real estate transactions as a real estate related financial transaction that is secured by a single 1-to-4 family residential property. For residential real estate transactions exempted from the appraisal requirement as a result of the revised threshold, regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices. The final rule includes exempted transactions with residential properties in rural areas under the Economic Growth Act and requires evaluations for these transactions. The final rule also amends appraisal regulations requiring regulated institutions to subject appraisals for federally related transactions to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice.
Future Legislation and Regulation. Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under which the Company and the Bank operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material, adverse effect on the business, financial condition and results of operations of the Company and the Bank. Future legislation, regulation, and government policy could affect the banking industry as a whole, including the business and results of operations of the Company and the Bank, in ways that are difficult to predict. The Company fully expects that the financial institution industry will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.
Employment Transition of Loan Originators. Section 106 of the Economic Growth Act allows certain state-licensed mortgage loan originators (MLOs) who are licensed in one state to temporarily work in another state while waiting for licensing approval in the new state. It also grants MLOs who move from a depository institution (where loan officers do not need to be state licensed) to a nondepository institution (where they do need to be state licensed) a grace period to complete the necessary licensing.
Wage and Hour Division, Department of Labor. On December 16, 2019, the Department of Labor issued a final rule, the rule updates a number of regulations on the calculation of overtime compensation both to provide clarity and to better reflect the 21st-century workplace. These changes will promote compliance with the FLSA, provide appropriate and updated guidance in an area of evolving law and practice, and encourage employers to provide additional and innovative benefits to workers without fear of costly litigation. This final rule was effective on January 15, 2020.
CARES Act. In response to the COVID-19 pandemic, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act on March 27, 2020. Among other things, the CARES Act included the following provisions impacting financial institutions:
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Community Bank Leverage Ratio. The CARES Act directs federal bank regulators to adopt interim final rules to lower the threshold under the community bank leverage ratio from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulators issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the community bank leverage ratio framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% community bank leverage ratio requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% community bank leverage ratio requirement to a 9% community bank leverage ratio requirement. It establishes a minimum community bank leverage ratio of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable community bank leverage ratio requirement.
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Temporary Troubled Debt Restructurings (“TDR”) Relief. The CARES Act allows banks to elect to suspend requirements under GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a TDR, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. Federal banking regulators are required to defer to the determination of the banks making such suspension. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, extended this temporary relief until the earlier of 60 days after the termination date of the national emergency or January 1, 2022.
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Small Business Administration (“SBA”) Paycheck Protection Program. The CARES Act created the SBA’s Paycheck Protection Program. Under the Paycheck Protection Program, funds were authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions, including the Bank, that process loan applications and service the loans.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
The Company is subject to many risks that could adversely affect its future financial condition and performance and, therefore, the market value of its securities. The risk factors applicable to the Company include, but are not limited to the following:
COVID-19 Pandemic Risks
The ongoing COVID-19 pandemic and measures intended to prevent its spread may adversely affect our business, financial condition and operations; the extent of such impacts are highly uncertain and difficult to predict.
Global health and economic concerns relating to the COVID-19 outbreak and government actions taken to reduce the spread of the virus have had a material adverse impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. The pandemic has resulted in federal, state and local authorities, including those who govern the markets in which we operate, implementing numerous measures to try to contain the virus. These measures, including shelter in place orders and business limitations and shutdowns, have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The COVID-19 outbreak has adversely impacted and is likely to continue to adversely impact our workforce and operations and the operations of our customers and business partners. In particular, we may experience adverse effects due to a number of operational factors impacting us or our customers or business partners, including but not limited to:
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credit losses resulting from financial stress experienced by our borrowers, especially those operating in industries most hard hit by government measures to contain the spread of the virus;
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operational failures, disruptions or inefficiencies due to changes in our normal business practices necessitated by our
internal measures to protect our employees and government-mandated measures intended to slow the spread of the
virus;
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possible business disruptions experienced by our vendors and business partners in carrying out work that supports
our operations;
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decreased demand for our products and services due to economic uncertainty, volatile market conditions and
temporary business closures;
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any financial liability, credit losses, litigation costs or reputational damage resulting from our origination of PPP loans;
and
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heightened levels of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and
increased online activity brought about by the pandemic.
The extent to which the pandemic impacts our business, liquidity, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and
severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating
conditions can resume. In addition, the rapidly changing and unprecedented nature of COVID-19 heightens the inherent
uncertainty of forecasting future economic conditions and their impact on our loan portfolio, thereby increasing the risk that
the assumptions, judgments and estimates used to determine the allowance for loan losses and other estimates are
incorrect. Further, our loan deferral program could delay or make it difficult to identify the extent of asset quality deterioration during the deferral period. As a result of these and other conditions, the ultimate impact of the pandemic is highly uncertain and subject to change, and we cannot predict the full extent of the impacts on our business, our operations or the global economy as a whole.
Technology Risks
The Company’s operations may be adversely affected by cyber security risks.
In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks. The secure processing, maintenance, and use of this information is critical to the Company's operations and business strategy. In addition, the Company relies heavily on communications and information systems to conduct its business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in the Company's customer relationship management, general ledger, deposit, loan, and other systems. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect its networks, computers, and data from damage or unauthorized access. To date, the Company has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but the Company’s systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers. The Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged, or disclosed. A breach in security or other failure could result in legal claims, regulatory penalties, disruption in operations, increased expenses, loss of customers and business partners, and damage to the Company’s reputation, which could adversely affect its business and financial condition. Furthermore, as cyber threats continue to evolve and increase, the Company may be required to expend significant additional financial and operational resources to modify or enhance its protective measures, or to investigate and remediate any identified information security vulnerabilities.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions and other firms to better serve customers and to reduce costs. The pace of these technological changes has increased in the “Fintech” environment, in which industry changing products and services are often introduced and adopted, including innovative ways that customers can make payments, access products, and manage accounts. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services, which could entail significant time, resources and additional risk to develop or adopt, or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
Credit Risks
The Company’s concentration in loans secured by real estate may increase its credit losses, which would negatively affect our financial results.
At December 31, 2020, loans secured by real estate totaled $662.8 million and represented 79.25% of the Company’s loan portfolio, net of deferred loan fees. If we experience adverse changes in the local real estate market or in the local or national economy, borrowers’ ability to pay these loans may be impaired, which could impact the Company’s financial performance. The Company attempts to limit its exposure to this risk by applying good underwriting practices at origination, evaluating the appraisals used to establish property values, and routinely monitoring the financial condition of borrowers. If the value of real estate serving as collateral for the loan portfolio were to continue to decline materially, a significant part of the loan portfolio could become under-collateralized. If the loans that are secured by real estate become troubled when real estate market conditions are declining or have declined, in the event of foreclosure, the Company may not be able to realize the amount of collateral that was anticipated at the time of originating the loan. In that event, the Company might have to increase the provision for loan losses, which could have a material adverse effect on its operating results and financial condition.
An inadequate allowance for loan losses would reduce our earnings.
Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. We maintain an allowance for loan losses based upon many factors, including the following:
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actual loan loss history;
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nature, terms, and volume of the loan portfolio;
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the amount and trends of problems loans and non-performing loans;
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the effect of changes in the local real estate market on collateral values;
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the legal and regulatory environment;
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lending policies and procedures;
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credit administrations and lending staff;
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concentrations of credit;
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the loan review function;
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the effect of current economic conditions on a borrower’s ability to pay; and
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other factors deemed relevant by management.
These determinations are based upon estimates that are inherently subjective, and their accuracy depends on the outcome of future events; therefore, realized losses may differ from current estimates. Changes in economic, operating, and other conditions, including changes in interest rates, which are generally beyond our control, could increase actual loan losses significantly. As a result, actual losses could exceed our current allowance estimate. We cannot provide assurance that our allowance for loan losses is sufficient to cover actual loan losses should such losses differ significantly from the current estimates.
Liquidity and Interest Rate Risks
The Company’s success depends upon its ability to manage interest rate risk.
The profitability of the Company depends significantly on its net interest income, which is the difference between the interest earned on loans, securities and other interest-earning assets, and the interest paid on deposits and borrowings. Changes in interest rates will affect the rates earned on securities and loans and rates paid on deposits and other borrowings. While the Company believes that its current interest rate exposure does not present any significant negative exposure to interest rate changes, it cannot eliminate its exposure to interest rate risk because the factors which cause interest rate risk are beyond the Company’s control. These factors include competition, federal economic, monetary and fiscal policies, and general economic conditions.
The Company may be required to transition from the use of the London Inter Offered Rate (“LIBOR”) index in the future.
The Company has certain variable-rate loans indexed to LIBOR to calculate the loan interest rate. The United Kingdom Financial Conduct Authority, which regulates LIBOR, has previously announced that the continued availability of the LIBOR on the current basis is not guaranteed after 2021. In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one week and two month LIBOR offered rates will cease after December 31, 2021; but, the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, federal bank regulators have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.
It is difficult to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR, and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based variable-rate loans, as well as LIBOR-based securities, subordinated notes, trust preferred securities, or other securities or financial arrangements. The transition to alternative reference rate for new contracts, or the implementation of a substitute index or indices for the calculation of interest rates under the Company’s existing loan agreements with borrowers or other financial arrangements, could change the Company’s market risk profile, interest margin, interest spread and pricing models, may cause the Company to incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept a substitute index or indices, and may result in disputes or litigation with customers or other counter-parties over the appropriateness or comparability to LIBOR of the substitute index or indices, any of which could have a material adverse effect on the Company’s results of operations.
Market Risks
The Company’s success depends upon its ability to compete effectively in the banking industry.
The Company’s banking subsidiary faces competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area. Certain divisions within the banking subsidiary face competition from wealth management and investment brokerage firms. A number of these banks and other financial institutions are significantly larger and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. In addition, the Company faces competition from market place lenders and other financial technology firms, which may provide competitive services quickly and in innovative ways and may have fewer regulatory constraints and lower cost structures. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.
The Company could be adversely affected by economic conditions in its market area.
The Company’s branches are located in the counties of Clarke, Frederick and Loudoun, the towns of Purcellville, Leesburg and Ashburn, and the City of Winchester. Because our lending is concentrated in this market, we will be affected by the general economic conditions in these areas. Changes in the economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing. A decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact the demand for banking products and services generally, which could negatively affect our financial condition and performance.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.
Operational Risks
Our exposure to operational risk may adversely affect our business.
We are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.
Reputational risk, or the risk to our earnings and capital from negative public opinion, could result from our actual alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance or the occurrence of any of the events or instances mentioned below, or from actions taken by government regulators or community organizations in response to that conduct. Negative public opinion could also result from adverse news or publicity that impairs the reputation of the financial services industry generally.
Further, if any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be adversely affected. We depend on internal systems and outsourced technology to support these data storage and processing operations. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. We could be adversely affected if one of our employees causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. We are also at risk of the impact of natural disasters, terrorism and international hostilities on our systems or for the effects of outages or other failures involving power or communications systems operated by others.
If any of the foregoing risks materialize, it could have a material adverse affect on our business, financial condition and results of operations.
The Company may not be able to successfully manage its growth or implement its growth strategy, which may adversely affect results of operations and financial condition.
A key component of the Company’s business strategy is to continue to grow and expand. The Company’s ability to grow and expand depends upon its ability to open new branch locations, attract new deposits to the existing and new branch locations, and identify attractive loan and investment opportunities. The Company may not be able to implement its growth strategy if it is unable to identify attractive markets or branch locations. Once identified, successfully managing growth will depend on integrating the new branch locations while maintaining adequate capital, cost controls and asset quality. As this growth strategy is implemented, the Company will incur construction costs and increased personnel, occupancy and other operating expenses. Because these costs are incurred before new deposits and loans are generated, adding new branch locations will initially decrease earnings, despite efficient execution of this strategy. In addition, the Company could experience difficulties expanding into new markets or product lines. The Company’s lack of history and familiarity with those markets, clients and lines of business may lead to unexpected challenges or difficulties that inhibit its success and adversely affect the Company’s results of operations.
The Company relies heavily on its senior management team and the unexpected loss of key officers could adversely affect operations.
The Company believes that its growth and success depends heavily upon the skills of its senior management team. The Company also depends on the experience of its subsidiary’s officers and on their relationships with the customers they serve. The loss of one or more of these officers could disrupt the Company’s operations and impair its ability to implement its business strategy, which could adversely affect the Company’s financial condition and performance.
Legal, Regulatory and Compliance Risks
Government measures to regulate the financial industry, including the Dodd-Frank Act, subject us to increased regulation and could adversely affect us.
As a financial institution, we are heavily regulated at the state and federal levels. These laws and regulations are generally intended to benefit consumers, borrowers and depositors, but not investors. Our success depends on our ability to maintain compliance with existing and new laws and regulations. As a result of the financial crisis and related global economic downturn that began in 2007, we have faced, and expect to continue to face, increased public and legislative scrutiny as well as stricter and more comprehensive regulation of our financial services practices. The Dodd-Frank Act includes significant changes in the financial regulatory landscape and has increased our operations and compliance costs in the short-term. Future legislation, regulation and government policy, which are beyond our control, may change rapidly and unpredictably and could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. With the incoming Biden administration, a Democratic controlled Congress, and changes in leadership at federal agencies such as the CFPB, we expect that financial institutions will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices. As a result of the provisions in the Dodd-Frank Act and other current or future laws and regulations applicable to the Bank, we could experience additional costs, as well as limitations on the products and services we offer and on our ability to efficiently pursue business opportunities, which may adversely affect our businesses, financial condition or results of operations.
The Bank is subject to more stringent capital and liquidity requirements as a result of the Basel III regulatory capital reforms and the Dodd-Frank Act.
The Bank is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which it must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. Under the Dodd-Frank Act, the federal banking agencies have established stricter capital requirements and leverage limits for banks and bank holding companies that are based on the Basel III regulatory capital reforms. The Basel III Capital Rules require banking organizations to maintain significantly more capital and adopted more demanding regulatory capital risk weightings and calculations. While the recently passed Economic Growth Act requires that federal banking regulators establish a simplified leverage capital framework for smaller banks, these more stringent capital requirements could, among other things, limit banking operations and activities, and growth of loan portfolios, in order to focus on retention of earnings to improve capital levels. The Bank believes that it maintains sufficient levels of Tier 1 and Common Equity Tier 1 capital to comply with the Basel III Final rules. However, if the Bank fails to meet these minimum capital guidelines and/or other regulatory requirements, the Bank could be subject to regulatory restrictions, including limitations on paying dividends to the holding company for shareholder dividends and share repurchases and paying discretionary bonuses, or experience other adverse consequences that could cause its financial condition to be materially and adversely affected.
In addition, there can be no assurance that our methodology for assessing our asset quality will succeed in properly identifying impaired loans or calculating an appropriate loan loss allowance. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. If our assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if bank regulatory authorities require us to increase the allowance for loan losses as a part of their examination process, our earnings and capital could be significantly and adversely affected.
Changes in accounting standards could impact reported earnings and capital.
The authorities that promulgate accounting standards, including the Financial Accounting Standards Board (the “FASB”), the SEC, and other regulatory authorities, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of financial statements for prior periods. Such changes could also impact the capital levels of the Bank, or require the Company to incur additional personnel or technology costs. Most notably, new guidance on the calculation of credit reserves using current expected credit losses, referred to as CECL, was finalized in June 2016. The standard has been delayed for the Company and will now be effective for the Company beginning January 1, 2023. To implement the new standard, the Company has and will incur costs related to data collection and documentation, technology and training. Although the Company is currently unable to reasonably estimate the impact of the new standard on its financial statements, adoption of the new standard could necessitate, among other things, higher loan loss reserve levels, and the Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses and opening retained earnings as of the beginning of the quarter in which the standard is effective. If the Company is required to materially increase the level of the allowance for loan losses or incurs additional expenses to determine the appropriate level of the allowance for loan losses, such changes could adversely affect the Company’s capital levels, financial condition and results of operations.
Risks Relating to Our Securities
There can be no assurances concerning continuing dividend payments.
Our common stockholders are only entitled to receive the dividends declared by our Board of Directors. Although we have historically paid quarterly dividends on our common stock, there can be no assurances that we will be able to continue to pay regular quarterly dividends or an annual stock dividend or that any dividends we do declare will be in any particular amount. The primary source of money to pay our cash dividends comes from dividends paid to the Company by the Bank. The Bank’s ability to pay dividends to the Company is subject to, among other things, its earnings, financial condition and applicable regulations, which in some instances limit the amount that may be paid as dividends. In addition, the Company and the Bank are required to maintain a capital conservation buffer of 2.5% of Common Equity Tier 1 Capital on top of minimum risk-weighted asset ratios to pay dividends without additional restrictions.
There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price you paid for them.
Although our common shares are listed for trading under the symbol “EFSI,” the trading in our common shares has substantially less liquidity than many other publicly traded companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that volume of trading in our common shares will increase in the future.
The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.
The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Market fluctuations could adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes, tariffs, government shutdowns, Brexit, or international currency fluctuations, may negatively affect the market price of our common stock. Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein. As a result, period-to-period comparisons should not be relied upon as an indication of future performance. Our stock price could fluctuate significantly in response to our quarterly or annual results, annual projections, and the impact of these risk factors on our operating results or financial position.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

---

ITEM 2. PROPERTIES
Item 2. Properties
The Company owns or leases buildings which are used in normal business operations. The Company’s corporate headquarters, and that of Bank of Clarke County, is located at 2 East Main Street, Berryville, Virginia, 22611. At December 31, 2020, Bank of Clarke County operated twelve full-service branches, one loan production office and one drive-through only facility in the Virginia communities of Berryville, Winchester, Boyce, Stephens City, Purcellville, Leesburg, Ashburn and Fairfax. See Note 1 “Nature of Banking Activities and Significant Accounting Policies” and Note 6 “Bank Premises and Equipment, Net” and Note 13 "Leases" in the “Notes to the Consolidated Financial Statements” of this Form 10-K for information with respect to the amounts at which bank premises and equipment are carried and commitments under long-term leases.
All of the Company’s properties are well maintained, are in good operating condition and are adequate for the Company’s present and anticipated future needs.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company is a party or of which the property of the Company is subject.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
None.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is quoted on the OTC Markets Group's OTCQX Market under the symbol “EFSI.” The OTC Markets Group provides information about the common stock to professional market makers who match sellers with buyers. Securities brokers can obtain information from the OTC Markets Group when working with clients. When a client decides to initiate a transaction, the broker will contact one of the stock’s market makers. Any over-the-counter market quotations in the Company’s common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of March 18, 2021, the Company had approximately 929 shareholders of record.
The Company has historically paid dividends on a quarterly basis. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of the Company’s Board of Directors. Some of the factors affecting the payment of dividends on the Company’s common stock are operating results, financial condition, capital adequacy, regulatory requirements and shareholders returns.
Issuer Purchases of Equity Securities for the Quarter Ended December 31, 2020
On June 17, 2020, the Corporation renewed the stock repurchase program to repurchase up to 150,000 shares of its common stock prior to June 30, 2021. During 2020, the Company purchased 67,189 shares of its Common Stock under its stock repurchase program at an average price of $27.60.
The following table details the Company's purchases of its common stock during the fourth quarter pursuant to the Stock Repurchase program discussed above.
