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:

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:

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.

$27.60.

The following table details the Company's purchases of its common stock during the fourth quarter pursuant to the Stock Repurchase program renewed on June 20, 2019. The Company authorized 150,000 shares for repurchase under the Stock Repurchase program. The program has an expiration date of June 30, 2020.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

		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, 2019		6,700			$	30.25			6,700			143,300
November 1 - November 30, 2019		—			—				6,700			143,300
December 1 - December 31, 2019		2,233			31.47				8,933			141,067
		8,933			$	30.55			8,933			141,067

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 31^st of the year indicated, assuming $100 was initially invested on December 31, 20142015 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.

		2015				2016				2017				2018				2019				2020
Eagle Financial Services, Inc.			100				116				149				149				154				152
NASDAQ Bank Index			100				135				140				115				139				124
NASDAQ Composite Index			100				108				138				133				179				257

		2014				2015				2016				2017				2018				2019
Eagle Financial Services, Inc.		$	100			$	102			$	119			$	152			$	152			$	157
NASDAQ Bank Index		100				107				144				149				122				148
NASDAQ Composite Index		100				106				114				146				140				189

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,
		2020				2019				2018				2017				2016
		(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				629				777				(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

		December 31,
		2019				2018				2017				2016				2015
		(dollars in thousands, except per share amounts)
Income Statement Data:
Interest and dividend income		$	35,454			$	31,923			$	28,351			$	25,785			$	24,493
Interest expense		4,239				2,515				1,154				1,067				1,347
Net interest income		$	31,215			$	29,408			$	27,197			$	24,718			$	23,146
Provision for (recovery of) loan losses		629				777				(625		)		(188		)		(227		)
Net interest income after provision for (recovery of) loan losses		$	30,586			$	28,631			$	27,822			$	24,906			$	23,373
Noninterest income		7,759				3,879				6,780				6,669				8,438
Net revenue		$	38,345			$	35,510			$	34,602			$	31,575			$	31,811
Noninterest expenses		26,776				25,195				23,190				22,652				22,481
Income before income taxes		$	11,569			$	10,315			$	11,412			$	8,923			$	9,330
Income tax expense		1,810				1,314				3,626				2,553				2,433
Net Income		$	9,759			$	9,001			$	7,786			$	6,370			$	6,897
Performance Ratios:
Return on average assets		1.18		%		1.16		%		1.08		%		0.96		%		1.10		%
Return on average equity		10.60		%		10.67		%		9.50		%		7.98		%		9.17		%
Shareholders’ equity to assets		10.98		%		10.96		%		10.95		%		11.34		%		11.97		%
Dividend payout ratio		35.21		%		36.15		%		39.29		%		45.30		%		40.61		%
Non-performing loans to total loans		0.34		%		0.35		%		1.11		%		1.35		%		1.07		%
Non-performing assets to total assets		0.27		%		0.28		%		0.84		%		1.05		%		0.90		%
Per Common Share Data:
Net income, basic		$	2.84			$	2.60			$	2.24			$	1.81			$	1.97
Net income, diluted		2.84				2.60				2.24				1.81				1.97
Cash dividends declared		1.00				0.94				0.88				0.82				0.80
Book value		28.08				25.42				24.30				22.90				22.24
Market price		31.05				30.99				32.00				25.75				23.00
Average shares outstanding, basic		3,438,410				3,467,667				3,468,275				3,518,848				3,495,334
Average shares outstanding, diluted		3,438,410				3,467,667				3,468,275				3,518,848				3,495,334
Balance Sheet Data:
Total securities		$	166,200			$	145,468			$	133,673			$	120,330			$	107,719
Total loans		644,760				606,827				568,817				516,942				495,573
Total assets		877,320				799,617				765,751				700,149				653,272
Total deposits		771,544				703,104				663,414				603,877				550,718
Shareholders’ equity		96,326				87,599				83,817				79,416				78,221

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, 2019,2020, the Company had total assets of $877.3 million,$1.13 billion, net loans of $639.8$829.2 million, total deposits of $771.5 million$1.01 billion and shareholders’ equity of $96.3$105.1 million. The Company’s net income was $9.8$11.2 million for the year ended December 31, 2019.

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 $5.0$10.0 million on a secured basis and $2.0$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 $2.5$5.0 million on a secured basis and $1.0$3.0 million unsecured.  Loans exceeding $5.0$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 generallylargely 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 captures losses that are attributable to various economic events which may affectaccounts for a certain loan type withinmeasure of imprecision in the loan portfolio or a certain industrial or geographic sector within the Company’s market. As the loans, which are affected by these events, are identified or losses are experienced on the loans which are affected by these events, they will be reflected within the specific or general allowances.estimate. Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the 20192020 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;

difficult market conditions in our industry;

•

effects of soundness of other financial institutions;

effects of soundness of other financial institutions;

•

potential impact on us of existing and future legislation and regulations;

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;

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;

•

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;

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;

the successful management of interest rate risk;

•

risks inherent in making loans such as repayment risks and fluctuating collateral values;

risks inherent in making loans such as repayment risks and fluctuating collateral values;

•

changes in general economic and business conditions in the market area;

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;

reliance on the management team, including the ability to attract and retain key personnel;

•

changes in interest rates and interest rate policies;

changes in interest rates and interest rate policies;

•

maintaining capital levels adequate to support growth;

maintaining capital levels adequate to support growth;

•

maintaining cost controls and asset qualities as new branches are opened or acquired;

maintaining cost controls and asset qualities as new branches are opened or acquired;

•

demand, development and acceptance of new products and services;

demand, development and acceptance of new products and services;

•

problems with technology utilized by the Bank;

problems with technology utilized by the Bank;

•

changing trends in customer profiles and behavior;

changing trends in customer profiles and behavior;

•

changes in accounting policies and banking and other laws and regulations; and

changes in accounting policies and banking and other laws and regulations; and

•

other factors described in Item 1A., “Risk Factors,” above.

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 20192020 was $9.8$11.2 million, an increase of $758 thousand$1.4 million or 8.42%14.48% from 2018’s2019’s net income of $9.0 million. Net income for 2018 increased $1.2 million or 15.60% from 2017’s net income of $7.8$9.8 million. Basic and diluted earnings per share were $3.27 and $2.84 $2.60,for 2020 and $2.24 for 2019, 2018, and 2017, 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 1.18%1.11%, 1.16%1.18%, and 1.08%1.16% for 2020, 2019, and 2018, and 2017, 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 10.60%11.03%, 10.67%10.60%, and 9.50%10.67% for 2020, 2019, and 2018, and 2017, 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, $29.4 million for 2018, and $27.2 million for 2017, which represents an increase of $1.8$4.4 million or 6.14% and $2.2 million or 8.13% for 2019 and 2018, respectively.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, $31.9 million for 2018, and $28.4 million for 2017, which represents an increase of $3.5$3.4 million or 11.06% and an increase of $3.6 million or 12.60%9.74% for 2019 and 2018, respectively.2020. Total interest expense was $3.3 million for 2020 and $4.2 million for 2019, $2.5 million for 2018, and $1.2 million for 2017, which represents an increasea decrease of $1.7 million$958 thousand or 68.55% and an increase of $1.4 million or 117.94%22.60% in 2019 and 2018, respectively.2020. The increase in total interest income and net interest expenseincome during 20192020 was driven by the growth in interest-earning assets and interest-bearing liabilities as well as increasesdecreases in rates paid on deposit accounts driven by market rate increases.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, 2018, and 2017.

2018.

The net interest margin was 3.76% for 2020, 4.02% for 2019, and 4.07% for 2018, and 4.10% for 2017.2018. 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% for 2019 and 2018 and 34% for 2017.. 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, 2018, and 2017.

2018.

Net interest income and net interest margin may experience some decline as interest bearing assets arecontinue 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				744				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				441				4.42	%			11,722				526				4.49	%			11,591				516				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			359				1				0.24	%			194				4				2.06	%			134				3				2.24	%
Interest-bearing deposits in other banks			47,261				112				0.24	%			15,202				297				1.95	%			9,712				176				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			$	347				0.32	%		$	89,536			$	450				0.50	%		$	91,353			$	320				0.35	%
Money market accounts			184,346				930				0.50	%			150,291				1,463				0.97	%			132,136				815				0.62	%
Savings accounts			122,560				121				0.10	%			105,176				207				0.20	%			104,473				159				0.15	%
Time deposits:
$250,000 and more			75,520				1,203				1.59	%			59,550				1,221				2.05	%			70,778				687				0.97	%
Less than $250,000			60,600				655				1.08	%			61,775				852				1.38	%			36,808				509				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			1				—				0.60	%			1,074				31				2.89	%			964				25				2.59	%
Federal Home Loan Bank advances			7,650				25				0.33	%			2,547				15				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	%