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plan
Maximum
Number of
Shares that
may Yet Be
Purchased
Under the
Plan
October 1 - October 31, 2020
-
$
-
-
137,626
November 1 - November 30, 2020
16,201
25.57
16,201
121,425
December 1 - December 31, 2020
-
-
16,201
121,425
16,201
$
25.57
16,201
121,425
Stock Performance
The following line graph compares the cumulative total return to the shareholders of the Company to the returns of the NASDAQ Bank Index and the NASDAQ Composite Index for the last five years. The amounts in the table represent the value of the investment on December 31st of the year indicated, assuming $100 was initially invested on December 31, 2015 and the reinvestment of dividends. See Management Discussion and Analysis sections Liquidity and Capital Resources and Note 16, “Restrictions on Dividends, Loans and Advances” to the Consolidated Financial Statements for information on Eagle Financial Services, Inc. ability and intent to pay dividends.
Eagle Financial Services, Inc.
NASDAQ Bank Index
NASDAQ Composite Index

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
The following table presents selected financial data, which was derived from the Company’s audited financial statements for the periods indicated.
December 31,
(dollars in thousands, except per share amounts)
Income Statement Data:
Interest and dividend income
$
38,908
$
35,454
$
31,923
$
28,351
$
25,785
Interest expense
3,281
4,239
2,515
1,154
1,067
Net interest income
$
35,627
$
31,215
$
29,408
$
27,197
$
24,718
Provision for (recovery of) loan losses
1,457
(625
)
(188
)
Net interest income after provision for (recovery of) loan losses
$
34,170
$
30,586
$
28,631
$
27,822
$
24,906
Noninterest income
8,579
7,759
3,879
6,780
6,669
Net revenue
$
42,749
$
38,345
$
35,510
$
34,602
$
31,575
Noninterest expenses
29,441
26,776
25,195
23,190
22,652
Income before income taxes
$
13,308
$
11,569
$
10,315
$
11,412
$
8,923
Applicable income taxes
2,136
1,810
1,314
3,626
2,553
Net Income
$
11,172
$
9,759
$
9,001
$
7,786
$
6,370
Performance Ratios:
Return on average assets
1.11
%
1.18
%
1.16
%
1.08
%
0.96
%
Return on average equity
11.03
%
10.60
%
10.67
%
9.50
%
7.98
%
Shareholders’ equity to assets
9.30
%
10.98
%
10.96
%
10.95
%
11.34
%
Dividend payout ratio
31.80
%
35.21
%
36.15
%
39.29
%
45.30
%
Non-performing loans to total loans
0.57
%
0.34
%
0.35
%
1.11
%
1.35
%
Non-performing assets to total assets
0.47
%
0.27
%
0.28
%
0.84
%
1.05
%
Per Share Data:
Net income, basic
$
3.27
$
2.84
$
2.60
$
2.24
$
1.81
Net income, diluted
3.27
2.84
2.60
2.24
1.81
Cash dividends declared
1.04
1.00
0.94
0.88
0.82
Book value
30.86
28.08
25.42
24.30
22.90
Market price
29.50
31.05
30.99
32.00
25.75
Average shares outstanding, basic
3,417,543
3,438,410
3,467,667
3,468,275
3,518,848
Average shares outstanding, diluted
3,417,543
3,438,410
3,467,667
3,468,275
3,518,848
Balance Sheet Data:
Total securities
$
166,222
$
166,200
$
145,468
$
133,673
$
120,330
Total loans
836,334
644,760
606,827
568,817
516,942
Total assets
1,130,152
877,320
799,617
765,751
700,149
Total deposits
1,013,098
771,544
703,104
663,414
603,877
Shareholders’ equity
105,074
96,326
87,599
83,817
79,416

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The purpose of this discussion is to focus on the important factors affecting the financial condition, results of operations, liquidity and capital resources of Eagle Financial Services, Inc. (the “Company”). This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
GENERAL
The Company is a bank holding company which owns 100% of the stock of Bank of Clarke County (the “Bank”). Accordingly, the results of operations for the Company are dependent upon the operations of the Bank. The Bank conducts a commercial banking business which consists of attracting deposits from the general public and investing those funds in commercial, consumer and real estate loans and corporate, municipal and U.S. government agency securities. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the extent permitted by law. At December 31, 2020, the Company had total assets of $1.13 billion, net loans of $829.2 million, total deposits of $1.01 billion and shareholders’ equity of $105.1 million. The Company’s net income was $11.2 million for the year ended December 31, 2020.
COVID-19 and Related Response
The COVID-19 crisis has changed our communities, both in the way we live and the way we do business. While circumstances continue to change at a rapid pace, the Company is steadfastly working to meet and exceed the needs of its customers, employees and the communities in which it does business. The Company, while considered an essential business, has implemented procedures to protect its employees, customers and the community and still serve their banking needs. Branch lobbies reopened in February 2021, but with enhanced safety features for employees and customers. Our customers also continue to conduct their business via automated teller machines, online banking and our call center. Approximately 50% of our employees are currently working from home with the remaining essential workers showing up every day at our branches and operations centers. In efforts to assist local businesses during this pandemic, the Company has approved 909 Small Business Association Paycheck Protection Program ("SBA PPP") loans, totaling $88.5 million as of December 31, 2020. The Company is also working with local small businesses, consumers and other commercial customers through its loan deferral program whereby customers experiencing hardships due to COVID-19 may be granted a deferral in loan payments for up to six months. During 2020, the Company approved 255 deferrals with loan balances totaling approximately $130.2 million for its customers experiencing hardships related to COVID-19. As of December 31, 2020, 241 loans with loan balances totaling approximately $128.7 million had begun making payments on their loans after the deferral date had passed.
MANAGEMENT’S STRATEGY
The Company strives to be an outstanding financial institution in its market by building solid sustainable relationships with: (1) its customers, by providing highly personalized customer service, a network of conveniently placed branches and ATMs, a competitive variety of products/services and courteous, professional employees, (2) its employees, by providing generous benefits, a positive work environment, advancement opportunities and incentives to exceed expectations, (3) its communities, by participating in local concerns, providing monetary support, supporting employee volunteerism and providing employment opportunities, and (4) its shareholders, by providing sound profits and returns, sustainable growth, regular dividends and committing to our local, independent status.
OPERATING STRATEGY
The Bank is a locally owned and managed financial institution. This allows the Bank to be flexible and responsive in the products and services it offers. The Bank grows primarily by lending funds to local residents and businesses at a competitive price that reflects the inherent risk of lending. The Bank attempts to fund these loans through deposits gathered from local residents and businesses. The Bank prices its deposits by comparing alternative sources of funds and selecting the lowest cost available. When deposits are not adequate to fund asset growth, the Bank relies on borrowings, both short and long term. The Bank’s primary source of borrowed funds is the Federal Home Loan Bank of Atlanta which offers numerous terms and rate structures to the Bank.
As interest rates change, the Bank attempts to maintain its net interest margin. This is accomplished by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through Eagle Investment Group, which is the Bank’s investment management division that offers both trust services and investment sales, mortgage originations and deposit operations. The Bank also incurs noninterest expenses associated with compensating employees, maintaining and acquiring fixed assets, and purchasing goods and services necessary to support its daily operations.
The Bank has a marketing department which seeks to develop new business. This is accomplished through an ongoing calling program whereby account officers visit with existing and potential customers to discuss the products and services offered. The Bank also utilizes traditional advertising such as television commercials, radio ads, newspaper ads, and billboards.
LENDING POLICIES
Administration and supervision over the lending process is provided by the Bank’s Credit Administration Department. The principal risk associated with the Bank’s loan portfolio is the creditworthiness of its borrowers. In an effort to manage this risk, the Bank’s policy gives loan amount approval limits to individual loan officers based on their position and level of experience. Credit risk is increased or decreased, depending on the type of loan and prevailing economic conditions. In consideration of the different types of loans in the portfolio, the risk associated with real estate mortgage loans, commercial loans and consumer loans varies based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay debt.
The Company has written policies and procedures to help manage credit risk. The Company utilizes a loan review process that includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and regular portfolio reviews to establish loss exposure and to ascertain compliance with the Company’s policies.
The Bank uses a tiered approach to approve credit requests consisting of individual lending authorities, joint approval of Category I officers, and a director loan committee. Lending limits for individuals are set by the Board of Directors and are determined by loan purpose, collateral type, and internal risk rating of the borrower. The highest individual authority (Category I) is assigned to the Bank’s President / Chief Executive Officer, Chief Revenue Officer and Chief Credit Officer (approval authority only). Two officers in Category I may combine their authority to approve loan requests to borrowers with credit exposure up to $10.0 million on a secured basis and $6.0 million unsecured. Three Category I officers may combine to approve loan requests to borrowers with credit exposure up to $15.0 million on a secured basis and $9.0 million unsecured. Officers in Category II, III, IV, V, VI and VII have lesser authorities and with approval of a Category I officer may extend loans to borrowers with exposure of $5.0 million on a secured basis and $3.0 million unsecured. Loans exceeding $15.0 million and up to the Bank’s legal lending limit can be approved by the Director Loan Committee consisting of four directors (three directors constituting a quorum). The Director’s Loan Committee also reviews and approves changes to the Bank’s Loan Policy as presented by management.
The following sections discuss the major loan categories within the total loan portfolio:
One-to-Four-Family Residential Real Estate Lending
Residential lending activity may be generated by the Bank’s loan officer solicitations, referrals by real estate professionals, and existing or new bank customers. Loan applications are taken by a Bank loan officer. As part of the application process, information is gathered concerning income, employment and credit history of the applicant. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Directors Loan Committee. In connection with residential real estate loans, the Bank requires title insurance, hazard insurance and, if applicable, flood insurance. In addition to traditional residential mortgage loans secured by a first or junior lien on the property, the Bank offers home equity lines of credit.
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real estate in the Bank’s market area, including multi-family residential buildings, commercial buildings and offices, small shopping centers and churches. Commercial real estate loan originations are obtained through broker referrals, direct solicitation of developers and continued business from customers. In its underwriting of commercial real estate, the Bank’s loan to original appraised value ratio is generally 80% or less. Commercial real estate lending entails significant additional risk as compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or the economy, in general. The Bank’s commercial real estate loan underwriting criteria require an examination of debt service coverage ratios, the borrower’s creditworthiness, prior credit history and reputation, and the Bank typically requires personal guarantees or endorsements of the borrowers’ principal owners.
Construction and Land Development Lending
The Bank makes local construction loans, primarily residential, and land acquisition and development loans. The construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The average life of most construction loans is less than one year and the Bank offers both fixed and variable rate interest structures. The interest rate structure offered to customers depends on the total amount of these loans outstanding and the impact of the interest rate structure on the Bank’s overall interest rate risk. There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of the estimated appraised value of the finished home. The Bank also obtains a first lien on the property as security for its construction loans and typically requires personal guarantees from the borrower’s principal owners. Finally, the Bank performs inspections of the construction projects to ensure that the percentage of construction completed correlates with the amount of draws on the construction line of credit.
Commercial and Industrial Lending
Commercial business loans generally have more risk than residential mortgage loans but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of its business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.
Consumer Lending
The Bank offers various secured and unsecured consumer loans, which include personal installment loans, personal lines of credit, automobile loans, and credit card loans. The Bank generally originates its consumer loans within its geographic market area and these loans are largely made to customers with whom the Bank has an existing relationship. Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral on a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and from any verifiable secondary income. Although creditworthiness of the applicant is the primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.
CRITICAL ACCOUNTING POLICIES
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within these statements is, to a significant extent, based on measurements of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the probable losses inherent in the Company’s loan portfolio. As required by GAAP, the allowance for loan losses is accrued when the occurrence of losses is probable and losses can be estimated. Impairment losses are accrued based on the differences between the loan balance and the value of its collateral, the present value of future cash flows, or the price established in the secondary market. The Company’s allowance for loan losses has three basic components: the general allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when actual events occur. The general allowance uses historical experience and other qualitative factors to estimate future losses and, as a result, the estimated amount of losses can differ significantly from the actual amount of losses which would be incurred in the future. However, the potential for significant differences is mitigated by continuously updating the loss history and qualitative factor analyses of the Company. The specific allowance is based upon the evaluation of specific impaired loans on which a loss may be realized. Factors such as past due history, ability to pay, and collateral value are used to identify those loans on which a loss may be realized. Each of these loans is then evaluated to determine how much loss is estimated to be realized on its disposition. The sum of the losses on the individual loans becomes the Company’s specific allowance. This process is inherently subjective and actual losses may be greater than or less than the estimated specific allowance. The unallocated allowance accounts for a measure of imprecision in the estimate. Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the 2020 Form 10-K, provides additional information related to the allowance for loan losses.
FORWARD LOOKING STATEMENTS
The Company makes forward looking statements in this report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:
•
difficult market conditions in our industry;
•
effects of soundness of other financial institutions;
•
potential impact on us of existing and future legislation and regulations;
•
the ability to successfully manage growth or implement growth strategies if the Bank is unable to identify attractive markets, locations or opportunities to expand in the future or successfully implement new product lines;
•
competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;
•
the successful management of interest rate risk;
•
risks inherent in making loans such as repayment risks and fluctuating collateral values;
•
changes in general economic and business conditions in the market area;
•
reliance on the management team, including the ability to attract and retain key personnel;
•
changes in interest rates and interest rate policies;
•
maintaining capital levels adequate to support growth;
•
maintaining cost controls and asset qualities as new branches are opened or acquired;
•
demand, development and acceptance of new products and services;
•
problems with technology utilized by the Bank;
•
changing trends in customer profiles and behavior;
•
changes in accounting policies and banking and other laws and regulations; and
•
other factors described in Item 1A., “Risk Factors,” above.
Because of these uncertainties, actual future results may be materially different from the results indicated by these forward looking statements. In addition, past results of operations do not necessarily indicate future results.
RESULTS OF OPERATIONS
Net Income
Net income for 2020 was $11.2 million, an increase of $1.4 million or 14.48% from 2019’s net income of $9.8 million. Basic and diluted earnings per share were $3.27 and $2.84 for 2020 and 2019, respectively.
Return on average assets (ROA) measures how efficiently the Company uses its assets to produce net income. Some issues reflected within this efficiency include the Company’s asset mix, funding sources, pricing, fee generation, and cost control. The ROA of the Company, on an annualized basis, was 1.11%, 1.18%, and 1.16% for 2020, 2019, and 2018, respectively.
Return on average equity (ROE) measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by the shareholders. The ROE for the Company was 11.03%, 10.60%, and 10.67% for 2020, 2019, and 2018, respectively.
Net Interest Income
Net interest income, the difference between total interest income and total interest expense, is the Company’s primary source of earnings. Net interest income was $35.6 million for 2020 and $31.2 million for 2019, which represents an increase of $4.4 million or 14.13%. Net interest income is derived from the volume of earning assets and the rates earned on those assets as compared to the cost of funds. Total interest income was $38.9 million for 2020 and $35.5 million for 2019, which represents an increase of $3.4 million or 9.74% for 2020. Total interest expense was $3.3 million for 2020 and $4.2 million for 2019, which represents a decrease of $958 thousand or 22.60% in 2020. The increase in total interest income and net interest income during 2020 was driven by the growth in interest-earning assets and decreases in rates paid on deposit accounts driven by market rate decreases. Refer to the table titled “Volume and Rate Analysis” for further detail.
The table titled “Average Balances, Income and Expenses, Yields and Rates” displays the composition of interest earnings assets and interest bearing liabilities and their respective yields and rates for the years ended December 31, 2020, 2019, and 2018.
The net interest margin was 3.76% for 2020, 4.02% for 2019, and 4.07% for 2018. The net interest margin is calculated by dividing tax-equivalent net interest income by total average earnings assets. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The tax rate used to calculate the tax benefit was 21%. The table titled “Tax-Equivalent Net Interest Income” reconciles net interest income to tax-equivalent net interest income, which is not a measurement under GAAP, for the years ended December 31, 2020, 2019, and 2018.
Net interest income and net interest margin may experience some decline as interest bearing assets continue to be repriced or replaced more rapidly than interest earning liabilities.
Average Balances, Income and Expenses, Yields and Rates
(dollars in thousands)
December 31, 2020
December 31, 2019
December 31, 2018
Average
Interest
Income/
Average
Average
Interest
Income/
Average
Average
Income/
Average
Balance
Expense
Rate
Balance
Expense
Rate
Balance
Expense
Rate
Assets:
Securities:
Taxable
$
130,566
$
2,934
2.25
%
$
113,625
$
3,159
2.78
%
$
98,628
$
2,803
2.84
%
Tax-Exempt (1)
21,764
3.42
%
31,009
1,084
3.50
%
38,656
1,331
3.44
%
Total Securities
$
152,330
$
3,678
2.41
%
$
144,634
$
4,243
2.93
%
$
137,284
$
4,134
3.01
%
Loans:
Taxable
744,622
34,925
4.69
%
613,884
30,722
5.00
%
573,040
27,482
4.80
%
Non-accrual
3,618
-
-
%
2,723
-
-
%
1,916
-
-
%
Tax-Exempt (1)
9,992
4.42
%
11,722
4.49
%
11,591
4.45
%
Total Loans
$
758,232
$
35,366
4.66
%
$
628,329
$
31,248
4.97
%
$
586,547
$
27,998
4.77
%
Federal funds sold
0.24
%
2.06
%
2.24
%
Interest-bearing deposits in other banks
47,261
0.24
%
15,202
1.95
%
9,712
1.81
%
Total earning assets
$
954,564
$
39,157
4.10
%
$
785,636
$
35,792
4.56
%
$
731,761
$
32,311
4.42
%
Allowance for loan losses
(6,041
)
(5,333
)
(4,661
)
Total non-earning assets
66,007
49,780
48,601
Total assets
$
1,014,530
$
830,083
$
775,701
Liabilities and Shareholders' Equity:
Interest-bearing deposits:
NOW accounts
$
108,965
$
0.32
%
$
89,536
$
0.50
%
$
91,353
$
0.35
%
Money market accounts
184,346
0.50
%
150,291
1,463
0.97
%
132,136
0.62
%
Savings accounts
122,560
0.10
%
105,176
0.20
%
104,473
0.15
%
Time deposits:
$250,000 and more
75,520
1,203
1.59
%
59,550
1,221
2.05
%
70,778
0.97
%
Less than $250,000
60,600
1.08
%
61,775
1.38
%
36,808
1.38
%
Total interest-bearing deposits
$
551,991
$
3,256
0.59
%
$
466,328
$
4,193
0.90
%
$
435,548
$
2,490
0.57
%
Federal funds purchased and securities sold under agreements to repurchase
-
0.60
%
1,074
2.89
%
2.59
%
Federal Home Loan Bank advances
7,650
0.33
%
2,547
0.59
%
-
-
-
%
Total interest-bearing liabilities
$
559,642
$
3,281
0.59
%
$
469,949
4,239
0.90
%
$
436,512
$
2,515
0.58
%
Noninterest-bearing liabilities:
Demand deposits
341,229
258,176
246,056
Other Liabilities
12,357
9,900
8,811
Total liabilities
$
913,228
$
738,025
$
691,379
Shareholders' equity
101,302
92,058
84,322
Total liabilities and shareholders' equity
$
1,014,530
$
830,083
$
775,701
Net interest income
$
35,876
$
31,553
$
29,796
Net interest spread
3.51
%
3.66
%
3.84
%
Interest expense as a percent of average earning assets
0.34
%
0.54
%
0.34
%
Net interest margin
3.76
%
4.02
%
4.07
%
(1)
Income and yields are reported on a tax-equivalent basis using a federal tax rate of 21%.