		December 31, 2019											December 31, 2018											December 31, 2017
		Average Balances				Interest Income/ Expense				Average Yield/ Rate			Average Balances				Interest Income/ Expense				Average Yield/ Rate			Average Balances				Interest Income/ Expense				Average Yield/ Rate
Assets:
Securities:
Taxable		$	113,625			$	3,159			2.78	%		$	98,628			$	2,803			2.84	%		$	90,881			$	2,339			2.57	%
Tax-Exempt (1)		31,009				1,084				3.50	%		38,656				1,331				3.44	%		38,432				1,567				4.08	%
Total Securities		$	144,634			$	4,243			2.93	%		$	137,284			$	4,134			3.01	%		$	129,313			$	3,906			3.02	%
Loans:
Taxable		613,884				30,722				5.00	%		573,040				27,482				4.80	%		530,109				24,616				4.64	%
Non-accrual		2,723				—				—	%		1,916				—				—	%		5,701				—				—	%
Tax-Exempt (1)		11,722				526				4.49	%		11,591				516				4.45	%		5,927				311				5.25	%
Total Loans		$	628,329			$	31,248			4.97	%		$	586,547			$	27,998			4.77	%		$	541,737			$	24,927			4.60	%
Federal funds sold		194				4				2.06	%		134				3				2.24	%		171				1				0.58	%
Interest-bearing deposits in other banks		15,202				297				1.95	%		9,712				176				1.81	%		13,870				156				1.12	%
Total earning assets (2)		$	785,636			$	35,792			4.56	%		$	731,761			$	32,311			4.42	%		$	679,390			$	28,990			4.27	%
Allowance for loan losses		(5,333		)									(4,661		)									(4,548		)
Total non-earning assets		49,780											48,601											48,590
Total assets		$	830,083										$	775,701										$	723,432
Liabilities and Shareholders’ Equity:
Interest-bearing deposits:
NOW accounts		$	89,536			$	450			0.50	%		$	91,353			$	320			0.35	%		$	85,154			$	161			0.19	%
Money market accounts		150,291				1,463				0.97	%		132,136				815				0.62	%		128,068				290				0.23	%
Savings accounts		105,176				207				0.20	%		104,473				159				0.15	%		100,838				66				0.07	%
Time deposits:
$250,000 and more		59,550				1,221				2.05	%		70,778				687				0.97	%		57,010				340				0.60	%
Less than $250,000		61,775				852				1.38	%		36,808				509				1.38	%		39,319				227				0.58	%
Total interest-bearing deposits		$	466,328			$	4,193			0.90	%		$	435,548			$	2,490			0.57	%		$	410,389			$	1,084			0.26	%
Federal funds purchased		1,074				31				2.89	%		964				25				2.59	%		823				13				1.58	%
Federal Home Loan Bank advances		2,547				15				0.59	%		—				—				—	%		5,096				57				1.12	%
Total interest-bearing liabilities		$	469,949			$	4,239			0.90	%		$	436,512			$	2,515			0.58	%		$	416,308			$	1,154			0.28	%
Noninterest-bearing liabilities:
Demand deposits		258,176											246,056											216,044
Other Liabilities		9,900											8,811											9,129
Total liabilities		$	738,025										$	691,379										$	641,481
Shareholders’ equity		92,058											84,322											81,951
Total liabilities and shareholders’ equity		$	830,083										$	775,701										$	723,432
Net interest income						$	31,553					��					$	29,796										$	27,836
Net interest spread										3.66	%										3.84	%										3.99	%
Interest expense as a percent of average earning assets										0.54	%										0.34	%										0.17	%
Net interest margin										4.02	%										4.07	%										4.10	%

(1)
(1)	Income and yields are reported on a tax-equivalent basis using a federal tax rate of 21%, 21% and 34% for 2019, 2018 and 2017, respectively..

(2)
(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,
		2020				2019				2018
		(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			25				46				25
Total Net Interest Income		$	35,627			$	31,215			$	29,408
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans		$	93			$	110			$	108
Add: Tax Benefit on Tax-Exempt Interest Income - Securities			156				228				280
Total Tax Benefit on Tax-Exempt Interest Income		$	249			$	338			$	388
Tax-Equivalent Net Interest Income		$	35,876			$	31,553			$	29,796

		December 31,
		2019				2018				2017
GAAP Financial Measurements:
Interest Income - Loans		$	31,138			$	27,890			$	24,821
Interest Income - Securities and Other Interest-Earnings Assets		4,316				4,033				3,530
Interest Expense - Deposits		4,193				2,490				1,084
Interest Expense - Other Borrowings		46				25				70
Total Net Interest Income		$	31,215			$	29,408			$	27,197
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans (1)		$	110			$	108			$	106
Add: Tax Benefit on Tax-Exempt Interest Income - Securities (1)		228				280				533
Total Tax Benefit on Tax-Exempt Interest Income		$	338			$	388			$	639
Tax-Equivalent Net Interest Income		$	31,553			$	29,796			$	27,836

(1)
(1)	Tax benefit was calculated using the federal statutory tax rate of 21%, 21% and 34% for 2019, 2018 and 2017, respectively..