(2)
Non-accrual loans are not included in this total since they are not considered earning assets.
Tax-Equivalent Net Interest Income
(dollars in thousands)
Twelve Months Ended
December 31,
(in thousands)
GAAP Financial Measurements:
Interest Income - Loans
$
35,273
$
31,138
$
27,890
Interest Income - Securities and Other Interest-Earnings Assets
3,635
4,316
4,033
Interest Expense - Deposits
3,256
4,193
2,490
Interest Expense - Other Borrowings
Total Net Interest Income
$
35,627
$
31,215
$
29,408
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans
$
$
$
Add: Tax Benefit on Tax-Exempt Interest Income - Securities
Total Tax Benefit on Tax-Exempt Interest Income
$
$
$
Tax-Equivalent Net Interest Income
$
35,876
$
31,553
$
29,796
(1)
Tax benefit was calculated using the federal statutory tax rate of 21%.
The tax-equivalent yield on earning assets decreased 46 basis points from 2019 to 2020 and increased 14 basis points from 2018 to 2019. The tax-equivalent yield on securities decreased 52 basis points from 2019 to 2020 and decreased eight basis point from 2018 to 2019. The tax-equivalent yield on loans decreased 31 basis points from 2019 to 2020 and increased 20 basis points from 2018 to 2019. The decrease in the yield on earning assets, the loan portfolio and the securities portfolio in 2020 was mainly a result of decreases in interest rates by the Federal Reserve during the first quarter of the year.
The average rate on interest-bearing liabilities decreased 31 basis points from 2019 to 2020 and increased 32 basis points from 2018 to 2019. The average rate on total interest-bearing deposits decreased 31 basis points from 2019 to 2020 and increased 33 basis points from 2018 to 2019. The average rate on interest bearing deposits decreased due to the decreases in rates paid on deposit accounts driven by market rate decreases. In general, deposit pricing is done in response to monetary policy actions and yield curve changes. Local competition for funds affects the cost of time deposits, which are primarily comprised of certificates of deposit. The Company prefers to rely most heavily on non-maturity deposits, which include NOW accounts, money market accounts, and savings accounts. The average balance of non-maturity interest-bearing deposits increased $70.9 million or 20.54% from $345.0 million during 2019 to $415.9 million in 2020 and $17.0 million or 5.20% from $328.0 million during the year ended December 31, 2018 as compared to the year ending 2019.
The table titled “Volume and Rate Analysis” provides information about the effect of changes in financial assets and liabilities and changes in rates on net interest income. Non-accruing loans are excluded from the average outstanding loans.
Tax-equivalent net interest income increased $4.3 million during 2020. The increase in tax-equivalent net interest income during 2020 is comprised of an increase due to volume of $5.7 million and a decrease due to rate of $1.3 million. The increase in tax-equivalent net interest income during 2020 was affected by the increased volume of taxable loans and taxable securities, offset in part by decreases in the rates earned from interest-earning assets.
Tax-equivalent net interest income increased $1.8 million during 2019. The increase in tax-equivalent net interest income during 2019 is comprised of an increase due to volume of $1.9 million and a decrease due to rate of $149 thousand. The increase in tax-equivalent net interest income during 2019 was affected by the increased volume of taxable loans and taxable securities, offset in part by an increase in the rate paid on interest-bearing liabilities.
Volume and Rate Analysis (Tax-Equivalent Basis)
(dollars in thousands)
2020 vs 2019
Increase (Decrease)
Due to Changes in:
2019 vs 2018
Increase (Decrease)
Due to Changes in:
Volume
Rate
Total
Volume
Rate
Total
Earning Assets:
Securities:
Taxable
$
$
(1,032
)
$
(225
)
$
$
(57
)
$
Tax-exempt
(316
)
(24
)
(340
)
(271
)
(247
)
Loans:
Taxable
5,929
(1,726
)
4,203
2,045
1,195
3,240
Tax-exempt
(76
)
(9
)
(85
)
Federal funds sold
(191
)
(3
)
-
Interest-bearing deposits in other banks
(317
)
(185
)
Total earning assets
$
6,215
$
(2,850
)
$
3,365
$
2,300
$
1,181
$
3,481
Interest-Bearing Liabilities:
NOW accounts
$
$
(259
)
$
(103
)
$
(6
)
$
$
Money market accounts
(1,001
)
(533
)
Savings accounts
(128
)
(86
)
Time deposits:
$250,000 and more
(110
)
(18
)
(89
)
Less than $250,000
(16
)
(181
)
(197
)
-
Total interest-bearing deposits
$
$
(1,477
)
$
(937
)
$
$
1,327
$
1,703
Federal funds purchased and securities sold under agreements to repurchase
$
(2
)
$
(29
)
$
(31
)
$
$
$
Federal Home Loan Bank advances
(3
)
-
Total interest-bearing liabilities
$
$
(1,509
)
$
(958
)
$
$
1,330
$
1,724
Change in net interest income
$
5,664
$
(1,341
)
$
4,323
$
1,906
$
(149
)
$
1,757
Provision for Loan Losses
The provision for loan losses is based upon management’s estimate of the amount required to maintain an adequate allowance for loan losses as discussed within the Critical Accounting Policies section above. The provision for loan losses was $1.5 million for 2020 and $629 thousand for 2019. Changes in the amount of provision for loan losses during each period reflect the results of the Company’s analysis used to determine the adequacy of the allowance for loan losses. The provision for loan losses in 2020 reflects loan growth in the portfolio during the year as well as decline in the current state of the economy and the related increase in the qualitative factors within our allowance for loan losses, primarily associated with the ongoing COVID-19 pandemic. The provision for loan losses in 2019 reflects loan growth in the portfolio during the year as well as one large charge-off in the amount of $850 thousand. The Company is committed to maintaining an allowance that adequately reflects the risk inherent in the loan portfolio. This commitment is more fully discussed in the “Asset Quality” section.
Noninterest Income
Total noninterest income was $8.6 million, $7.8 million, and $6.9 million during 2020 and 2019, respectively. This represents an increase of $820 thousand or 10.57% for 2020. Management reviews the activities which generate noninterest income on an ongoing basis.
The following table provides the components of noninterest income for the twelve months ended December 31, 2020 and 2019, which are included within the respective Consolidated Statements of Income headings. The following paragraphs provide information about activities which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.
December 31,
(dollars in thousands)
$ Change
% Change
Income from fiduciary activities
$
1,398
$
1,380
$
1.30
%
Service charges on deposit accounts
1,187
(267
)
(22.49
)%
Other service charges and fees
4,757
4,893
(136
)
(2.78
)%
Gain (loss) on sale of bank premises and equipment
(132
)
NM
Gain (loss) on sale of securities
(7
)
NM
Bank owned life insurance income
(48
)
NM
Other operating income
131.34
%
Total noninterest income
$
8,579
$
7,759
$
10.57
%
NM - Not Meaningful
Services charges on deposit accounts decreased $267 thousand or 22.49% when comparing the year ended December 31, 2020 to 2019. This decrease is mainly due to decreases in overdraft charges. Reduced overdraft
charges can be attributed mostly to changes in customer activity during the COVID-19 pandemic.
Bank owned life insurance (BOLI) income increased significantly during 2020 when compared to 2019. During 2020 the Company invested $12 million into BOLI.
Other operating income increased during 2020. The fluctuation from 2019 to 2020 is mostly attributed to cash distributions received from various investments of Company.
Noninterest Expenses
Total noninterest expenses were $29.4 million and $26.8 million during 2020 and 2019, respectively. This represents an increase of $2.7 million or 9.95% during 2020.
The following table provides the components of noninterest expense for the twelve months ended December 31, 2020 and 2019, which are included within the respective Consolidated Statements of Income headings. The following paragraphs provide information about activities which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.
December 31,
(dollars in thousands)
$ Change
% Change
Salaries and employee benefits
$
18,074
$
15,025
$
3,049
20.29
%
Occupancy expenses
1,592
1,611
(19
)
(1.18
)%
Equipment expenses
15.29
%
Advertising and marketing expenses
(161
)
(18.55
)%
Stationery and supplies
(28
)
(16.28
)%
ATM network fees
1,009
1,141
(132
)
(11.57
)%
Other real estate owned expense
(67
)
(88.16
)%
(Gain) loss on foreclosure and sale of other real estate owned
(143
)
(586
)
NM
FDIC assessment
110.48
%
Computer software expense
47.93
%
Bank franchise tax
7.47
%
Professional fees
1,120
1,057
5.96
%
Data processing fees
1,657
1,275
29.96
%
Other operating expenses
2,679
3,031
(352
)
(11.61
)%
Total noninterest expenses
$
29,441
$
26,776
$
2,665
9.95
%
NM - Not Meaningful
The COVID-19 pandemic has had and continues to have an impact on noninterest expenses incurred during 2020. Decreases in expenses compared to the prior year were noted in advertising and marketing expenses as well as ATM network fees. These decreases were due to adjustments in the timing of marketing promotions and change in customer activity during this time. Increases in equipment expenses and computer software expenses in comparison to the prior year were largely due to hardware and software purchases to allow for remote work during the COVID-19 pandemic.
Salaries and employee benefits expense increased during 2020. Annual pay increases, newly hired employees, additional bonus/COVID pay for employees that have been unable to work remotely during the pandemic and additional bonuses for loan employees originating SBA PPP lending have attributed to the increases in 2020.
Advertising and marketing expenses increased during 2019. Digital marketing expenses increased approximately $108 thousand as the Company strategically began placing more resources into that area during 2019.
Other real estate owned expenses and (Gain) loss on other real estate owned decreased significantly during 2020. These amounts can fluctuate based on the number of properties foreclosed on and sold during any time period.
FDIC assessments decreased during increased back to regular levels during 2020. The Company received notification of a Small Bank Credit Assessment for approximately $178 thousand during the second quarter of 2019. This credit was received because the Deposit Insurance Fund reserve ratio exceeded the established level as of June 30, 2019. Credits were applied to the successive invoices in 2019.
Bank franchise tax has increased during 2020. This expense increases as capital levels increase.
Data processing fees increased during 2020. Much of this increase is related to the Company moving its in-house core banking software to a service bureau environment. The Company migrated to a service bureau environment in late June 2018. This increase can also be attributed to an increase in both the number of customers and the number of transactions being performed.
Other operating expenses decreased during 2020. During the third and fourth quarters of 2019, $150 thousand was accrued and subsequently paid in connection with the Separation Agreement and Release with James W. McCarty, Jr.'s resignation as Executive Vice President, Chief Administrative Officer and Secretary of the Company.
The efficiency ratio of the Company was 67.59% and 67.21% for 2020 and 2019, respectively. The efficiency ratio is calculated by dividing total noninterest expenses by the sum of tax-equivalent net interest income and total noninterest income, excluding gains and losses on the investment portfolio and other gains/losses from OREO, repossessed vehicles, disposals of bank premises and equipment, etc. The tax rate utilized is 21%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency. A reconciliation of tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income is presented within the Net Interest Income section above.
The calculation of the efficiency ratio for the twelve months ended December 31, 2020 and 2019 are as follows:
December 31,
(in thousands)
Summary of Operating Results:
Noninterest expenses
$
29,441
$
26,776
Less: (Gain) loss on other real estate owned
(143
)
Adjusted noninterest expenses
$
29,584
$
26,333
Net interest income
$
35,627
$
31,215
Noninterest income
$
8,579
$
7,759
Less: Gain (loss) on sales of securities
(7
)
Less: Gain (loss) on the sale and disposal of premises and equipment
Less: (Loss) on sale of repossessed assets
(5
)
-
Adjusted noninterest income
$
7,892
$
7,629
Tax equivalent adjustment (1)
Total net interest income and noninterest income, adjusted
$
43,768
$
39,182
Efficiency ratio
67.59
%
67.21
%
(1)
Includes tax-equivalent adjustments on loans and securities using the federal statutory tax rate of 21%.
Income Taxes
Income tax expense was $2.1 million and $1.8 million for the years ended December 31, 2020 and 2019, respectively. These amounts correspond to an effective tax rate of 16.05% and 15.65% for 2020 and 2019, respectively. The effective tax rate is below the statutory rate of 21%, due primarily to tax credits on qualified affordable housing project investments as discussed in Note 25 to the Consolidated Financial Statements as well as qualified rehabilitation credits. During 2020, one of the Company’s tax credit investments was finalized and the total amount of credits to be received was determined and certified. The effective tax rate is also impacted by tax-exempt income on investment securities and loans. Note 9 to the Consolidated Financial Statements provides a reconciliation between income tax expense computed using the federal statutory income tax rate and the Company’s actual income tax expense during 2020 and 2019.
FINANCIAL CONDITION
Assets, Liabilities and Shareholders’ Equity
The Company’s total assets were $1.13 billion at December 31, 2020, an increase of $252.8 million or 28.82% from $877.3 million at December 31, 2019. Securities remained relatively stable between 2019 and 2020. Loans, net of allowance for loan losses, increased by $189.5 million or 29.61% from 2019 to 2020. Total liabilities were $1.03 billion at December 31, 2020, compared to $781.0 million at December 31, 2019. Total shareholders’ equity at year end 2020 and 2019 was $105.1 million and $96.3 million, respectively.
Securities
Total securities, excluding restricted stock, were $165.0 million as of December 31, 2019 and 2020. The table titled “Securities Portfolio” shows the carrying value of securities at December 31, 2020, 2019, and 2018. The Company purchased $78.4 million in securities during 2020. This amount includes $77.2 million or 98.41% in mortgage-backed securities and $1.2 million or 1.59% in subordinated debt. The Company had $52.4 million in maturities, calls, and principal repayments on securities during 2020. This amount includes $5.3 million or 10.17% in obligations of U.S. government corporations and agencies, $39.1 million or 74.58% in mortgage-backed securities and $8.0 million or 15.25% in obligations of states and political subdivisions. The Company did not have any securities from a single issuer, other than U.S. government agencies, whose amount exceeded 10% of shareholders’ equity as of December 31, 2020. Note 2 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio as of December 31, 2020 and 2019.
Securities Portfolio
(dollars in thousands)
December 31,
Securities available for sale:
Obligations of U.S. government corporations and agencies
$
17,483
$
22,186
$
21,731
Mortgage-backed securities
119,009
108,161
76,483
Obligations of states and political subdivisions
27,213
34,656
46,084
Subordinated debt
1,250
-
-
$
164,955
$
165,003
$
144,298
The ability to dispose of available for sale securities prior to maturity provides management more options to react to future rate changes and provides more liquidity, when needed, to meet short-term obligations. The Company had a net unrealized gain on available for sale securities of $4.1 million and $1.8 million at December 31, 2020 and 2019, respectively. Unrealized gains or losses on available for sale securities are reported within shareholders’ equity, net of the related deferred tax effect, as accumulated other comprehensive income (loss).
The table titled “Maturity Distribution and Yields of Securities” shows the maturity period and average yield for the different types of securities in the portfolio at December 31, 2020. Although mortgage-backed securities have definitive maturities, they provide monthly principal curtailments which can be reinvested at a prevailing rate and for a different term.
Maturity Distribution and Yields of Securities
(dollars in thousands)
December 31, 2020
Due in one year
or less
Due after 1
through 5 years
Due after 5
through 10 years
Due after 10 years
and Equity Securities
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Securities available for sale:
Obligations of U.S. government corporations and agencies
$
-
-
%
$
1,057
3.29
%
$
15,240
2.74
%
$
1,186
2.46
%
$
17,483
2.75
%
Mortgage-backed securities
-
-
%
-
-
%
-
-
%
119,009
1.59
%
119,009
1.59
%
Subordinated debt
-
-
%
-
-
%
1,250
5.00
%
-
-
%
1,250
5.00
%
Obligations of states and political subdivisions, taxable
-
-
%
3,662
2.79
%
4,105
3.10
%
1,065
2.73
%
8,832
2.93
%
Total taxable
$
-
-
%
$
4,719
2.90
%
$
20,595
2.95
%
$
121,260
1.61
%
$
146,574
1.83
%
Obligations of states and political subdivisions, tax-exempt (1)
3.85
%
4,160
2.57
%
13,461
2.59
%
-
-
%
18,381
2.64
%
Total
$
3.85
%
$
8,879
2.74
%
$
34,056
2.81
%
$
121,260
1.61
%
$
164,955
1.92
%
(1)
Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 21%.
Loan Portfolio
The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Gross loans net of deferred costs and fees were $836.3 million and $644.8 million at December 31, 2020 and 2019, respectively. This represents an increase of $191.5 million or 29.71% for 2020. The ratio of net loans to deposits decreased during the year from 82.92% to 81.85% at December 31, 2019 and December 31, 2020, respectively. This decrease was due to strong deposit growth during the year. The table titled “Loan Portfolio” shows the composition of the loan portfolio over the last five years. Loan balances in the table are shown before net deferred costs and fees.
Loan Portfolio
(dollars in thousands)
Loans secured by real estate:
Construction and land development
$
42,544
$
42,561
$
54,675
$
43,786
$
23,266
Secured by farmland
15,846
13,917
7,251
8,568
8,525
Secured by 1-4 family residential properties
248,246
219,580
221,861
223,210
227,966
Multifamily
21,496
14,415
7,923
4,095
3,566
Commercial
334,661
286,600
265,595
239,915
208,525
Commercial and industrial loans
140,762
46,543
33,086
37,427
30,341
Consumer installment loans
21,321
9,541
8,470
10,187
12,677
All other loans
10,773
12,050
8,454
2,050
2,259
Total loans
$
835,649
$
645,207
$
607,315
$
569,238
$
517,125
Loans secured by real estate were $662.8 million or 79.25% and $577.1 million or 89.50% of total loans at December 31, 2020 and 2019, respectively. This represents an increase of $85.7 million or 14.85% for 2020. Consumer installment loans were $21.3 million or 2.55% and $9.5 million or 1.48% of total loans at December 31, 2020 and 2019, respectively. This represents an increase of $11.8 million or 123.47% for 2020. Commercial and industrial loans were $140.8 million or 16.83% and $46.5 million or 7.22% of total loans at December 31, 2020 and 2019. This represents an increase of $94.2 million or 202.43% for 2020. All other loans were $10.8 million and $12.1 million at December 31, 2020 and 2019. This represents a decrease of $1.3 million or 10.60%. During the year ended December 31, 2020, loan growth was mainly concentrated in commercial and industrial loans, resulting from SBA PPP loan originations. SBA PPP loans outstanding as of December 31, 2020 were $81.3 million. There was also strong growth in residential and commercial real estate loans during this period.
The table titled “Maturity Schedule of Selected Loans” shows the different loan categories and the period during which they mature. For loans maturing in more than one year, the table also shows a breakdown between fixed rate loans and floating rate loans. The table indicates that $368.1 million or 44.05% of the loan portfolio matures within five years. The floating rate loans maturing after five years are primarily comprised of loan secured by 1-4 family residential properties.