The tax-equivalent yield on earning assets decreased 46 basis points from 2019 to 2020 and increased 14 basis points from 2018 to 2019 and increased 15 basis points from 2017 to 2018.2019. The tax-equivalent yield on securities decreased eight52 basis points from 20182019 to 20192020 and decreased oneeight basis point from 20172018 to 2018.2019. The tax-equivalent yield on loans decreased 31 basis points from 2019 to 2020 and increased 20 basis points from 2018 to 2019 and increased 17 basis points from 2017 to 2018.2019. The slight increasedecrease in the yield on earning assets, and the loan portfolio and the securities portfolio in 2020 was mainly a result of changes in the portfolio mix during 2019 and 2018 and increasesdecreases in interest rates by the Federal Reserve during 2018.

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 and increased 30 basis points from 2017 to 2018.2019.  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 and increased 31 basis points from 2017 to 2018.2019. The average rate on interest bearing deposits increaseddecreased due to the increases

decreases in rates paid on deposit accounts driven by market rate increases.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 2018 to $345.0 million in 2019 and $13.9 million or 4.43% from $314.1 million atthe year ended December 31, 2017 during 2018. Changes in2018 as compared to the average rate on interest-bearing liabilities can also be affected by the pricing on other sources of funds, namely borrowings. The Company from time to time will utilize overnight borrowings in the form of federal funds purchased. The average rate on these borrowings increased 30 basis points from 2018 to 2019 and 101 basis points from 2017 to 2018. The cost of federal funds purchased is affected by the Federal Reserve’s changes in the federal funds target rate, which decreased to 1.75% during December 2019, from 2.50% in December 2018. As another funding option, the Company borrows from the Federal Home Loan Bank through short and long term advances. The average rate on FHLB advances was 0.59% during 2019 and 1.12% during 2017. There were no FHLB advances outstanding during 2018.

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.

Tax-equivalent net interest income increased $2.0 million during 2018. The increase in tax-equivalent net interest income during 2018 is comprised of an increase due to volume of $2.4 million and a decrease due to rate of $436 thousand. The increase in tax-equivalent net interest income during 2018 was primarily affected by the increased volume of taxable loans and taxable securities combined with the rising interest rate environment, 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		$	807			$	(1,032	)		$	(225	)		$	413			$	(57	)		$	356
Tax-exempt			(316	)			(24	)			(340	)			(271	)			24				(247	)
Loans:
Taxable			5,929				(1,726	)			4,203				2,045				1,195				3,240
Tax-exempt			(76	)			(9	)			(85	)			6				4				10
Federal funds sold			188				(191	)			(3	)			1				—				1
Interest-bearing deposits in other banks			(317	)			132				(185	)			106				15				121
Total earning assets		$	6,215			$	(2,850	)		$	3,365			$	2,300			$	1,181			$	3,481
Interest-Bearing Liabilities:
NOW accounts		$	156			$	(259	)		$	(103	)		$	(6	)		$	136			$	130
Money market accounts			468				(1,001	)			(533	)			127				521				648
Savings accounts			42				(128	)			(86	)			1				47				48
Time deposits:
$250,000 and more			(110	)			92				(18	)			(89	)			623				534
Less than $250,000			(16	)			(181	)			(197	)			343				—				343
Total interest-bearing deposits		$	540			$	(1,477	)		$	(937	)		$	376			$	1,327			$	1,703
Federal funds purchased and securities sold under agreements to repurchase		$	(2	)		$	(29	)		$	(31	)		$	3			$	3			$	6
Federal Home Loan Bank advances			13				(3	)			10				15				—				15
Total interest-bearing liabilities		$	551			$	(1,509	)		$	(958	)		$	394			$	1,330			$	1,724
Change in net interest income		$	5,664			$	(1,341	)		$	4,323			$	1,906			$	(149	)		$	1,757

		2019 vs 2018 Increase (Decrease) Due to Changes in:												2018 vs 2017 Increase (Decrease) Due to Changes in:
		Volume				Rate				Total				Volume				Rate				Total
Earning Assets:
Securities:
Taxable		$	413			$	(57	)		$	356			$	208			$	256			$	464
Tax-exempt		(271		)		24				(247		)		9				(245		)		(236		)
Loans:
Taxable		2,045				1,195				3,240				2,010				856				2,866
Tax-exempt		6				4				10				244				(39		)		205
Federal funds sold		1				—				1				—				2				2
Interest-bearing deposits in other banks		106				15				121				(19		)		39				20
Total earning assets		$	2,300			$	1,181			$	3,481			$	2,452			$	869			$	3,321
Interest-Bearing Liabilities:
NOW accounts		$	(6	)		$	136			$	130			$	13			$	146			$	159
Money market accounts		127				521				648				10				515				525
Savings accounts		1				47				48				3				90				93
Time deposits:
$100,000 and more		(89		)		623				534				98				249				347
Less than $100,000		343				—				343				(14		)		296				282
Total interest-bearing deposits		$	376			$	1,327			$	1,703			$	110			$	1,296			$	1,406
Federal funds purchased		$	3			$	3			$	6			$	3			$	9			$	12
Federal Home Loan Bank advances		15				—				15				(57		)		—				(57		)
Total interest-bearing liabilities		$	394			$	1,330			$	1,724			$	56			$	1,305			$	1,361
Change in net interest income		$	1,906			$	(149	)		$	1,757			$	2,396			$	(436	)		$	1,960

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 (recovery of) loan losses was $1.5 million for 2020 and $629 thousand for 2019, $777 thousand for 2018, and $(625) thousand for 2017.2019. Changes in the amount of provision for (recovery of) 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 provision for loan losses in 2018 reflects higher specific reserves on remaining impaired loans as well as loan growth in the portfolio during the year. The recovery of loan losses in 2017 is due mainly to a decline in the historical loss experience utilized in our allowance model. 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 $6.8 million during 2019, 2018, and 2017, respectively. This represents an increase of $880$820 thousand or 12.79%10.57% for 2019 and an increase of $99 thousand or 1.46% for 2018.2020. 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, 2019, 2018,2020 and 2017,2019, 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)		2020				2019				$ Change				% Change
Income from fiduciary activities		$	1,398			$	1,380			$	18				1.30	%
Service charges on deposit accounts			920				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			5				137				(132	)		NM
Gain (loss) on sale of securities			687				(7	)			694			NM
Bank owned life insurance income			310				(48	)			358			NM
Other operating income			502				217				285				131.34	%
Total noninterest income		$	8,579			$	7,759			$	820				10.57	%

	December 31,
(dollars in thousands)	2019			2018			$ Change			% Change		2018			2017			$ Change			% Change
Income from fiduciary activities	$	1,380		$	1,360		$	20		1.47	%	$	1,360		$	1,238		$	122		9.85	%
Service charges on deposit accounts	1,187			1,218			(31		)	(2.55	)%	1,218			1,223			(5		)	(0.41	)%
Other service charges and fees	4,893			4,173			720			17.25	%	4,173			3,878			295			7.61	%
Gain (loss) on the sale and disposal of premises and equipment	137			(3		)	140			NM		(3		)	(12		)	9			NM
(Loss) gain on sale of securities	(7		)	17			(24		)	NM		17			(10		)	27			NM
Other operating income	169			114			55			48.25	%	114			463			(349		)	(75.38	)%
Total noninterest income	$	7,759		$	6,879		$	880		12.79	%	$	6,879		$	6,780		$	99		1.46	%

NM - Not Meaningful

Income from fiduciary activities increased from 2017 to 2018. The majority of the increase is due to a one-time fee, collected during the first quarter of 2018, related to the settlement of a real estate transaction. The amount of income from fiduciary activities is determined by the number of active

Services charges on deposit accounts and total assets under management. Also, income can fluctuate due to the number of estates settled within any period. These fluctuations do not necessarily indicate future results.

The amount of other services charges and fees is comprised primarily of commissions from the sale of non-deposit investment products, fees received from the Bank’s credit card program, fees generated from the Bank’s ATM/debit card programs, and fees generated from procuring applications for secondary market loans. Other service charges and fees increased by $720decreased $267 thousand or 17.25% for 2019 and increased by $295 thousand or 7.61% for 2018.22.49% when comparing the year ended December 31, 2020 to 2019. This increase can be primarily attributed to an increase of ATM fee income of $191 thousand for 2019 and an increase of $194 thousand for 2018. ATM fee income fluctuatesdecrease is mainly due to usage. Commissions for the sale of non-deposit investment products increased $319 thousand for 2019 due to increased activitydecreases in the market Fees generated from procuring applications for secondary market loans increased $180 thousand for 2019. This increaseoverdraft 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 activity insignificantly during 2020 when compared to 2019. During 2020 the secondary market due to the interest rate environment.