Maturity Schedule of Selected Loans
(dollars in thousands)
December 31, 2020
Within
1 Year
After
1 Year
Within
5 Years
After
5 Years
Total
Loans secured by real estate:
Construction and land development
$
17,616
$
15,600
$
9,328
$
42,544
Secured by farmland
6,321
8,882
15,846
Secured by 1-4 family residential properties
16,283
61,996
169,967
248,246
Multifamily
13,408
7,130
21,496
Commercial
29,311
98,494
206,856
334,661
Commercial and industrial loans
9,825
90,317
40,620
140,762
Consumer installment loans
5,786
15,007
21,321
All other loans
9,764
10,773
$
75,561
$
292,534
$
467,554
$
835,649
For maturities over one year:
Floating rate loans
$
39,808
$
113,289
$
153,097
Fixed rate loans
252,726
354,265
606,991
$
292,534
$
467,554
$
760,088
Asset Quality
The Company has policies and procedures designed to control credit risk and to maintain the quality of its loan portfolio. These include underwriting standards for new originations and ongoing monitoring and reporting of asset quality and adequacy of the allowance for loan losses. There were $5.4 million in total non-performing assets, which consist of nonaccrual loans, loans 90 days or more past due and still accruing, other real estate owned, and repossessed assets at December 31, 2020. This is an increase of $3.0 thousand when compared to the December 31, 2019 balance of $2.4 million. This increase resulted mostly from the increase in nonaccrual loans.
Nonaccrual loans were $4.8 million at December 31, 2020 and $2.2 million at 2019. The gross amount of interest income that would have been recognized on nonaccrual loans was $158 thousand for 2020 and $52 thousand for 2019. None of this interest income was included in net income for 2020 or 2019. A total of 13 loans totaling $3.8 million were placed in nonaccrual during 2020. The balance of these loans added to nonaccrual status during 2020 ranged from $12 thousand to $1.5 million with the average outstanding balance being $293 thousand. In addition, five loans totaling $618 thousand were removed from nonaccrual status during 2020. Of the $618 thousand in loans removed from nonaccrual status between December 31, 2019 and December 31, 2020, one loan was paid off, three loans were foreclosed on and one loan was charged-off. Management evaluates the financial condition of these borrowers and the value of any collateral on these loans. The results of these evaluations are used to estimate the amount of losses which may be realized on the disposition of these nonaccrual loans. Nonaccrual loans that were evaluated for impairment at December 31, 2020 totaled $4.8 million and had no specific allocations assigned.
Other real estate owned increased from $183 thousand at December 31, 2019 to $607 thousand at December 31, 2020. Three properties were foreclosed on during 2020. The property held at December 31, 2019 sold during the year. When the property is sold, the difference between the amount of other real estate owned and the settlement proceeds is recognized as a gain or loss on the sale of other real estate owned. A net gain of $143 thousand was recognized on other real estate owned during 2020. Net losses of $443 thousand were recognized on other real estate owned during 2019.
Nonperforming and Other Assets
Nonperforming assets consist of nonaccrual loans, loans past due 90 days and accruing interest, other real estate owned (foreclosed properties), and repossessed assets. The table titled “Nonperforming Assets” shows the amount of nonperforming assets and loans past due 90 days and accruing interest outstanding during the last five years. The table also shows the ratios for the allowance for loan losses as a percentage of nonperforming assets and nonperforming assets as a percentage of loans outstanding and other real estate owned.
Loans are placed on non-accrual status when collection of principal and interest is doubtful, generally when a loan becomes 90 days past due. There are three negative implications for earnings when a loan is placed on non-accrual status. First, all interest accrued but unpaid at the date that the loan is placed on non-accrual status is either deducted from interest income or written off as a loss. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses that require additional provisions for loan losses to be charged against earnings.
For real estate loans, upon foreclosure, the properties are recorded at the fair value of the property based on current appraisals and other current market trends, less selling costs. If a write down of the OREO property is necessary at the time of foreclosure, the amount is charged-off against the allowance for loan losses. A review of the recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair value, additional write downs of the property value are charged directly to operations. Gains on properties acquired through foreclosure where the fair value less costs to sell exceeds the related loan balance and there have been no prior charge-offs are recorded to current earnings.
In addition, the Company may, under certain circumstances, restructure loans in troubled debt restructurings as a concession to a borrower when the borrower is experiencing financial distress. Each loan considered for restructuring is evaluated based on customer circumstances and may include modifications to one or more loan provisions. Such restructured loans are included in impaired loans. At December 31, 2020, 2019, 2018, 2017, and 2016, the Company had $3.3 million, $3.0 million, $3.8 million, $4.4 million and $7.3 million in restructured loans, respectively.
Nonperforming Assets
(dollars in thousands)
December 31,
Nonaccrual loans
$
4,754
$
2,185
$
2,118
$
6,339
$
6,991
Loans past due 90 days and accruing interest
-
-
-
Other real estate owned and repossessed assets
Total nonperforming assets
$
5,361
$
2,368
$
2,919
$
6,445
$
7,374
Allowance for loan losses to nonperforming assets
%
%
%
%
%
Non-performing assets to period end loans and other real estate owned
0.64
%
0.37
%
0.48
%
1.13
%
1.43
%
Other potential problem loans are defined as performing loans that possess certain risks that management has identified that could result in the loans not being repaid in accordance with their terms. Accordingly, these loans are risk rated at a level of substandard or lower. At December 31, 2020, other potential problem loans totaled $2.7 million. Of the total other potential problem loans, $2.7 million or 100.00% are currently considered impaired and are disclosed in Note 4 to the Consolidated Financial Statements.
Allowance for Loan Losses
The purpose and the methods for measuring the allowance for loans are discussed in the Critical Accounting Policies section above. The table titled “Analysis of Allowance for Loan Losses” shows the activity within the allowance during the last five years, including a breakdown of the loan types which were charged-off and recovered.
Charged-off loans were $465 thousand and $1.3 million for 2020 and 2019, respectively. Recoveries were $1.1 million and $201 thousand for 2020 and 2019, respectively. Net recoveries were $666 thousand for 2020. Net charge-offs were $1.1 million for 2019. This represents a decrease in net charge-offs of $1.8 million or 159.89% for 2020. The allowance for loan losses as a percentage of loans was 0.85% and 0.77% at the end of 2020 and 2019, respectively. Excluding outstanding PPP loans of $81.3 million as of December 31, 2020, the allowance for loan losses as a percentage of total loans was 0.94%. The increase in allowance for loan losses as a percentage of total loans from December 31, 2019 to December 31, 2020 is primarily due to the decline in the current state of the economy and the related increase in the qualitative factors within our allowance for loan losses, primarily associated with the current COVID-19 pandemic. The allowance for loan losses at year-end covered net charge-offs during the year by 4.47 times for 2019. This ratio for 2020 is not considered meaningful due to net recoveries being recognized. The ratio of net charge-offs (recoveries) to average loans was (0.09)% for 2020 and 0.18% for 2019.
The provision for loan losses for the year ended December 31, 2020 was $1.5 million, compared to $629 thousand for the year ended December 31, 2019. The provision for loan losses in 2020 reflected loan growth in the portfolio during the year as well as decline in the current state of the economy and the related increase in the qualitative factors within our allowance for loan losses, primarily associated with the current COVID-19 pandemic. The provision for loan losses in 2019 resulted from the growth of the loan portfolio as well as one large charge-off in the amount of $850 thousand.
The table titled “Allocation of Allowance for Loan Losses” shows the amount of the allowance for loan losses which is allocated to the indicated loan categories, along with that category’s percentage of total loans, at December 31, 2020, 2019, 2018, 2017, and 2016. The amount of allowance for loan losses allocated to each loan category is based on the amount of delinquent loans in that loan category, the status of nonperforming assets in that loan category, the historical losses for that loan category, the evaluation of qualitative factors impacting the portfolio and the financial condition of certain borrowers whose financial conditional is monitored on a periodic basis. Management believes that the allowance for loan losses is adequate based on the loan portfolio’s current risk characteristics.
Analysis of Allowance for Loan Losses
(dollars in thousands)
December 31,
Balance, beginning of period
$
4,973
$
5,456
$
4,411
$
4,505
$
4,959
Loans charged-off:
Commercial, financial and agricultural
$
$
$
$
$
-
Real estate-construction and land development
-
-
-
Real estate-mortgage
Consumer and other loans
Total loans charged off
$
$
1,313
$
$
$
Recoveries:
Commercial, financial and agricultural
$
$
$
$
$
Real estate-construction and land development
Real estate-mortgage
Consumer and other loans
Total recoveries
$
1,131
$
$
$
$
Net charge-offs (recoveries)
(666
)
1,112
(268
)
(531
)
Provision for loan losses
1,457
(625
)
(188
)
Balance, end of period
$
7,096
$
4,973
$
5,456
$
4,411
$
4,505
Ratio of allowance for loan losses to loans outstanding at period end
0.85
%
0.77
%
0.90
%
0.78
%
0.87
%
Ratio of net charge offs (recoveries) to average loans outstanding during the period
(0.09
)%
0.18
%
(0.05
)%
(0.10
)%
0.05
%
Allocation of Allowance for Loan Losses
(dollars in thousands)
Commercial, Financial,
and Agricultural
Real Estate
Construction
Real Estate
Mortgage
Consumer and
Other Loans
Allowance
for Loan
Losses
Percent of
Loans in
Category
to Total
Loans
Allowance
for Loan
Losses
Percent of
Loans in
Category
to Total
Loans
Allowance
for Loan
Losses
Percent of
Loans in
Category
to Total
Loans
Allowance
for Loan
Losses
Percent of
Loans in
Category
to Total
Loans
December 31, 2020
$
1,395
16.9
%
$
1,613
7.0
%
$
3,665
72.3
%
$
3.8
%
December 31, 2019
7.2
%
8.8
%
3,592
80.7
%
3.3
%
December 31, 2018
5.4
%
10.2
%
3,776
81.6
%
2.8
%
December 31, 2017
6.6
%
9.2
%
3,381
82.1
%
2.1
%
December 31, 2016
5.9
%
6.1
%
3,514
85.1
%
2.9
%
Deposits
Total deposits were $1.01 billion and $771.5 million at December 31, 2020 and 2019, respectively, which represents an increase of $241.6 million or 31.31% during 2020. The table titled “Average Deposits and Rates Paid” shows the average deposit balances and average rates paid for 2020, 2019 and 2018.
Average Deposits and Rates Paid
(dollars in thousands)
December 31,
Amount
Rate
Amount
Rate
Amount
Rate
Noninterest-bearing
$
341,229
$
258,176
$
246,056
Interest-bearing:
NOW accounts
108,965
0.32
%
89,536
0.50
%
91,353
0.35
%
Money market accounts
184,346
0.50
%
150,291
0.97
%
132,136
0.62
%
Regular savings accounts
122,560
0.10
%
105,176
0.20
%
104,473
0.15
%
Time deposits:
$250,000 and more
75,520
1.59
%
59,550
2.05
%
70,778
0.97
%
Less than $250,000
60,600
1.08
%
61,775
1.38
%
36,808
1.38
%
Total interest-bearing
$
551,991
0.59
%
$
466,328
0.90
%
$
435,548
0.57
%
Total deposits
$
893,220
$
724,504
$
681,604
Noninterest-bearing demand deposits, which are comprised of checking accounts, increased $138.4 million or 51.42% from $269.2 million at December 31, 2019 to $407.6 million at December 31, 2020. Interest-bearing deposits, which include NOW accounts, money market accounts, regular savings accounts and time deposits, increased $103.1 million or 20.53% from $502.4 million at December 31, 2019 to $605.5 million at December 31, 2020. Total money market account balances increased $53.7 million or 34.84% from $154.1 million at December 31, 2019 to $207.8 million at December 31, 2020. Reciprocal money market accounts balances (included in total money market account balances) increased from $27.0 million to $34.6 million at December 31, 2019 and December 31, 2020, respectively. The reciprocal money market balance at December 31, 2020 and December 31, 2019 consists of money market accounts obtained through the ICS network. Total regular savings account balances increased $29.1 million or 26.99% from $107.7 million at December 31, 2019 to $136.8 million at December 31, 2020. The growth in deposits mainly reflected higher levels of customer balances due to government stimulus and customer spending habits in light of the ongoing pandemic. Time deposits decreased $9.5 million or 6.90% from $138.2 million at December 31, 2019 to $128.7 million at December 31, 2020.
The Company attempts to fund asset growth with deposit accounts and focus upon core deposit growth as its primary source of funding. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, and time deposits of less than $250,000. Core deposits totaled $944.3 million or 93.21% and $692.4 million or 89.75% of total deposits at December 31, 2020 and 2019, respectively.
The table titled “Maturities of Certificates of Deposit and Other Time Deposits of $100,000 and Greater” shows the amount of certificates of deposit of $100,000 and more maturing within the time period indicated at December 31, 2020. The total amount maturing within one year is $89.9 million or 95.32% of the total amount outstanding.
Maturities of Certificates of Deposit and Other Time Deposits of $100,000 and Greater
(dollars in thousands)
Within
Three
Months
Three
to Six
Months
Six to
Twelve
Months
Over
One
Year
Total
Percent
of Total
Deposits
December 31, 2020
$
28,967
$
24,710
$
36,243
$
4,415
$
94,335
9.31
%
CAPITAL RESOURCES
Total shareholders’ equity on December 31, 2020 was $105.1 million, reflecting a percentage of total assets of 9.08% as compared to $96.3 million and 10.98% at December 31, 2019. The common stock’s book value per share increased $2.97 or 10.58% to $31.05 per share at December 31, 2020 from $28.08 per share at December 31, 2019. During 2020, the Company paid $1.04 per share in dividends as compared to $1.00 per share for 2019. The Company has a Dividend Investment Plan that allows participating shareholders to reinvest the dividends in Company stock. During 2020, the Company purchased 67,189 shares of its Common Stock under its stock repurchase program at an average price of $27.60. During 2019, the Company purchased 53,988 shares of its Common Stock under its stock repurchase program at an average price of $32.79. As evidenced below, the Bank continues to be a well capitalized financial institution.
Analysis of Bank Capital
(dollars in thousands)
December 31, 2020
December 31, 2019
Tier 1 Capital:
Common stock
$
1,682
$
1,682
Capital surplus
9,773
9,773
Retained earnings
86,370
79,320
Total Tier 1 capital
$
97,825
$
90,775
Common equity tier 1 capital
$
97,825
$
90,775
Tier 2 Capital:
Allowance for loan losses and reserves for off-balance sheet commitments
$
7,132
$
4,997
Total Tier 2 capital
$
7,132
$
4,997
Total risk-based capital
$
104,957
$
95,772
Risk weighted assets
$
789,773
$
665,141
Risk Based Capital Ratios:
Common equity Tier 1 capital ratio
12.39
%
13.65
%
Tier 1 risk-based capital ratio
12.39
%
13.65
%
Total risk-based capital ratio
13.29
%
14.40
%
Tier 1 leverage ratio
9.06
%
10.61
%
Federal regulatory risk-based capital guidelines require percentages to be applied to various assets, including off-balance sheet assets, based on their perceived risk in order to calculate risk-weighted assets. Tier 1 capital consists of total shareholders’ equity plus qualifying trust preferred securities outstanding less net unrealized gains and losses on available for sale securities, goodwill and other intangible assets. Total capital is comprised of Tier 1 capital plus the allowable portion of the allowance for loan losses and any excess trust preferred securities that do not qualify as Tier 1 capital.
Effective January 1, 2015, the Federal Reserve issued final risk-based capital rules to align with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. In addition, a capital conservation buffer requirement was phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increased by the same amount each year until it was fully implemented at 2.5% effective January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with any ratio (excluding the leverage ratio) above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As fully phased in effective January 1, 2019, the rules require the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
Pursuant to the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the Company, is not subject to consolidated regulatory capital requirements.
The table titled “Analysis of Bank Capital” shows the components of Tier 1 capital, Tier 2 capital, the amount of total risk-based capital and risk-weighted assets, and the risk based capital ratios for the Bank at December 31, 2020 and 2019.
On September 17, 2019, the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio “CBLR” framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. On April 6, 2020, in a joint statement, the FDIC, Federal Reserve and the Office of Comptroller of the Currency (“OCC”), issued two interim final rules regarding temporary changes to the CBLR framework to implement provisions of the CARES Act. Under the interim final rules, the community bank leverage ratio will be reduced to 8 percent beginning in the second quarter and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk based capital. The CBLR framework was first available for banks to use beginning in their March 31, 2020, Call Report. The Bank did not opt into the CBLR framework as of December 31, 2020.
Note 15 to the Consolidated Financial Statements provides additional discussion and analysis of regulatory capital requirements.
LIQUIDITY
Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, securities classified as available for sale and loans maturing within one year. At December 31, 2020 liquid assets totaled $320.4 million as compared to $290.3 million at December 31, 2019. These amounts represent 31.26% and 37.17% of total liabilities at December 31, 2020 and 2019, respectively. Securities provide a constant source of liquidity through paydowns and maturities. Also, the Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity. The Bank’s membership with the Federal Home Loan Bank of Atlanta also provides a source of borrowings with numerous rate and term structures. The Company’s senior management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. 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.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Note 18 to the Consolidated Financial Statements provides information about the off-balance sheet arrangements which arise through the lending activities of the Company. These arrangements increase the degree of both credit and interest rate risk beyond that which is recognized through the financial assets and liabilities on the consolidated balance sheets.
The table titled “Contractual Obligations and Scheduled Payments” presents the Company’s contractual obligations and scheduled payment amounts due within the period indicated at December 31, 2020.
Contractual Obligations and Scheduled Payments
(dollars in thousands)
December 31, 2020
Less
than
One
Year
One Year
through
Three
Years
Three
Years
through
Five
Years
More
than
Five
Years
Total
Operating leases
$
$
$
$
4,039
$
5,676
$
$
$
$
4,039
$
5,676
The payments due on operating leases are discussed in Note 13 to the Consolidated Financial Statements.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As the holding company of the Bank, the Company’s primary component of market risk is interest rate volatility. Interest rate fluctuations will impact the amount of interest income and expense the Bank receives or pays on almost all of its assets and liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those which have a very short term until maturity. Interest rate risk exposure of the Company is, therefore, experienced at the Bank level. Asset / liability management attempts to maximize the net interest income of the Company by adjusting the volume and price of rate sensitive assets and liabilities. The Company does not subject itself to foreign currency exchange or commodity price risk due to prohibition through policy and the current nature of operations. Derivative instruments and hedging activities of the Company have historically been minimal and there have been no derivative instruments since a single interest rate swap agreement expired on December 1, 2016.
The Bank’s interest rate management strategy is designed to maximize net interest income and preserve the capital of the Company. The Bank’s financial instruments are periodically subjected to various simulations whose results are discussed in the following paragraphs. These models are based on actual data from the Bank’s financial statements and assumptions about the performance of certain financial instruments. Prepayment assumptions are applied to all mortgage related assets, which includes real estate loans and mortgage-backed securities. Prepayment assumptions are based on a median rate at which principal payments are received on these assets over their contractual term. The rate of principal payback is assumed to increase when rates fall and decrease when rates rise. Term assumptions are applied to non-maturity deposits, which includes demand deposits, NOW accounts, savings accounts, and money market accounts. Demand deposits and NOW accounts are generally assumed to have a term greater than one year since the total amount outstanding does not fluctuate with changes in interest rates. Savings accounts and money market accounts are assumed to be more interest rate sensitive, therefore, a majority of the amount outstanding is assumed to have a term of less than one year.