Company invested $12 million into BOLI.

Other operating income decreasedincreased during 2018.2020.  The fluctuation in this yearfrom 2019 to 2020 is mostly attributed to the receiptcash distributions received from various investments of a $270 thousand bank owned life insurance (BOLI) benefit during 2017.

Company.

Noninterest Expenses

Total noninterest expenses were $29.4 million and $26.8 million $25.2 million,during 2020 and $23.2 million during 2019, 2018, and 2017, respectively. This represents an increase of $1.6$2.7 million or 6.28%9.95% during 2019 and an increase of $2.0 million or 8.65% during 2018.

2020.

The following table provides the components of noninterest expense for the twelve months ended December 31, 2019, 2018,2020 and 2017,2019, 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)		2020				2019				$ 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			988				857				131				15.29	%
Advertising and marketing expenses			707				868				(161	)			(18.55	)%
Stationery and supplies			144				172				(28	)			(16.28	)%
ATM network fees			1,009				1,141				(132	)			(11.57	)%
Other real estate owned expense			9				76				(67	)			(88.16	)%
(Gain) loss on foreclosure and sale of other real estate owned			(143	)			443				(586	)		NM
FDIC assessment			221				105				116				110.48	%
Computer software expense			679				459				220				47.93	%
Bank franchise tax			705				656				49				7.47	%
Professional fees			1,120				1,057				63				5.96	%
Data processing fees			1,657				1,275				382				29.96	%
Other operating expenses			2,679				3,031				(352	)			(11.61	)%
Total noninterest expenses		$	29,441			$	26,776			$	2,665				9.95	%

	December 31,
(dollars in thousands)	2019			2018			$ Change			% Change		2018			2017			$ Change			% Change
Salaries and employee benefits	$	15,025		$	14,083		$	942		6.69	%	$	14,083		$	13,643		$	440		3.23	%
Occupancy expenses	1,611			1,476			135			9.15	%	1,476			1,473			3			0.20	%
Equipment expenses	857			915			(58		)	(6.34	)%	915			955			(40		)	(4.19	)%
Advertising and marketing expenses	868			761			107			14.06	%	761			731			30			4.10	%
Stationery and supplies	172			195			(23		)	(11.79	)%	195			173			22			12.72	%
ATM network fees	1,141			912			229			25.11	%	912			816			96			11.76	%
Other real estate owned expense	76			183			(107		)	(58.47	)%	183			11			172			1,563.64	%
Loss (gain) on other real estate owned	443			866			(423		)	NM		866			(1		)	867			NM
FDIC assessment	105			225			(120		)	(53.33	)%	225			222			3			1.35	%
Computer software expense	459			474			(15		)	(3.16	)%	474			647			(173		)	(26.74	)%
Bank franchise tax	656			583			73			12.52	%	583			534			49			9.18	%
Professional fees	1,057			1,036			21			2.03	%	1,036			1,007			29			2.88	%
Data processing fees	1,275			794			481			60.58	%	794			564			230			40.78	%
Other operating expenses	3,031			2,692			339			12.59	%	2,692			2,415			277			11.47	%
Total noninterest expenses	$	26,776		$	25,195		$	1,581		6.28	%	$	25,195		$	23,190		$	2,005		8.65	%

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 20192020. Annual pay increases, newly hired employees, additional bonus/COVID pay for employees that have been unable to work remotely during the pandemic and 2018. Most ofadditional bonuses for loan employees originating SBA PPP lending have attributed to the increase during 2019 related to increases in salaries expense. In addition to annual pay increases, several one-time expenses approximating $370 thousand were incurred for the hiring and relocation of the Company’s new CEO as well as the hiring of other vital employees. In July 2019, the Company appointed Brandon C. Lorey to succeed John R. Milleson as President and CEO. The majority of the increase during 2018 was related to merit and cost of living increases. In addition to pay increases, the number of full-time equivalent employees increased from 173 to 179 during the year.

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.

ATM network fees increased 25.11% during 2019 and 11.76% during 2018. ATM network fees fluctuate based on the usage of ATM and debit cards.

Other real estate owned expenses and (Gain) loss (gain) on other real estate owned decreased significantly during 2019.2020. These differences are attributable to one large property that was foreclosedamounts can fluctuate based on and subsequently sold in 2018. The balances for 2018 were also not comparable to 2017 due to this single large property that wasthe number of properties foreclosed on and sold in 2018.

during any time period.  

FDIC assessments decreased $120 thousand during 2019.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.

Computer software expense decreased during 2018. Fees paid to our core software provider have decreased due to a conscious effort to reduce unused services and renegotiate contract amounts.

Bank franchise tax has increased during 2019 and 2018.2020.  This expense increases as capital levels increase.

Data processing fees increased during 2019 and 2018.2020.  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 increaseddecreased during 2019 and 2018.2020. 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 increase in 2018 is primarily due to increases in loan related expenses driven by loan volume.

The efficiency ratio of the Company was 67.21%, 66.36%,67.59% and 67.47%67.21% for 2019, 2018,2020 and 2017,2019, 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% for 2019 and 2018 and 34% for 2017.. 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, 2019, 2018,2020 and 20172019 are as follows:

		December 31,
		2020				2019
		(in thousands)
Summary of Operating Results:
Noninterest expenses		$	29,441			$	26,776
Less: (Gain) loss on other real estate owned			(143	)			443
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			687				(7	)
Less: Gain (loss) on the sale and disposal of premises and equipment			5				137
Less: (Loss) on sale of repossessed assets			(5	)			—
Adjusted noninterest income		$	7,892			$	7,629
Tax equivalent adjustment (1)			249				338
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%.

	December 31,
	2019			2018			2017
	(in thousands)
Summary of Operating Results:
Noninterest expenses	$	26,776		$	25,195		$	23,190
Less: Loss (gain) on other real estate owned	443			866			(1		)
Adjusted noninterest expenses	$	26,333		$	24,329		$	23,191
Net interest income	$	31,215		$	29,408		$	27,197
Noninterest income	$	7,759		$	6,879		$	6,780
Less: (Loss) gain on sales of securities	(7		)	17			(10		)
Less: Gain (loss) on the sale and disposal of premises and equipment	137			(3		)	(12		)
Less: (Loss) on sale of of repossessed assets	—			—			(6		)
Less: Life insurance proceeds	—			—			270
Adjusted noninterest income	$	7,629		$	6,865		$	6,538
Tax equivalent adjustment (1)	338			388			639
Total net interest income and noninterest income, adjusted	$	39,182		$	36,661		$	34,374
Efficiency ratio	67.21		%	66.36		%	67.47		%

(1) Includes tax-equivalent adjustments on loans and securities using the federal statutory tax rate of 21% for 2019 and 2018 and 34% for 2017.

Income Taxes

Income tax expense was $1.8 million, $1.3$2.1 million and $3.6$1.8 million for the years ended December 31, 2019, 2018,2020 and 2017,2019, respectively. These amounts correspond to an effective tax rate of 15.65%, 12.74%,16.05% and 31.77%15.65% for 2020 and 2019, 2018, and 2017, respectively. The Tax Cuts and Jobs Act was signed into law on December 22, 2017, which reduced the Company's corporate tax rate from 34% to 21%. The Tax Cuts and Jobs Act required for the Company's deferred tax assets and liabilities to be adjusted at that date, for the effect of the change in the corporate tax rate. This adjustment resulted in a net increase to federal income tax expense of $397 thousand during 2017. The effective tax rate is below the statutory rate of 21% for 2019 and 2018 and 34% for 2017,, 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 the third quarter of 2018,2020, one of the Company’s rehabilitation 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 2019, 2018,2020 and 2017.

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 an increase of $77.7 million or 9.72% from $799.6 million at December 31, 2018. Securities increased $20.7 million or 14.35% from 2018 to 2019.and 2020. Loans, net of allowance for loan losses, increased by $38.4$189.5 million or 6.39%29.61% from 20182019 to 2019.2020. Total liabilities were $1.03 billion at December 31, 2020, compared to $781.0 million at December 31, 2019, compared to $712.0 million at December 31, 2018.2019. Total shareholders’ equity at year end 2020 and 2019 was $105.1 million and 2018 was $96.3 million, and $87.6 million, respectively.