The simulation analysis evaluates the potential effect of upward and downward changes in market interest rates on future net interest income. The Bank views the immediate shock of rates as a more effective measure of interest rate risk exposure. The analysis assesses the impact on net interest income over a 12 month period after an immediate increase or “shock” in rates, of 100 basis points up to 400 basis points. The shock down 200 to 400 basis points analysis is not meaningful as interest rates are at historic lows and cannot decrease another 200 to 400 basis points and therefore only an immediate decrease or “shock” of 100 basis points is disclosed. The simulation analysis results are presented in the table below:
Year 1 Net Interest Income Simulation
(dollars in thousands)
Change in
Net Interest Income
Assumed Market Interest Rate Shock
Dollars
Percent Change
-100 BP
(427
)
(1.27
)%
+100 BP
1,149
3.42
%
+200 BP
1,555
4.63
%
+300 BP
1,957
5.83
%
+400 BP
2,302
6.85
%
The Bank uses simulation analysis to assess earnings at risk and economic value of equity (EVE) analysis to assess economic value at risk. This analysis method allows management to regularly monitor the direction and magnitude of the Bank’s interest rate risk exposure. The modeling techniques cannot be measured with complete precision. Maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturity deposit sensitivity and loan and deposit pricing are key assumptions used in acquiring this analysis. There is a realm of uncertainty in using these assumptions but the analysis does provide the Bank with the ability to estimate interest rate risk position over time.
The table below examines the Economic Value of Equity (EVE). The EVE of the balance sheet is defined as the discounted present value of expected asset cash flows minus the discounted present value of the expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The model indicates an exposure to falling interest rates. These results are driven primarily by the relative change in value of the Bank’s core deposit base as rates rise.
Static EVE Change
(dollars in thousands)
Change in EVE
Assumed Market Interest Rate Shift
Dollars
Percent Change
-100 BP Shock
4,502
4.17
%
+100 BP Shock
(13,462
)
(12.46
)%
+200 BP Shock
(256
)
(0.24
)%
+300 BP Shock
10,414
9.64
%
+400 BP Shock
18,700
17.31
%

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Eagle Financial Services, Inc.
Berryville, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Eagle Financial Services, Inc. and its subsidiary (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - General Allowance - Qualitative Factors
As described in Note 1 (Nature of Banking Activities and Significant Accounting Policies) and Note 4 (Allowance for Loan Losses) to the consolidated financial statements, the Company has established an allowance for loan losses to provide for loan losses which are estimated to have occurred as of the balance sheet date, which totaled $7.10 million at December 31, 2020. The Company’s allowance for loan losses consists of three components: the specific allowance; the general allowance; and the unallocated allowance. The general component relates to loans that are not considered impaired and is based on historical loss experience adjusted for qualitative factors and totaled $7.02 million at December 31, 2020. The qualitative portion of the general allowance is based on management’s evaluation of specific factors which are used to develop loss percentages applied to the loan portfolio, by loan pool, based on management’s assessment of shared risk characteristics within groups of similar loans. The qualitative factors assessed include: national and local economic trends and conditions; the quality of the Company’s loan review system; changes in lending policies; the experience, ability, and depth of management; concentrations of credit; trends in volume and terms of loans; levels and trends in delinquencies and nonperforming loans; changes in collateral values; and competition and regulatory requirements.
Management exercised significant judgment when assessing the considerations which serve as the basis for the qualitative factors used to adjust the Company’s historical loss experience in the general component of the allowance for loan losses estimate. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.
How We Addressed the Matter in Our Audit
The primary audit procedures we performed to address this critical audit matter included:
• Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included:
•
Evaluating the completeness and accuracy of data inputs used as the basis for the qualitative factors.
•
Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors.
•
Evaluating the qualitative factors for directional consistency and for reasonableness.
•
Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Company's auditor since 2015.
Winchester, Virginia
March 30, 2021
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2020 and 2019
(dollars in thousands, except per share amounts)
December 31, 2020
December 31, 2019
Assets
Cash and due from banks
$
12,644
$
10,920
Interest-bearing deposits with other institutions
67,054
22,487
Federal funds sold
Total cash and cash equivalents
79,920
33,659
Securities available for sale, at fair value
164,955
165,003
Restricted investments
1,267
1,197
Loans
836,334
644,760
Allowance for loan losses
(7,096
)
(4,973
)
Net Loans
829,238
639,787
Bank premises and equipment, net
18,725
19,297
Other real estate owned, net of allowance
Other assets
35,440
18,194
Total assets
$
1,130,152
$
877,320
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand deposits
$
407,576
$
269,171
Savings and interest bearing demand deposits
476,864
364,175
Time deposits
128,658
138,198
Total deposits
$
1,013,098
$
771,544
Other liabilities
11,980
9,450
Total liabilities
$
1,025,078
$
780,994
Commitments and contingencies
Shareholders’ Equity
Preferred stock, $10 par value; 500,000 shares authorized and unissued
$
-
$
-
Common stock, $2.50 par value; authorized 10,000,000 shares; issued and outstanding 2020, 3,405,035 including 20,928 unvested restricted stock; issued and outstanding 2019, 3,430,103 including 18,488 unvested restricted stock
8,460
8,529
Surplus
10,811
11,406
Retained earnings
82,524
74,909
Accumulated other comprehensive income
3,279
1,482
Total shareholders’ equity
$
105,074
$
96,326
Total liabilities and shareholders’ equity
$
1,130,152
$
877,320
See Notes to Consolidated Financial Statements
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 2020 and 2019
(dollars in thousands, except per share amounts)
Interest and Dividend Income
Interest and fees on loans
$
35,273
$
31,138
Interest and dividends on securities available for sale:
Taxable interest income
2,858
3,089
Interest income exempt from federal income taxes
Dividends
Interest on deposits in banks
Interest on federal funds sold
Total interest and dividend income
$
38,908
$
35,454
Interest Expense
Interest on deposits
3,256
4,193
Interest on federal funds purchased and securities sold under agreements to repurchase
-
Interest on Federal Home Loan Bank advances
Total interest expense
$
3,281
$
4,239
Net interest income
$
35,627
$
31,215
Provision For Loan Losses
1,457
Net interest income after provision for loan losses
$
34,170
$
30,586
Noninterest Income
Income from fiduciary activities
$
1,398
$
1,380
Service charges on deposit accounts
1,187
Other service charges and fees
4,757
4,893
Gain (loss) on the sale and disposal of bank premises and equipment
Gain (loss) on sale of securities
(7
)
Bank owned life insurance income (expense)
(48
)
Other operating income
Total noninterest income
$
8,579
$
7,759
Noninterest Expenses
Salaries and employee benefits
$
18,074
$
15,025
Occupancy expenses
1,592
1,611
Equipment expenses
Advertising and marketing expenses
Stationery and supplies
ATM network fees
1,009
1,141
Other real estate owned expense
(Gain) loss on other real estate owned
(143
)
FDIC assessment
Computer software expense
Bank franchise tax
Professional fees
1,120
1,057
Data processing fees
1,657
1,275
Other operating expenses
2,679
3,031
Total noninterest expenses
$
29,441
$
26,776
Income before income taxes
$
13,308
$
11,569
Income Tax Expense
2,136
1,810
Net income
$
11,172
$
9,759
Earnings Per Share
Net income per common share, basic
$
3.27
$
2.84
Net income per common share, diluted
$
3.27
$
2.84
See Notes to Consolidated Financial Statements
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2020 and 2019
(dollars in thousands)
Net income
$
11,172
$
9,759
Other comprehensive income:
Changes in benefit obligations and plan assets for post retirement benefit plans, net of reclassification adjustments, net of deferred income tax of ($5) and $0 for the years ended December 31, 2020 and 2019, respectively
(25
)
-
Unrealized gain (loss) on available for sale securities, net of reclassification adjustments, net of deferred income tax of $484 and $807 for the years ended December 31, 2020 and 2019, respectively
1,822
3,035
Total other comprehensive income
1,797
3,035
Total comprehensive income
$
12,969
$
12,794
See Notes to Consolidated Financial Statements
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2020 and 2019
(dollars in thousands, except per share amounts)
Common
Stock
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
December 31, 2018
$
8,573
$
11,992
$
68,587
$
(1,553
)
$
87,599
Net income
9,759
9,759
Other comprehensive income
3,035
3,035
Restricted stock awards, stock incentive plan (18,150 shares)
(46
)
-
Stock-based compensation expense
Issuance of common stock, dividend investment plan (14,176 shares)
Issuance of common stock, employee benefit plan (4,064 shares)
Retirement of common stock (53,988 shares)
(135
)
(1,636
)
(1,771
)
Dividends declared ($1.00 per share)
(3,437
)
(3,437
)
December 31, 2019
$
8,529
$
11,406
$
74,909
$
1,482
$
96,326
Net income
11,172
11,172
Other comprehensive income
1,797
1,797
Restricted stock awards, stock incentive plan (19,238 shares)
(48
)
-
Stock-based compensation expense
Issuance of common stock, dividend investment plan (13,239 shares)
Issuance of common stock, employee benefit plan (7,204 shares)
Retirement of common stock (67,189 shares)
(168
)
(1,686
)
(1,854
)
Dividends declared ($1.04 per share)
(3,557
)
(3,557
)
December 31, 2020
$
8,460
$
10,811
$
82,524
$
3,279
$
105,074
See Notes to Consolidated Financial Statements
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2020 and 2019
(dollars in thousands)
Cash Flows from Operating Activities
Net income
$
11,172
$
9,759
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
1,028
Amortization of intangible and other assets
Provision for loan losses
1,457
(Gain) loss on other real estate owned
(143
)
(Gain) on the sale and disposal of premises and equipment
(5
)
(137
)
Loss on the sale of repossessed assets
-
(Gain) loss on the sale of securities
(687
)
Stock-based compensation expense
Premium amortization on securities, net
Bank owned life insurance (income) expense
(310
)
Deferred tax (benefit) expense
(471
)
Changes in assets and liabilities:
(Increase) in other assets
(1,397
)
(942
)
(Decrease) in other liabilities
(1,459
)
(1,339
)
Net cash provided by operating activities
$
11,006
$
11,348
Cash Flows from Investing Activities
Proceeds from maturities, calls, and principal payments of securities available for sale
$
52,360
$
24,604
Proceeds from the sale of securities available for sale
28,323
12,350
Purchases of securities available for sale
(78,443
)
(54,310
)
Proceeds from the sale of restricted investments
2,125
Purchase of restricted investments
(2,195
)
(452
)
Proceeds for the sale of bank premises and equipment
Purchases of bank premises and equipment
(456
)
(1,314
)
Proceeds from the sale of other real estate owned
Proceeds from the sale of repossessed assets
Purchase of bank-owned life insurance
(12,000
)
-
Net (increase) in loans
(191,411
)
(40,211
)
Net cash (used in) investing activities
$
(201,474
)
$
(57,982
)
Cash Flows from Financing Activities
Net increase in demand deposits, money market and savings accounts
$
251,094
$
45,384
Net (decrease) increase in certificates of deposit
(9,540
)
23,056
Net (decrease) increase in federal funds purchased
-
(1,871
)
Issuance of common stock, employee benefit plan
Retirement of common stock
(1,854
)
(1,771
)
Cash dividends paid
(3,198
)
(2,996
)
Net cash provided by financing activities
$
236,729
$
61,940
Increase in cash and cash equivalents
$
46,261
$
15,306
Cash and Cash Equivalents
Beginning
33,659
18,353
Ending
$
79,920
$
33,659
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest
$
3,351
$
4,198
Income taxes
$
2,618
$
-
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized gain on securities available for sale
$
2,306
$
3,842
Minimum postretirement liability adjustment
$
(30
)
$
-
Other real estate and repossessed assets acquired in settlement of loans
$
$
1,167
Issuance of common stock, dividend investment plan
$
$
Lease liabilities arising from right-of-use assets
$
$
3,745
See Notes to Consolidated Financial Statements
NOTE 1. Nature of Banking Activities and Significant Accounting Policies
Eagle Financial Services, Inc. (the “Company” or “Corporation”) and the Bank grant commercial, financial, agricultural, residential and consumer loans to customers in Virginia and the Eastern Panhandle of West Virginia. The loan portfolio is well diversified and generally is collateralized by assets of the customers. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrowers.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to accepted practices within the banking industry.
Principles of Consolidation
The Company owns 100% of Bank of Clarke County (the “Bank”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated.
Trust Assets
Eagle Investment Group (“EIG”), as a division of the Bank offers both a trust department and investment services. The trust services division of EIG offers a full range of personal and retirement plan services, which include serving as agent for bill paying and custody of assets, as investment manager with full authority or advisor, as trustee or co-trustee for trusts under will or under agreement, as trustee of life insurance trusts, as guardian or committee, as agent under a power of attorney, as executor or co-executor for estates, as custodian or investment advisor for individual retirement plans, and as trustee or trust advisor for corporate retirement plans such as profit sharing and 401(k) plans. The brokerage division of EIG offers a full range of investment services, which include tax-deferred annuities, IRAs and rollovers, mutual funds, retirement plans, 529 college savings plans, life insurance, long term care insurance, fixed income investing, brokerage CDs, and full service or discount brokerage services. Securities and other property held by the Eagle Investment Group in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and interest bearing deposits. Generally, federal funds are purchased and sold for one-day periods.
Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Debt securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be “other than temporary” are reflected in earnings as realized losses. In estimating “other than temporary” impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
The Bank is required to maintain an investment in the capital stock of certain correspondent banks. No readily available market exists for this stock and it has no quoted market value. The investment in these securities is recorded at cost and they are reported on the Company’s consolidated balance sheet as restricted investments.
Loans
The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout the Counties of Clarke, Frederick, and Loudoun, Virginia and the City of Winchester, Virginia. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan fees collected and certain costs incurred related to loan originations are deferred and amortized as an adjustment to interest income over the life of the related loans. Deferred fees and costs are recorded as an adjustment to interest income using a method that approximates a constant yield.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 120 and 90 days delinquent, respectively, unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal and interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Troubled Debt Restructurings (TDR)
In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower’s payment history, past due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on non-accrual status at the time of the TDR, the loan will remain on non-accrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above.
Risks by Loan Portfolio Segments
One-to-Four-Family Residential Real Estate Lending
Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. As part of the application process, information is gathered concerning income, employment and credit history of the applicant. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Directors Loan Committee.
Commercial Real Estate Lending
Commercial real estate lending entails significant additional risk as compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or the economy, in general.
Construction and Land Development Lending
There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of the estimated appraised value of the finished home.
Commercial and Industrial Lending
Commercial business loans generally have more risk than residential mortgage loans, but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of the borrower. Commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.
Consumer Lending
Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral on a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.
Paycheck Protection Program Loans
In 2020, the Company participated in the Paycheck Protection Program (PPP). The PPP commenced subsequent to the passage of the Coronavirus Aid, Relief and Economic Security("CARES") Act in March 2020 and was later expanded by the Paycheck Protection Program and Health Care Enhancement Act of April 2020. The PPP was designed to provide U.S. small businesses with cash-flow assistance during the COVID-19 pandemic through loans that are fully guaranteed by the Small Business Administration (SBA) which may be forgiven upon satisfaction of certain criteria. As of December 31, 2020, the Company had 911 PPP loans with outstanding balances totaling $81.3 million. As compensation for originating the loans, the Company received lender processing fees from the SBA, which were deferred, along with the related loan origination costs. These net fees are being accreted to interest income over the remaining contractual lives of the loans. Upon forgiveness of a PPP loan and repayment by the SBA, which may be prior to the loan's maturity, the remainder of any unrecognized net fees are recognized in interest income. The Company has continued to participate in the newest round of the PPP during the first quarter of 2021. Our outstanding PPP loans were included in the commercial and industrial segment at December 31, 2020, and their underlying guarantees were considered in the determination of the allowance for loan losses as discussed below.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for (recovery of) 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 for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are 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-impaired loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors considered in the general component include the levels and trends in delinquencies and nonperforming loans, trends in volume and terms of loans, the effects of any changes in lending policies, the experience, ability, and depth of management, national and local economic trends and conditions, changes in collateral values, concentrations of credit, the quality of the Company’s loan review system, competition and regulatory requirements. An 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, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair market value less estimated liquidation costs of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement or are in a nonaccrual status.
Bank Premises and Equipment
Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range from 10 to 39 years for buildings and 3 to 10 years for furniture and equipment.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs at the date of foreclosure. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less estimated cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in the (gain) loss on other real estate owned line item in the consolidated statements of income.
Retirement Plans
The Company sponsors a 401(k) savings plan under which eligible employees may defer a portion of their compensation on a pretax basis. The Company also provides a match to participants in this plan, as described more fully in Note 11.
Stock-Based Compensation Plan
During 2014, the Company’s shareholders approved a stock incentive plan which allows key employees and directors to increase their personal financial interest in the Company. This plan permits the issuance of incentive stock options and non-qualified stock options and the award of stock appreciation rights, common stock, restricted stock, and phantom stock. The plan, as adopted, authorized the issuance of up to 500,000 shares of common stock. This plan is discussed more fully in Note 10.
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 assets and liabilities and gives current recognition to changes in tax rates and laws.
When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the applicable taxing authority, 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, the Company 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 than not” recognition threshold are measured as the largest amount of tax benefit that is more than fifty percent (50%) 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 balance sheet along with any associated interest and penalties that would be payable to the applicable taxing authority upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income. The Company has no uncertain tax positions.
Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred.
Reclassifications
Certain reclassifications have been made to the 2019 financial statements to conform to reporting for 2020. The results of the reclassifications are not considered material and had no effect on prior years' net income or shareholders' equity.
Earnings Per Common Share
Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Nonvested restricted shares are included in the weighted average number of common shares used to compute basic earnings per share because of dividend participation and voting rights. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The number of potential common shares is determined using the treasury method.
The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock.
Twelve Months Ended
December 31,
Average number of common shares outstanding
3,417,543
3,438,410
Effect of dilutive common stock
-
-
Average number of common shares outstanding used to calculate diluted earnings per share
3,417,543
3,438,410
There were no potentially dilutive securities outstanding in 2020 or 2019.
Comprehensive Income
Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, net of income taxes, are reported within the balance sheet as a separate component of shareholders’ equity. These changes, along with net income, are components of comprehensive income and are reported in the statement of comprehensive income. In addition to net income, the Company’s comprehensive income includes changes in the benefit obligations and plan assets for postretirement benefit plans and unrealized gains or losses on available for sale securities.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.
Stock Repurchase Program
On June 17, 2020, the Corporation renewed the stock repurchase program to repurchase up to 150,000 shares of its common stock prior to June 30, 2021. During 2020, the Company purchased 67,189 shares of its Common Stock under its stock repurchase program at an average price of $27.60. During 2019, the Company purchased 53,988 shares of its Common Stock under its stock repurchase program at an average price of $32.79. The maximum number of shares that may yet be purchased under the plan as of December 31, 2020 are 121,425.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company formed a CECL committee during 2016 which continues to meet weekly to address the compliance requirements. Historic loan data has been gathered and reviewed for completeness and accuracy. In addition, the committee has selected a third-party that is assisting in calculating the financial impact of ASU 2016-13 and anticipates running parallel allowance models under the current and new standard in advance of the required implementation date.
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments - Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is working to identify loans that are directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loans.
On March 12, 2020, the SEC finalized amendments to its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and were effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date. Prior to these changes, the Company was required to comply with section 404(b) of the Sarbanes Oxley Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter. The rule change revises the definition of “accelerated filers” to exclude entities with public float of less than $700 million and less than $100 million in annual revenues. The Company expects to meet this expanded category of small reporting company and will no longer be considered an accelerated filer. If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”. The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (ICFR) and include the opinion on ICFR in its annual report on Form 10-K. Non-accelerated filers also have additional time to file quarterly and annual financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. As the Bank has total assets exceeding $1.0 billion, it remains subject to FDICIA, which requires an auditor attestation concerning internal controls over financial reporting. As such, other than the additional time provided to file quarterly and annual financial statements, this change does not significantly change the Company’s annual reporting and audit requirements.
In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06 “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.
In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.
Recently Adopted Accounting Developments
In March 2020 (Revised in April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables - Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In August 2020, a joint statement on additional loan modifications was issued. Among other things, the Interagency Statement addresses accounting and regulatory reporting considerations for loan modifications, including those accounted for under Section 4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act was signed into law on March 27, 2020 to help support individuals and businesses through loans, grants, tax changes and other types of relief. The most significant impacts of the Act related to accounting for loan modifications and establishment of the Paycheck Protection Program (“PPP”). On December 21, 2020, the Consolidated Appropriates Act of 2021 (“CAA”) was passed. The CAA extends or modifies many of the relief programs first created by the CARES Act, including the PPP and treatment of certain loan modifications related to the COVID-19 pandemic. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.
NOTE 2. Securities
Amortized costs and fair values of securities available for sale at December 31, 2020 and 2019 were as follows:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Fair
Value
December 31, 2020
(in thousands)
Obligations of U.S. government corporations and agencies
$
16,576
$
$
-
$
17,483
Mortgage-backed securities
117,161
1,894
(46
)
119,009
Obligations of states and political subdivisions
25,840
1,373
-
27,213
Subordinated debt
1,250
-
-
1,250
$
160,827
$
4,174
$
(46
)
$
164,955
December 31, 2019
(in thousands)
Obligations of U.S. government corporations and agencies
$
21,917
$
$
(94
)
$
22,186
Mortgage-backed securities
107,410
(215
)
108,161
Obligations of states and political subdivisions
33,854
(56
)
34,656
$
163,181
$
2,187
$
(365
)
$
165,003
Carrying amounts of restricted securities at December 31, 2020 and 2019 were as follows:
December 31, 2020
December 31, 2019
(in thousands)
Federal Reserve Bank Stock
$
$
Federal Home Loan Bank Stock
Community Bankers’ Bank Stock
$
1,267
$
1,197
The amortized cost and fair value of securities available for sale at December 31, 2020, by contractual maturity, are shown below. Maturities may differ from contractual maturities primarily (others could be called) in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.
Amortized Cost
Fair Value
(in thousands)
Due in one year or less
$
$
Due after one year through five years
8,587
8,879
Due after five years through ten years
32,281
34,056
Due after ten years
119,208
121,260
$
160,827
$
164,955
During the twelve months ended December 31, 2020, the Company sold $28.3 million in available for sale securities with gross gains of $687 thousand and no gross losses. During the twelve months ended December 31, 2019, the Company sold $12.4 million in available for sale securities with gross gains of $37 thousand and gross losses of $44 thousand.
The fair value and gross unrealized losses for securities available for sale, totaled by the length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2020 and 2019 were as follows:
Less than 12 months
12 months or more
Total
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
December 31, 2020
(in thousands)
Mortgage-backed securities
$
12,014
$
$
-
$
-
$
12,014
$
$
12,014
$
$
-
$
-
$
12,014
$
Less than 12 months
12 months or more
Total
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
December 31, 2019
(in thousands)
Obligations of U.S. government corporations and agencies
$
5,466
$
$
1,997
$
$
7,463
$
Mortgage-backed securities
19,509
5,271
24,780
Obligations of states and political subdivisions
3,127
4,050
$
28,102
$
$
8,191
$
$
36,293
$
Gross unrealized losses on available for sale securities included three (3) and twenty-eight (28) debt securities at December 31, 2020 and December 31, 2019, respectively. The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company’s mortgage-backed securities are issued by U.S. government agencies, which guarantee payments to investors regardless of the status of the underlying mortgages. Consideration is given to the length of time and the amount of an unrealized loss, the financial condition of the issuer, and the intent and ability of the Company to retain its investment in the issuer long enough to allow for an anticipated recovery in fair value. The fair value of a security reflects its liquidity as compared to similar instruments, current market rates on similar instruments, and the creditworthiness of the issuer. Absent any change in the liquidity of a security or the creditworthiness of the issuer, prices will decline as market rates rise and vice-versa. The primary cause of the unrealized losses at December 31, 2020 and December 31, 2019 was changes in market interest rates. Since the losses can be primarily attributed to changes in market interest rates and not expected cash flows or an issuer’s financial condition, the unrealized losses are deemed to be temporary and management does not intend to sell and it is unlikely that management will be required to sell the securities prior to their anticipated recovery. The Company monitors the financial condition of these issuers continuously and will record other-than-temporary impairment if the recovery of value is unlikely.
Securities having a carrying value of $3.1 million at December 31, 2020 were pledged as security for trust accounts.
NOTE 3. Loans
The composition of loans at December 31, 2020 and 2019 was as follows:
December 31,
(in thousands)
Mortgage loans on real estate:
Construction and land development
$
42,544
$
42,561
Secured by farmland
15,846
13,917
Secured by 1-4 family residential properties
248,246
219,580
Multifamily
21,496
14,415
Commercial
334,661
286,600
Commercial and industrial loans
140,762
46,543
Consumer installment loans
21,321
9,541
All other loans
10,773
12,050
Total loans
$
835,649
$
645,207
Net deferred loan costs (fees)
(447
)
Allowance for loan losses
(7,096
)
(4,973
)
$
829,238
$
639,787
NOTE 4. Allowance for Loan Losses
Changes in the allowance for loan losses for the years December 31, 2020 and 2019 were as follows:
December 31,
(in thousands)
Balance, beginning
$
4,973
$
5,456
Provision charged to operating expense
1,457
Recoveries added to the allowance
1,131
Loan losses charged to the allowance
(465
)
(1,313
)
Balance, ending
$
7,096
$
4,973
Nonaccrual and past due loans by class at December 31, 2020 and December 31, 2019 were as follows:
December 31, 2020
(in thousands)
30 - 59
Days
Past Due
60 - 89
Days
Past Due
90 or More
Days Past
Due
Total Past
Due
Current
Total Loans
90 or More
Days Past Due
Still Accruing
Nonaccrual
Loans
Commercial - Non Real Estate:
Commercial & Industrial
$
$
-
$
-
$
$
140,719
$
140,762
$
-
$
-
Commercial Real Estate:
Owner Occupied
-
-
165,764
165,921
-
1,227
Non-owner occupied
-
168,118
168,740
-
2,405
Construction and Farmland:
Residential
-
-
-
-
10,644
10,644
-
-
Commercial
-
-
47,677
47,746
-
Consumer:
Installment
-
-
21,316
21,321
-
Residential:
Equity Lines
-
-
31,239
31,252
-
Single family
216,041
216,994
-
1,006
Multifamily
-
-
-
-
21,496
21,496
-
-
All Other Loans
-
-
-
-
10,773
10,773
-
-
Total
$
$
$
$
1,862
$
833,787
$
835,649
$
-
$
4,754
December 31, 2019
(in thousands)
30 - 59
Days
Past Due
60 - 89
Days
Past Due
90 or More
Days Past
Due
Total Past
Due
Current
Total Loans
90 or More
Past Due Still
Accruing
Nonaccrual
Loans
Commercial - Non Real Estate:
Commercial & Industrial
$
$
-
$
$
$
46,464
$
46,543
$
-
$
Commercial Real Estate:
Owner Occupied
1,078
-
-
1,078
147,879
148,957
-
Non-owner occupied
-
-
-
-
137,643
137,643
-
Construction and Farmland:
Residential
-
-
-
-
7,867
7,867
-
-
Commercial
-
-
48,424
48,611
-
Consumer:
Installment
-
9,480
9,541
-
Residential:
Equity Lines
-
-
33,127
33,248
-
Single family
1,251
2,263
184,069
186,332
-
1,244
Multifamily
-
-
-
-
14,415
14,415
-
-
All Other Loans
-
-
-
-
12,050
12,050
-
-
Total
$
1,772
$
$
1,470
$
3,789
$
641,418
$
645,207
$
-
$
2,185
Allowance for loan losses by segment at December 31, 2020 and December 31, 2019 were as follows:
Twelve Months Ended
December 31, 2020
(in thousands)
Construction
and Farmland
Residential
Real Estate
Commercial
Real Estate
Commercial
Consumer
All Other
Loans
Unallocated
Total
Allowance for credit losses:
Beginning Balance
$
$
1,601
$
1,991
$
$
$
$
$
4,973
Charge-Offs
(119
)
(20
)
(155
)
(49
)
(83
)
(39
)
-
(465
)
Recoveries
-
1,131
Provision
1,270
(493
)
(196
)
1,457
Ending balance
$
1,604
$
1,929
$
1,645
$
1,374
$
$
$
-
$
7,096
Ending balance: Individually evaluated for impairment
$
-
$
$
-
$
-
$
-
$
-
$
-
$
Ending balance: collectively evaluated for impairment
$
1,604
$
1,857
$
1,645
$
1,374
$
$
$
-
$
7,024
Loans:
Ending balance
$
58,390
$
269,742
$
334,661
$
140,762
$
21,321
$
10,773
$
-
$
835,649
Ending balance individually evaluated for impairment
$
$
3,869
$
3,632
$
$
$
-
$
-
$
7,768
Ending balance collectively evaluated for impairment
$
58,285
$
265,873
$
331,029
$
140,615
$
21,306
$
10,773
$
-
$
827,881
December 31, 2019
(in thousands)
Construction
and Farmland
Residential
Real Estate
Commercial
Real Estate
Commercial
Consumer
All Other
Loans
Unallocated
Total
Allowance for credit losses:
Beginning Balance
$
$
1,788
$
1,988
$
$
$
$
$
5,456
Charge-Offs
-
(406
)
-
(850
)
(5
)
(52
)
-
(1,313
)
Recoveries
-
Provision
(145
)
(17
)
(20
)
Ending balance
$
$
1,601
$
1,991
$
$
$
$
$
4,973
Ending balance: Individually evaluated for impairment
$
$
$
$
-
$
-
$
-
$
-
$
Ending balance: collectively evaluated for impairment
$
$
1,550
$
1,842
$
$
$
$
$
4,673
Loans:
Ending balance
$
56,478
$
233,995
$
286,600
$
46,543
$
9,541
$
12,050
$
-
$
645,207
Ending balance individually evaluated for impairment
$
$
3,681
$
3,053
$
$
$
-
$
-
$
7,403
Ending balance collectively evaluated for impairment
$
56,045
$
230,314
$
283,547
$
46,315
$
9,533
$
12,050
$
-
$
637,804
Beginning with the three months ended September 30, 2020, the Company changed its allowance methodology for the risk scale used in calculating the environmental factors portion of the general reserves assigned to unimpaired credits. During that quarter, management determined it necessary to adjust each of the risk scores assigned to all nine current qualitative factors due to changes that had occurred both internally and outside of the Company that have an impact on payment defaults, collateral values, risk ratings, etc. Management also determined it necessary to adjust the loss history period from 28 quarters to 12 quarters. The Company believes that the revised risk scale and loss history period is more indicative of the losses and risks inherent in the portfolio.
The following table represents the effect on the loan loss provision for year ended December 31, 2020 as a result of the change in allowance methodology from that used in prior periods.
(in thousands)
Calculated Provision (Recovery) Based on Current Methodology
Calculation Provision (Recovery) Based on Prior Methodology
Difference
Portfolio Segment:
Construction and Farmland
$
1,270
$
$
1,185
Residential Real Estate
(202
)
Commercial Real Estate
(493
)
(937
)
Commercial
(262
)
Consumer
All Other Loans
Total
$
1,653
$
$
Impaired loans by class at December 31, 2020 and December 31, 2019 were as follows:
As of
December 31, 2020
(in thousands)
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial
$
$
$
-
$
$
Commercial Real Estate:
Owner Occupied
1,282
1,227
-
1,258
Non-owner occupied
2,682
2,405
-
2,444
Construction and Farmland:
Residential
-
-
-
-
-
Commercial
-
Consumer:
Installment
-
Residential
Equity lines
-
-
Single family
2,655
2,413
-
2,514
Multifamily
-
-
-
-
-
Other Loans
-
-
-
-
-
$
7,386
$
6,354
$
-
$
6,577
$
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial
$
-
$
-
$
-
$
-
$
-
Commercial Real Estate:
Owner Occupied
-
-
-
-
-
Non-owner occupied
-
-
-
-
-
Construction and Farmland:
Residential
-
-
-
-
-
Commercial
-
-
-
-
-
Consumer:
Installment
-
-
-
-
-
Residential
Equity lines
-
-
-
-
-
Single family
1,449
1,431
1,448
Multifamily
-
-
-
-
-
Other Loans
-
-
-
-
-
$
1,449
$
1,431
$
$
1,448
$
Total:
Commercial
$
$
$
-
$
$
Commercial Real Estate
3,964
3,632
-
3,702
Construction and Farmland
-
Consumer
-
Residential
4,376
3,886
4,006
Other
-
-
-
-
-
Total
$
8,835
$
7,785
$
$
8,025
$
(1)
Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, and any partial charge-offs.
As of
December 31, 2019
(in thousands)
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial
$
$
$
-
$
$
Commercial Real Estate:
Owner Occupied
-
Non-owner occupied
-
-
Construction and Farmland:
Residential
-
-
-
-
-
Commercial
-
Consumer:
Installment
-
-
Residential:
Equity lines
-
Single family
2,854
2,435
-
2,583
Multifamily
-
Other Loans
-
-
-
-
-
$
4,946
$
4,034
$
-
$
4,260
$
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial
$
-
$
-
$
-
$
-
$
-
Commercial Real Estate:
Owner Occupied
-
-
-
-
-
Non-owner occupied
2,369
2,377
2,405
Construction and Farmland:
Residential
-
-
-
-
-
Commercial
Consumer:
Installment
-
-
-
-
-
Residential:
Equity lines
-
-
-
-
-
Single family
Multifamily
-
-
-
-
-
Other Loans
-
-
-
-
-
$
3,435
$
3,386
$
$
3,425
$
Total:
Commercial
$
$
$
-
$
$
Commercial Real Estate
3,145
3,062
3,098
Construction and Farmland
Consumer
-
-
Residential
4,375
3,689
3,859
Other
-
-
-
-
-
Total
$
8,381
$
7,420
$
$
7,685
$
(1)
Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, and any partial charge-offs.
When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in nonaccrual loans is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.
The Company uses a rating system for evaluating the risks associated with non-consumer loans. Consumer loans are not evaluated for risk unless the characteristics of the loan fall within classified categories. Descriptions of these ratings are as follows:
Pass
Pass loans exhibit acceptable history of profits, cash flow ability and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.
Pass Monitored
Pass monitored loans may be experiencing income and cash volatility, inconsistent operating trends, nominal liquidity and/or a leveraged balance sheet. A higher level of supervision is required for these loans as the potential for a negative event could impact the borrower’s ability to repay the loan.
Special mention
Special mention loans exhibit negative trends and potential weakness that, if left uncorrected, may negatively affect the borrower’s ability to repay its obligations. The risk of default is not imminent and the borrower still demonstrates sufficient financial strength to service debt.
Substandard
Substandard loans exhibit well defined weaknesses resulting in a higher probability of default. The borrowers exhibit adverse financial trends and a diminishing ability or willingness to service debt.
Doubtful
Doubtful loans exhibit all of the characteristics inherent in substandard loans; however given the severity of weaknesses, the collection of 100% of the principal is unlikely under current conditions.
Loss
Loss loans are considered uncollectible over a reasonable period of time and of such little value that its continuance as a bankable asset is not warranted.
Credit quality information by class at December 31, 2020 and December 31, 2019 was as follows:
As of
December 31, 2020
(in thousands)
INTERNAL RISK RATING GRADES
Pass
Pass
Monitored
Special
Mention
Substandard
Doubtful
Loss
Total
Commercial - Non Real Estate:
Commercial & Industrial
$
137,566
$
2,750
$
$
$
-
$
-
$
140,762
Commercial Real Estate:
Owner Occupied
126,839
31,927
5,929
1,226
-
-
165,921
Non-owner occupied
101,026
42,338
22,555
2,821
-
-
168,740
Construction and Farmland:
Residential
8,131
2,513
-
-
-
-
10,644
Commercial
19,599
24,982
3,004
-
-
47,746
Residential:
Equity Lines
31,087
-
-
31,252
Single family
193,579
16,639
3,594
3,053
-
216,994
Multifamily
10,923
8,700
1,873
-
-
-
21,496
All other loans
8,438
-
2,335
-
-
-
10,773
Total
$
637,188
$
129,973
$
39,729
$
7,304
$
$
-
$
814,328
Performing
Nonperforming
Consumer Credit Exposure by Payment Activity
$
21,316
$
As of
December 31, 2019
(in thousands)
INTERNAL RISK RATING GRADES
Pass
Pass
Monitored
Special
Mention
Substandard
Doubtful
Loss
Total
Commercial - Non Real Estate:
Commercial & Industrial
$
42,578
$
3,815
$
$
$
-
$
-
$
46,543
Commercial Real Estate:
Owner Occupied
103,958
38,989
5,654
-
-
148,957
Non-owner occupied
103,909
25,939
5,866
1,929
-
-
137,643
Construction and Farm land:
Residential
5,094
2,773
-
-
-
-
7,867
Commercial
17,018
30,661
-
-
48,611
Residential:
Equity Lines
32,295
-
-
33,248
Single family
162,195
19,427
2,347
2,225
-
186,332
Multifamily
11,714
1,337
-
-
14,415
All other loans
11,963
-
-
-
12,050
Total
$
490,724
$
123,870
$
15,454
$
5,458
$
$
-
$
635,666
Performing
Nonperforming
Consumer Credit Exposure by Payment Activity
$
9,480
$
NOTE 5. Troubled Debt Restructurings
All loans deemed a troubled debt restructuring, or “TDR”, are considered impaired, and are evaluated for collateral and cash-flow sufficiency. A loan is considered a TDR when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. All of the following factors are indicators that the Bank has granted a concession (one or multiple items may be present):
•
The borrower receives a reduction of the stated interest rate to a rate less than the institution is willing to accept at the time of the restructure for a new loan with comparable risk.
•
The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.
•
The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
•
The borrower receives a deferral of required payments (principal and/or interest).
•
The borrower receives a reduction of the accrued interest.
There were seventeen (17) troubled debt restructured loans totaling $3.3 million at December 31, 2020. At December 31, 2019, there were eighteen (18) troubled debt restructured loans totaling $3.0 million. Three loans, totaling $796 thousand, were in nonaccrual status at December 31, 2020. Four loans, totaling $401 thousand, were in nonaccrual status at December 31, 2019. There were no outstanding commitments to lend additional amounts to troubled debt restructured borrowers at December 31, 2020 or December 31, 2019.
During the year ended December 31, 2020, the Company approved 255 deferrals of interest and/or principal payments with respect to loan balances totaling approximately $130.5 million at December 31, 2020 for its customers experiencing hardships related to COVID-19. These deferrals were no more than six months in duration and were for loans not more than 30 days past due as of December 31, 2019. As such, they were not considered troubled debt restructurings based on the relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act and recent interagency regulatory guidance. As of December 31, 2020, 241 of these loans with loan balances totaling approximately $128.7 million had begun making payments on their loans after the end of the deferral period. The majority of the remainder of these loans are still in their original deferral period, have been granted an additional deferral or have paid off. In December 2020, the Consolidated Appropriations Act extended the period established by Section 4013 of the CARES Act for providing temporary relief from TDR classification to the earlier of January 1, 2022 or 60 days after the date when the national emergency concerning COVID-19 terminates.
The following tables set forth information on the Company’s troubled debt restructurings by class of financing receivable occurring during the years ended December 31, 2020 and 2019:
Twelve Months Ended
December 31, 2020
(in thousands)
Number of
Contracts
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
Commercial Real Estate
Non-owner occupied
$
$
Consumer:
Installment
Residential
Single family
Total
$
1,629
$
1,633
Twelve Months Ended
December 31, 2019
(in thousands)
Number of
Contracts
Pre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
Total
-
$
-
$
-
During the twelve months ended December 31, 2020, the Company restructured five loans by granting a concession to the borrower experiencing financial difficulty. The Company restructured one consumer installment loan and one residential single-family loan by granting three 90-day payment deferment periods. The Company restructured one single-family residential loan by reducing the payments due for a period of time and restructured another single-family residential loan by allowing a loan policy exception for a high loan-to-value. The Company also restructured one commercial real estate loan by granting interest-only payments.
During the twelve months ended December 31, 2019, the Company did not restructure any loans by granting a concession to the borrower.
Loans by class of financing receivable modified as TDRs within the previous 12 months and for which there was a payment default during the stated periods were:
Twelve Months Ended
December 31, 2020
(in thousands)
Number of
Contracts
Recorded
Investment
Total
-
-
Twelve Months Ended
December 31, 2019
(in thousands)
Number of
Contracts
Recorded
Investment
Residential
Single family
$
Total
$
Management defines default as over 30 days contractually past due under the modified terms, the foreclosure and/or repossession of the collateral, or the charge-off of the loan.
NOTE 6. Bank Premises and Equipment, Net
The major classes of bank premises and equipment and the total accumulated depreciation at December 31, 2020 and 2019 were as follows:
December 31,
(in thousands)
Land
$
6,644
$
6,644
Buildings and improvements
18,498
18,472
Furniture and equipment
8,358
7,972
$
33,500
$
33,088
Less accumulated depreciation
14,775
13,791
Bank premises and equipment, net
$
18,725
$
19,297
Depreciation expense on buildings and improvements was $500 thousand and $494 thousand for the years ended 2020 and 2019, respectively. Depreciation expense on furniture and equipment was $527 thousand and $463 thousand for the years ended 2020 and 2019, respectively.
NOTE 7. Deposits
The composition of deposits at December 31, 2020 and December 31, 2019 was as follows:
December 31, 2020
December 31, 2019
(in thousands)
Noninterest bearing demand deposits
$
407,576
$
269,171
Savings and interest bearing demand deposits:
NOW accounts
$
132,249
$
102,337
Money market accounts
207,837
154,133
Regular savings accounts
136,778
107,705
$
476,864
$
364,175
Time deposits:
Balances of less than $250,000
$
59,621
$
59,094
Balances of $250,000 or greater
69,037
79,104
$
128,658
$
138,198
$
1,013,098
$
771,544
Money market accounts include $34.6 million and $27.0 million in reciprocal deposits at December 31, 2020 and 2019, respectively.
The outstanding balance of time deposits at December 31, 2020 was due as follows:
December 31, 2020
(in thousands)
$
117,375
6,484
2,031
1,391
1,214
Thereafter
$
128,658
Deposit overdrafts reclassified as loans totaled $70 thousand and $135 thousand at December 31, 2020 and 2019, respectively.
NOTE 8. Borrowings
The Company, through its subsidiary bank, borrows funds in the form of federal funds purchased and Federal Home Loan Bank advances.
Federal fund lines of credit are extended to the Bank by nonaffiliated banks with which a correspondent banking relationship exists. The line of credit amount is determined by the creditworthiness of the Bank and, in particular, its regulatory capital ratios, which are discussed in Note 15. Federal funds purchased generally mature each business day. The following table summarizes information related to federal funds purchased for the years ended December 31, 2020 and 2019:
December 31,
(dollars in thousands)
Balance at year-end
-
-
Average balance during the year
1,074
Average interest rate during the year
0.61
%
2.91
%
Maximum month-end balance during the year
$
-
$
10,780
Gross lines of credit at year-end
28,000
28,000
Unused lines of credit at year-end
28,000
28,000
As of December 31, 2020, Company had remaining credit availability in the amount of $225.2 million with the Federal Home Loan Bank of Atlanta. This line may be utilized for short and/or long-term borrowing. Advances on the line are secured by all of the Company’s eligible first lien residential real estate loans on one-to-four-unit, single-family dwellings; multi-family dwellings; home equity lines of credit; and commercial real estate loans. The amount of the available credit is limited to a percentage of the estimated market value of the loans as determined periodically by the FHLB of Atlanta. The amount of the available credit is also limited to 20% of total Bank assets.
The Company had no borrowings with the FHLB at December 31, 2020 or December 31, 2019. The Company had a $50.0 million irrevocable letter of credit at December 31, 2020 with the FHLB to secure public deposits.
NOTE 9. Income Taxes
The Company files income tax returns with the United States of America, the Commonwealth of Virginia and West Virginia. With few exceptions, the Company is no longer subject to federal, state, or local income tax examinations for years prior to 2017.
The net deferred tax asset at December 31, 2020 and 2019 consisted of the following components:
December 31,
(in thousands)
Deferred tax assets:
Allowance for loan losses
$
1,490
$
1,044
Share-based compensation
Accrued postretirement benefits
Home equity origination costs
Nonaccrual interest
Lease liabilities
Other
$
2,625
$
2,057
Deferred tax liabilities:
Property and equipment
$
$
Right-of-use assets
Securities available for sale
$
2,423
$
1,847
Net deferred tax asset
$
$
The Company has not recorded a valuation allowance for deferred tax assets because management believes that it is more likely than not that they will be ultimately realized.
Income tax expense for the years ended December 31, 2020 and 2019 consisted of the following components:
December 31,
(in thousands)
Current tax expense
$
2,607
$
1,294
Deferred tax (benefit) expense
(471
)
$
2,136
$
1,810
The following table reconciles income tax expense to the statutory federal corporate income tax amount, which was calculated by applying the federal corporate income tax rate to pre-tax income for the years ended December 31, 2020 and 2019.
December 31,
(in thousands)
Statutory federal corporate tax amount
$
2,795
$
2,429
Tax-exempt interest (income)
(193
)
(260
)
Officer insurance (income) loss
(57
)
Net tax credits
(439
)
(379
)
Other, net
$
2,136
$
1,810
The effective tax rates were 16.05% and 15.65% for years ended December 31, 2020 and 2019, respectively. The effective tax rate is impacted by tax credits on qualified affordable housing project investments as discussed in Note 25 to the Consolidated Financial Statements as well as qualified rehabilitation credits.
NOTE 10. Stock-Based Compensation
Restricted Stock provides grantees with rights to shares of common stock upon completion of a service period or achievement of Company performance measures. During the restriction period, all shares are considered outstanding and dividends are paid to the grantee. Outside directors are periodically granted restricted shares which vest over a period of less than nine months. During 2020, executive officers were granted restricted shares which vest over a three year service period and restricted shares which vest based on meeting performance measures over a one year period. Beginning in 2018, certain non-executive officers also were granted restricted shares which vest over a three year service period. Vesting schedules were unchanged from the two prior years.
The following table presents the activity for Restricted Stock for the years ended December 31, 2020 and 2019:
Twelve Months Ended
December 31,
Shares
Weighted
Average
Grant Date
Fair Value
Shares
Weighted
Average
Grant Date
Fair Value
Nonvested, beginning of period
18,488
$
30.39
16,701
$
29.72
Granted
22,128
28.82
22,488
30.69
Vested
(19,238
)
29.01
(18,150
)
30.16
Forfeited
(450
)
31.03
(2,551
)
30.28
Nonvested, end of period
20,928
$
29.98
18,488
$
30.39
The Company recognizes compensation expense over the vesting period based on the fair value of the Company's stock on the grant date. Compensation expense was $604 thousand and $562 thousand during December 31, 2020 and 2019, respectively. The total grant date fair value of Restricted Stock which vested was $558 thousand and $547 thousand for the years ended December 31, 2020 and 2019, respectively. The total vest date fair value of Restricted Stock which vested was $561 thousand and $556 thousand for the years ended December 31, 2020 and 2019, respectively. Unrecognized compensation cost related to unvested Restricted Stock was $184 thousand at December 31, 2020. This amount is expected to be recognized over a weighted average period of one year. The Company's policy is to recognize forfeitures as they occur.
NOTE 11. Employee Benefits
The Company has an Employee Stock Ownership Plan (ESOP) to provide additional retirement benefits to substantially all employees. Contributions can be made to the Bank of Clarke County Employee Retirement Trust to be used to purchase the Company’s common stock. There were no contributions in 2020 and 2019.
The Company sponsors a 401(k) savings plan under which eligible employees may defer a portion of salary on a pretax basis, subject to certain IRS limits. The Company matches 50 percent of employee contributions, on a maximum of six percent of salary deferred, with Company common stock or cash, as elected by each employee. The shares for this purpose are provided principally by newly issued shares. The 401(k) plan includes a non-elective safe-harbor employer contribution and an age-weighted employer contribution. Each year, qualifying employees will receive a non-elective safe-harbor contribution equal to three percent of their salary for that year. Qualifying employees will receive an additional contribution based on their age and years of service. The percentage of salary for the age-weighted contribution increases on both factors, age and years of service, with a minimum of one percent of salary and a maximum of ten percent of salary. Contributions under the plan amounted to $1.5 million in 2020 and $1.1 million in 2019.
The Company has established an Executive Supplemental Income Plan for certain key employees. Benefits are to be paid in monthly installments following retirement or death. The agreement provides that if employment is terminated for reasons other than death or disability prior to age 65, the amount of benefits could be reduced or forfeited. The executive supplemental income benefit liability was $23 thousand and $30 thousand at December 31, 2020 and 2019, respectively. The executive supplemental income benefit expense, based on the present value of the retirement benefits, was $29 thousand in 2020 and $21 thousand in 2019. The plan is unfunded; however, life insurance has been acquired on the lives of these employees in amounts sufficient to discharge the plan’s obligations.
NOTE 12. Commitments and Contingencies
In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. These commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit. The Company does not anticipate any material losses as a result of these commitments.
During the normal course of business, various legal claims arise from time to time which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.
As a member of the Federal Reserve System, the Bank is required to maintain certain average reserve balances. These reserve balances include usable vault cash and amounts on deposit with the Federal Reserve Bank. In March 2020, the Federal Reserve announced they were reducing the reserve requirement to zero percent across all deposit tiers in response to the COVID-19 pandemic. This adjustment to the reserve requirements remained in effect through December 31, 2020. For the final weekly reporting period in the year ended December 31, 2019, the amount of daily average required balances was approximately $1.7 million. This required amount was met by vault cash and no additional amount was required to be on deposit with the Federal Reserve Bank. In addition, the Bank was required to maintain a total compensating balance on deposit with two correspondent banks in the amount of $250 thousand at December 31, 2020 and 2019.
See Note 18 with respect to financial instruments with off-balance-sheet risk.
NOTE 13. Leases
On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. The implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $3.8 million at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets. During the first quarter of 2020, the Company entered into a long-term lease agreement for a loan production office in Tysons Corner, Virginia. This resulted in the initial recognition of a right-of-use asset and lease liability of $549 thousand, also reflected in other assets and other liabilities.
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.
The Company’s two long-term lease agreements are classified as operating leases. These leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liability to the extent the options are reasonably certain of being exercised. These lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
The following tables present information about the Company’s leases:
(dollars in thousands)
December 31, 2020
December 31, 2019
Lease liability
$
4,113
$
3,680
Right-of-use asset
$
4,014
$
3,618
Weighted average remaining lease term
17 years
20 years
Weighted average discount term
3.34
%
3.62
%
Twelve Months Ended
Lease Cost
December 31, 2020
December 31, 2020
Operating lease cost
$
$
Variable lease cost
-
-
Short-term lease cost
Total lease cost
$
$
Cash paid for amounts included in the measurement of lease liabilities
$
$
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities is as follows:
As of
Lease payments due
December 31, 2020
Twelve months ending December 31, 2021
Twelve months ending December 31, 2022
Twelve months ending December 31, 2023
Twelve months ending December 31, 2024
Twelve months ending December 31, 2025
Thereafter
4,039
Total undiscounted cash flows
$
5,676
Discount
(1,563
)
Lease liability
$
4,113
NOTE 14. Transactions with Directors and Officers
The Bank grants loans to and accepts deposits from its directors, principal officers and related parties of such persons during the ordinary course of business. The aggregate balance of loans to directors, principal officers and their related parties was $5.4 million and $6.2 million at December 31, 2020 and 2019, respectively. These balances reflect total principal additions of $1.9 million and total principal payments of $2.7 million, during 2020. The aggregate balance of deposits from directors, principal officers and their related parties was $16.6 million and $24.3 million at December 31, 2020 and 2019, respectively.
NOTE 15. Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Effective January 1, 2015, the Federal Reserve issued a final rule that made technical changes to its market risk capital rules to align them with the BASEL III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The phase-in period for the final rules began January 1, 2015 with full compliance with the final rules phased in by January 1, 2019. As a part of this final rule, the Bank was required to begin calculating and disclosing Common Equity Tier 1 Capital to risk weighted assets in 2015. In addition to the minimum regulatory capital required for capital adequacy purposes, the Bank is required to maintain a minimum Capital Conservation Buffer, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses. The required amount of the Capital Conservation Buffer was 0.625% on January 1, 2016 and has increased by 0.625% each year until it reached 2.5% on January 1, 2019. The Capital Conservation Buffer is applicable to all ratios except the leverage ratio, which is noted below as Tier 1 Capital to Average Assets. The Bank's institution specific capital conservation buffer at December 31, 2020 was 5.29%.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital, and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes the Bank met all capital adequacy requirements to which it was subject at December 31, 2020 and 2019.
At December 31, 2020, the most recent notification from the Federal Reserve categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and common equity Tier 1 ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category.
The following table presents the Bank’s actual capital amounts and ratios at December 31, 2020 and 2019:
Actual
Minimum Capital
Requirement
Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
December 31, 2020
Common Equity Tier 1 Capital to Risk Weighted Assets
$
97,825
12.39
%
$
35,540
4.50
%
$
51,335
6.50
%
Total Capital to Risk Weighted Assets
104,957
13.29
%
63,182
8.00
%
78,977
10.00
%
Tier 1 Capital to Risk Weighted Assets
97,825
12.39
%
47,386
6.00
%
63,182
8.00
%
Tier 1 Capital to Average Assets
97,825
9.06
%
43,213
4.00
%
54,016
5.00
%
December 31, 2019
Common Equity Tier 1 Capital to Risk Weighted Assets
$
90,775
13.65
%
$
29,931
4.50
%
$
43,234
6.50
%
Total Capital to Risk Weighted Assets
95,772
14.40
%
53,211
8.00
%
66,514
10.00
%
Tier 1 Capital to Risk Weighted Assets
90,775
13.65
%
39,908
6.00
%
53,211
8.00
%
Tier 1 Capital to Average Assets
90,775
10.61
%
34,216
4.00
%
42,770
5.00
%
NOTE 16. Restrictions On Dividends, Loans and Advances
Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be paid at any date is generally limited to the lesser of the Bank’s retained earnings or the three preceding years’ undistributed net income of the Bank. Loans or advances are limited to 10% of the Bank’s capital stock and surplus on a secured basis. Capital stock and surplus is defined as tier 1 and tier 2 capital under the risk-based capital guidelines. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.
At December 31, 2020, the Bank’s retained earnings available for the payment of dividends to the Company was $17.7 million. Accordingly, $83.4 million of the Company’s equity in the net assets of the Bank was restricted at December 31, 2020. Funds available for loans or advances by the Bank to the Company amounted to $10.5 million at December 31, 2020.
NOTE 17. Dividend Investment Plan
The Company has a Dividend Investment Plan, which allows participants’ dividends to purchase additional shares of common stock at its fair market value on each dividend record date. In 2016, the Company amended the Plan to provide that shares of common stock purchased through the Plan would be purchased at a price equal to the market price of the shares. Prior to this date, the Plan allowed participants' dividends to purchase additional shares of common stock at 95% of its fair market value. Our board of directors determined to eliminate the discount for purchases of shares in order to reflect current best practices and market standards for dividend reinvestment plans generally and among our peers. No other changes have been made to the operation of the dividend reinvestment features of the Plan, and current participants will remain enrolled in the Plan under their current methods of participation unless they choose to alter their enrollment.
NOTE 18. Financial Instruments with Off-Balance-Sheet Risk
The Company, through its subsidiary bank, is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unfunded commitments under lines of credit, and commercial and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
At December 31, 2020 and 2019, the following financial instruments were outstanding whose contract amounts represent credit risk:
December 31, 2020
December 31, 2019
(dollars in thousands)
Commitments to extend credit
$
27,558
$
19,939
Unfunded commitments under lines of credit
146,202
121,609
Commercial and standby letters of credit
8,139
6,132
Commitments to extend credit are agreements to lend to a customer as long as the terms offered are acceptable and certain other conditions are met. Commitments generally have fixed expiration dates or other termination clauses. Since these commitments may expire or terminate, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, with regards to these commitments, is based on management’s credit evaluation of the customer.
Unfunded commitments under lines of credit are contracts for possible future extensions of credit to existing customers. Unfunded commitments under lines of credit include, but are not limited to, home equity lines of credit, overdraft protection lines of credit, credit cards, and unsecured and secured commercial lines of credit. The terms and conditions of these commitments vary depending on the line of credit’s purpose, collateral, and maturity. The amount disclosed above represents total unused lines of credit for which a contract with the Bank has been established.
Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in granting loans to customers. The Bank holds collateral supporting these commitments if it is deemed necessary. At December 31, 2020, $7.8 million of the outstanding letters of credit were collateralized.
The Bank has cash accounts in other commercial banks. The amount on deposit in these banks at December 31, 2020 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $3.7 million.
NOTE 19. Revenue Recognition
Substantially all of the Company's revenue from contracts with customers that is within the scope of ASC 606, "Revenue from Contracts with Customers" is reported within noninterest income. A limited amount of other in-scope items such as gains and losses on other real estate owned are recorded in noninterest expense. The recognition of interest income and certain sources of noninterest income (e.g. gains on securities transactions, bank owned life insurance income, etc.) are governed by other areas of U.S. GAAP. Significant revenue streams that are within the scope of ASC 606 and included in noninterest income are discussed in the following paragraphs.
Income from Fiduciary Activities
Trust asset management fee income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Service Charges on Deposit Accounts
Service charges on deposit accounts are principally comprised of overdrawn account fees and account maintenance charges. The Company’s performance obligations on revenue generated from deposit accounts are generally satisfied immediately, when the transaction occurs, or by month-end. Typically, the duration of a contract does not extend beyond the services performed. Due to the short duration of most customer contracts which generate these sources of noninterest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized.
Other Service Charges and Fees
The majority of the Company’s noninterest income is derived from short term contracts associated with services provided for other ancillary services such as ATM fees, brokerage commissions, secondary market fees and wire transfer fees. The Company’s performance obligations on revenue generated from these ancillary services are generally satisfied immediately, when the transaction occurs, or by month-end. Typically, the duration of a contract does not extend beyond the services performed. Due to the short duration of most customer contracts which generate these sources of noninterest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized.
The Company earns interchange fees from credit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized no less than monthly.
Noninterest income disaggregated by major source, for the years ended December 31, 2020 and 2019 consisted of the following:
December 31, 2020
December 31, 2019
(dollar in thousands)
Noninterest income:
Income from fiduciary activities(1):
Trust asset management fees
$
1,398
$
1,380
Service charges on deposit accounts(1):
Overdrawn account fees
Monthly and other service charges
Other service charges and fees:
Interchange fees (1)
ATM fees (1)
2,578
2,431
Brokerage commissions (1)
1,150
Secondary market fees
Other charges and fees (2)
Gain (loss) on the sale and disposal of bank premises and equipment (1)
Gain (loss) on sale of securities
(7
)
Bank owned life insurance income
(48
)
Other operating income (3)
Total noninterest income
$
8,579
$
7,759
(1)
Income within the scope of Topic 606.
(2)
Includes income within the scope of Topic 606 of $390 thousand and $412 thousand for the years ended December 31, 2020 and 2019, respectively. The remaining balance is outside the scope of Topic 606.
(3)
Includes income within the scope of Topic 606 of $505 thousand and $212 thousand for the years ended December 31, 2020 and 2019, respectively. The remaining balance is outside the scope of Topic 606.
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2020 and December 31, 2019, the Company did not have any significant contract balances.
NOTE 20. Quarterly Condensed Statements of Income - Unaudited
The Company’s quarterly net income, net income per common share and dividends per common share during 2020 and 2019 are summarized as follows:
March 31
June 30
September 30
December 31
(in thousands, except per share amounts)
Total interest and dividend income
$
9,107
$
9,661
$
10,150
$
9,990
Net interest income after provision for loan losses
8,102
8,005
9,367
8,696
Noninterest income
1,690
2,422
2,216
2,251
Noninterest expenses
6,875
7,014
7,465
8,087
Income before income taxes
2,917
3,413
4,118
2,860
Net income
2,441
2,819
3,406
2,506
Net income per common share, basic
0.71
0.83
0.99
0.74
Net income per common share, diluted
0.71
0.83
0.99
0.74
Dividends per common share
0.26
0.26
0.26
0.26
March 31
June 30
September 30
December 31
(in thousands, except per share amounts)
Total interest and dividend income
$
8,593
$
8,750
$
9,084
$
9,027
Net interest income after provision for loan losses
7,430
7,433
7,835
7,888
Noninterest income
1,844
1,878
2,219
1,818
Noninterest expenses
6,231
6,824
7,411
6,310
Income before income taxes
3,043
2,487
2,643
3,396
Net income
2,571
2,126
2,231
2,831
Net income per common share, basic
0.74
0.62
0.65
0.83
Net income per common share, diluted
0.74
0.62
0.65
0.83
Dividends per common share
0.24
0.25
0.25
0.26
NOTE 21. Fair Value Measurements
GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants as of the measurement date.
“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
•
Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and December 31, 2019:
Fair Value Measurements at
December 31, 2020
Using
Balance as of
Quoted Prices
in Active
Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31, 2020
(Level 1)
(Level 2)
(Level 3)
(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies
$
17,483
$
-
$
17,483
$
-
Mortgage-backed securities
119,009
-
119,009
-
Obligations of states and political subdivisions
27,213
-
27,213
-
Subordinated debt
1,250
-
1,250
-
Total assets at fair value
$
164,955
$
-
$
164,955
$
-
Fair Value Measurements at
December 31, 2019
Using
Balance as of
Quoted Prices
in Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
December 31, 2019
(Level 1)
(Level 2)
(Level 3)
(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies
$
22,186
$
-
$
22,186
$
-
Mortgage-backed securities
108,161
-
108,161
-
Obligations of states and political subdivisions
34,656
-
34,656
-
Total assets at fair value
$
165,003
$
-
$
165,003
$
-
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:
Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on the present value of its expected future cash flows discounted at the loan's coupon rate, or at the loans' observable market price or the fair value of the collateral securing the loans, if they are collateral dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data within the last twelve months (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.
Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. The fair value measurement of real estate held in other real estate owned is assessed in the same manner as impaired loans described above. We believe that the fair value component in its valuation follows the provisions of GAAP.
The following table displays quantitative information about Level 3 Fair Value Measurements for certain financial assets measured at fair value on a nonrecurring basis for December 31, 2020 and December 31, 2019:
Quantitative information about Level 3 Fair Value Measurements
December 31, 2020
Valuation Technique(s)
Unobservable Input
Range
Weighted Average (1)
Assets:
Impaired loans
Present value of cash flows
Discount rate
4% - 6%
4%
Other real estate owned
Discounted appraised value
Discount for current market conditions and selling costs
6%
6%
December 31, 2019
Valuation Technique(s)
Unobservable Input
Range
Weighted Average
Assets:
Impaired loans
Discounted appraised value
Selling cost
12%
12%
Impaired loans
Present value of cash flows
Discount rate
4% - 6%
5%
Other real estate owned
Discounted appraised value
Discount for current market conditions and selling costs
6%
6%
(1) - Weighted based on the relative fair values of the specific items measured at fair value.
The following table summarizes the Company’s financial and nonfinancial assets that were measured at fair value on a nonrecurring basis at December 31, 2020 and December 31, 2019:
Carrying value at
December 31, 2020
Balance as of
Quoted Prices in
Active Markets for Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable
Inputs
December 31, 2020
(Level 1)
(Level 2)
(Level 3)
(in thousands)
Financial Assets:
Impaired loans
$
1,355
$
-
$
-
$
1,355
Nonfinancial Assets:
Other real estate owned
-
Carrying value at
December 31, 2019
Balance as of
Quoted Prices in
Active Markets for Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable
Inputs
December 31, 2019
(Level 1)
(Level 2)
(Level 3)
(in thousands)
Financial Assets:
Impaired loans
$
3,075
$
-
$
-
$
3,075
Nonfinancial Assets:
Other real estate owned
-
-
The carrying amount and fair value of the Company’s financial instruments at December 31, 2020 and 2019 were as follows:
Fair Value Measurements at
December 31, 2020
Using
Carrying
Value
as of
Quoted
Prices
in Active
Markets
for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Fair Value
as of
December 31, 2020
(Level 1)
(Level 2)
(Level 3)
December 31, 2020
(in thousands)
Financial Assets:
Cash and short-term investments
$
79,920
$
79,920
$
-
$
-
$
79,920
Securities
164,955
-
164,955
-
164,955
Restricted Investments
1,267
-
1,267
-
1,267
Loans, net
829,238
-
-
819,691
819,691
Bank owned life insurance
12,709
-
12,709
-
12,709
Accrued interest receivable
3,441
-
3,441
-
3,441
Financial Liabilities:
Deposits
$
1,013,098
$
-
$
1,013,600
$
-
$
1,013,600
Accrued interest payable
-
-
Fair Value Measurements at
December 31, 2019
Using
Carrying
Value
as of
Quoted Prices
in Active
Markets
for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Fair Value
as of
December 31, 2019
(Level 1)
(Level 2)
(Level 3)
December 31, 2019
(in thousands)
Financial assets:
Cash and short-term investments
$
33,659
$
33,659
$
-
$
-
$
33,659
Securities
165,003
-
165,003
-
165,003
Restricted Investments
1,197
-
1,197
-
1,197
Loans, net
639,787
-
-
633,476
633,476
Bank owned life insurance
-
-
Accrued interest receivable
2,237
-
2,237
-
2,237
Financial liabilities:
Deposits
$
771,544
$
-
$
772,111
$
-
$
772,111
Accrued interest payable
-
-
The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations. As a result, the fair value of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities in order to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay their principal balance in a rising rate environment and more likely to do so in a falling rate environment. Conversely, depositors who are receiving fixed rate interest payments 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 the terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
NOTE 22. Change in Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes unrealized gains and losses on available for sale securities and changes in benefit obligations and plan assets for the post retirement benefit plan. Changes to accumulated other comprehensive income (loss) are presented net of tax as a component of equity. Reclassifications out of accumulated other comprehensive income (loss) are recorded in the Consolidated Statements of Income either as a gain or loss.
Changes to accumulated other comprehensive income (loss) by components are shown in the following tables for the years ended December 31, 2020 and 2019:
Twelve Months Ended
December 31,
Unrealized
Gains and
Losses on
Available
for Sale
Securities
Change in
Benefit
Obligations
and Plan
Assets
for the
Post
Retirement
Benefit
Plan
Total
Unrealized
Gains and
Losses on
Available
for Sale
Securities
Change in
Benefit
Obligations
and Plan
Assets for
the Post
Retirement
Benefit
Plan
Total
(dollars in thousands)
(dollars in thousands)
January 1
$
1,438
$
$
1,482
$
(1,597
)
$
$
(1,553
)
Other comprehensive income (loss) before reclassifications
2,993
(33
)
2,960
3,835
-
3,835
Reclassifications from other comprehensive income (loss)
(687
)
(684
)
-
Tax effect of current period changes
(484
)
(479
)
(807
)
-
(807
)
Current period changes net of taxes
1,822
(25
)
1,797
3,035
-
3,035
December 31
$
3,260
$
$
3,279
$
1,438
$
$
1,482
For the years ended December 31, 2020 and 2019, $687 thousand and $(7) thousand, respectively, was reclassified out of accumulated other comprehensive income and appeared as Gain (loss) on sale of securities in the Consolidated Statement of Income. The tax expense (benefit) related to these reclassifications was $144 thousand and $(1) thousand for the years ended December 31, 2020 and 2019, respectively. The tax is included in Income Tax Expense in the Consolidated Statements of Income.
For the year ended December 31, 2020, $(3) thousand was reclassified out of accumulated other comprehensive income related to the Company's postretirement benefit plan. This reclassification is a component of net periodic benefit cost and was reflected in Other noninterest expense in the Consolidated Statements of Income. Tax related to this reclassification was less than $1 thousand and was included in Income Tax Expense in the Consolidated Statements of Income.
NOTE 23. Condensed Financial Information - Parent Company Only
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Balance Sheets
December 31, 2020 and 2019
(dollars in thousands)
Assets
Cash held in subsidiary bank
$
$
Loans, net of allowance
2,932
2,939
Investment in subsidiary
101,104
92,257
Other assets
Total assets
$
105,074
$
96,326
Liabilities and Shareholders’ Equity
Total liabilities
$
-
$
-
Shareholders’ Equity
Preferred stock
$
-
$
-
Common stock
8,460
8,529
Surplus
10,811
11,406
Retained earnings
82,524
74,909
Accumulated other comprehensive income
3,279
1,482
Total shareholders’ equity
$
105,074
$
96,326
Total liabilities and shareholders’ equity
$
105,074
$
96,326
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Statements of Income
Years Ended December 31, 2020 and 2019
(dollars in thousands)
Income
Dividends from subsidiary bank
$
4,250
$
5,000
Interest and fees on loans
Total income
$
4,383
$
5,134
Expenses
Other operating expenses
$
$
Total expenses
$
$
Income before income tax (benefit) and equity in undistributed earnings of subsidiary bank
$
4,088
$
4,677
Income Tax (Benefit)
(34
)
(70
)
Income before equity in undistributed earnings of subsidiary bank
$
4,122
$
4,747
Equity in Undistributed Net Income of Subsidiary Bank
7,050
5,012
Net income
$
11,172
$
9,759
Comprehensive income
$
12,969
$
12,794
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 2020 and 2019
(dollars in thousands)
Cash Flows from Operating Activities
Net Income
$
11,172
$
9,759
Adjustments to reconcile net income to net cash provided by operating activities
Stock-based compensation expense
Undistributed earnings of subsidiary bank
(7,050
)
(5,012
)
Changes in assets and liabilities:
Decrease (increase) in other assets
(50
)
Net cash provided by operating activities
$
4,731
$
5,259
Cash Flows from Investing Activities
Net decrease (increase) in loans
$
$
(43
)
Net cash provided by (used in) investing activities
$
$
(43
)
Cash Flows from Financing Activities
Cash dividends paid
(3,198
)
(2,996
)
Issuance of common stock, employee benefit plan
Retirement of common stock
(1,854
)
(1,771
)
Net cash (used in) financing activities
$
(4,825
)
$
(4,629
)
(Decrease) increase in cash
$
(87
)
$
Cash
Beginning
$
$
Ending
$
$
NOTE 24. Other Real Estate Owned
The following table is a summary of other real estate owned (OREO) activity for the twelve months ended December 31, 2020 and 2019:
Year Ended
Year Ended
December 31,
December 31,
Balance, beginning
$
$
Net loans transferred to OREO
1,151
Gain on foreclosure
Sales
(183
)
(1,266
)
Balance, ending
$
$
The major classifications of other real estate owned in the consolidated balance sheets at December 31, 2020 and 2019 were as follows:
As of
December 31, 2020
December 31, 2019
(in thousands)
Construction and Farmland
$
-
$
-
Residential Real Estate
Commercial Real Estate
-
Subtotal
$
$
Less valuation allowance
-
-
Total
$
$
There was one consumer mortgage loan totaling $68 thousand collateralized by residential real estate in the process of foreclosure at December 31, 2020. There were two consumer mortgage loans totaling $334 thousand collateralized by residential real estate in the process of foreclosure at December 31, 2019.
NOTE 25. Qualified Affordable Housing Project Investments
The Company invests in qualified affordable housing projects. The general purpose of these investments is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, provide tax credits and other tax benefits to investors, and to preserve and protect project assets.
At December 31, 2020 and 2019, the balance of the investment for qualified affordable housing projects was $2.8 million and $3.0 million, respectively. These balances are reflected in Other assets on the Consolidated Balance Sheets. Total unfunded commitments related to the investments in qualified affordable housing projects totaled $446 thousand and $798 thousand at December 31, 2020 and 2019. These balances are reflected in Other liabilities on the Consolidated Balance Sheets. The Company expects to fulfill these commitments by December 31, 2023, in accordance with the terms of the individual agreements.
During the twelve months ended December 31, 2020 and 2019, the Company recognized amortization expense of $229 thousand. The amortization expense was included in Other operating expenses on the Consolidated Statements of Income.
Total estimated credits to be received during 2020 are $337 thousand based on the most recent quarterly estimates received from the funds. Total tax credits and other tax benefits recognized during 2020 and 2019 were $324 thousand and $415 thousand, respectively.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal control over the Company’s financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended). Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, management has conducted an assessment of the design and effectiveness of its internal controls over financial reporting based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013.
Management maintains a comprehensive system of internal control to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. Those policies and procedures: 1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of the assets of the Company, 2) provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors, 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Management recognizes that there are inherent limitations in the effectiveness of any internal control system, including the possibility of human error and the circumvention or overriding of internal controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Changes in conditions will also impact the internal control effectiveness over time. Eagle Financial Services, Inc. and subsidiaries maintains an internal auditing program, under the supervision of the Audit Committee of the Board of Directors, which independently assesses the effectiveness of the system of internal control and recommends possible improvements.
Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2020, using the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded as of December 31, 2020, the Company’s internal control over financial reporting is adequate and effective and meets the criteria of the Internal Control - Integrated Framework.
Management’s assessment did not determine any material weaknesses within the Company’s internal control structure. There were no changes in the Company’s internal control over financial reporting during the Company’s quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
This annual report does not include an attestation report of the company’s registered public accounting firm, regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executives Officers and Corporate Governance
The information required by Part III, Item 10. is incorporated herein by reference to the Proxy Statement for the 2021 Annual Meeting of Shareholders to be held May 18, 2021.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by Part III, Item 11. is incorporated herein by reference to the Proxy Statement for the 2021 Annual Meeting of Shareholders to be held May 18, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Part III, Item 12. is incorporated herein by reference to the Proxy Statement for the 2021 Annual Meeting of Shareholders to be held May 18, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Part III, Item 13. is incorporated herein by reference to the Proxy Statement for the 2021 Annual Meeting of Shareholders to be held May 18, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information required by Part III, Item 14. is incorporated herein by reference to the Proxy Statement for the 2021 Annual Meeting of Shareholders to be held May 18, 2021.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
The financial statements are filed as part of this Annual Report on Form 10-K within Item 8.
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted since they are not required, or are not applicable, or the required information is given in the financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits, as applicable, are filed with this Form 10-K or incorporated by reference to previous filings.
Exhibit
No.
Description
3.1
Articles of Incorporation of the Company, restated in electronic format only as of March 1, 2006 (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated March 1, 2006).
3.2
Bylaws of the Company (incorporated herein by reference to Exhibit 312 of the Company’s Current Report on Form 8-K filed on April 17, 2020.
4.1
Description of Securities (incorporated herein by reference to Exhibit 4.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019).
10.1
Description of Executive Supplemental Income Plan (incorporated by reference to Exhibit 10.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1996).*
10.2
Amended and Restated Employment Agreement of Brandon C. Lorey (incorporated by reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019).*
10.3
Eagle Financial Services, Inc. Stock Incentive Plan (incorporated herein by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8, Registration No. 333-118319).*
10.4
Eagle Financial Services, Inc. 2014 Stock Incentive Plan (incorporated by reference to Exhibit A of the Proxy Statement for the Annual Meeting of Shareholders held on May 21, 2014, filed on April 21, 2014).
10.5
Amended and Restated Employment Agreement of John E. Hudson (incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019).*
10.6
Amended and Restated Employment Agreement of Kaley P. Crosen (incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019).*
10.7
Amended and Restated Employment Agreement of Kathleen J. Chappell (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 16, 2020).*
10.8
Eagle Financial Services, Inc. Dividend Investment Plan (incorporated herein by reference to to the Company’s Registration Statement on Form S-3, File No. 333-209460, filed on February 10, 2016).*
10.9
Amended and Restated Employment Agreement of Carl A. Esterhay (incorporated by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019).*
10.10
Amended and Restated Employment Agreement of Joseph T. Zmitrovich (incorporated by reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019).*
21.1
Subsidiary of the Company.
23.1
Consent of Yount, Hyde & Barbour, P.C.
31.1
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from the Eagle Financial Service, Inc. Annual Report on Form 10-K for the year ended December 31, 2020 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders” Equity, (v) Consolidated Statements of Cash Flows and (vi) notes to Consolidated Financial Statements.
*
Management contracts and compensatory plans and arrangements.
(b)
See Item 15(a)(3) above.
(c)
See Item 15(a)(2) above.