Securities

Total securities, excluding restricted stock, at December 31, 2019 were $165.0 million as compared to $144.3 million as of December 31, 2018, which represents an increase of $20.7 million or 14.35% during 2019.2019 and 2020. The table titled “Securities Portfolio” shows the carrying value of securities at December 31, 2020, 2019, 2018, and 2017.2018. The Company purchased $54.3$78.4 million in securities during 2019.2020. This amount includes $7.1$77.2 million or 13.06% in obligations of U.S. government corporations and agencies, $46.2 million or 85.12%98.41% in mortgage-backed securities and $1.0$1.2 million or 1.82%1.59% in obligations of states and political subdivisions.subordinated debt.  The Company had $24.6$52.4 million in maturities, calls, and principal repayments on securities during 2019.2020. This amount includes $5.8$5.3 million or 23.69%10.17% in obligations of U.S. government corporations and agencies, $13.3$39.1 million or 54.18%74.58% in mortgage-backed securities and $5.4$8.0 million or 22.13%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, 2019.2020. Note 2 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio as of December 31, 20192020 and 2018.

2019.

Securities Portfolio

(dollars in thousands)

		December 31,
		2020				2019				2018
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

		December 31,
		2019				2018				2017
Securities available for sale:
Obligations of U.S. government corporations and agencies		$	22,186			$	21,731			$	21,520
Mortgage-backed securities		108,161				76,483				61,244
Obligations of states and political subdivisions		34,656				46,084				49,802
		$	165,003			$	144,298			$	132,566

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 $1.8$4.1 million and a net unrealized loss of $2.0$1.8 million at December 31, 20192020 and 2018,2019, 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, 2019.2020. 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)			760				3.85	%			4,160				2.57	%			13,461				2.59	%			—				—	%			18,381				2.64	%
Total		$	760				3.85	%		$	8,879				2.74	%		$	34,056				2.81	%		$	121,260				1.61	%		$	164,955				1.92	%

		December 31, 2019
		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		$	—			—	%		$	5,045			2.19	%		$	16,061			2.75	%		$	1,080			2.46	%		$	22,186			2.61	%
Mortgage-backed securities		—				—	%		—				—	%		—				—	%		108,161				2.71	%		108,161				2.71	%
Obligations of states and political subdivisions, taxable		660				4.15	%		2,563				3.35	%		4,858				2.80	%		1,366				2.79	%		9,447				3.04	%
Total taxable		$	660			4.15	%		$	7,608			2.58	%		$	20,919			2.76	%		$	110,607			2.71	%		$	139,794			2.72	%
Obligations of states and political subdivisions, tax-exempt (1)		806				3.72	%		5,099				3.26	%		17,924				2.55	%		1,380				3.25	%		25,209				2.77	%
Total		$	1,466			3.92	%		$	12,707			2.85	%		$	38,843			2.66	%		$	111,987			2.72	%		$	165,003			2.73	%

(1)
(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 $644.8$836.3 million and $606.8$644.8 million at December 31, 20192020 and 2018,2019, respectively. This represents an increase of $37.9$191.5 million or 6.25%29.71% for 2019.2020. The ratio of net loans to deposits decreased during the year from 85.53%82.92% to 82.92%81.85% at December 31, 20182019 and December 31, 2019,2020, 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)

		2020				2019				2018				2017				2016
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

		December 31,
		2019				2018				2017				2016				2015
Loans secured by real estate:
Construction and land development		$	42,561			$	54,675			$	43,786			$	23,266			$	35,019
Secured by farmland		13,917				7,251				8,568				8,525				6,550
Secured by 1-4 family residential properties		219,580				221,861				223,210				227,966				229,651
Multifamily		14,415				7,923				4,095				3,566				3,975
Commercial		286,600				265,595				239,915				208,525				175,172
Commercial and industrial loans		46,543				33,086				37,427				30,341				29,366
Consumer installment loans		9,541				8,470				10,187				12,677				13,530
All other loans		12,050				8,454				2,050				2,259				2,413
Total loans		$	645,207			$	607,315			$	569,238			$	517,125			$	495,676

Loans secured by real estate were $662.8 million or 79.25% and $577.1 million or 89.50% and $557.3 million or 91.84% of total loans at December 31, 20192020 and 2018,2019, respectively. This represents an increase of $19.8$85.7 million or 3.55%14.85% for 2019.2020. Consumer installment loans were $21.3 million or 2.55% and $9.5 million or 1.48% and $8.5 million or 1.40% of total loans at December 31, 20192020 and 2018,2019, respectively. This represents an increase of $1.1$11.8 million or 12.64%123.47% for 2019.2020. Commercial and industrial loans were $140.8 million or 16.83% and $46.5 million or 7.22% and $33.1 million or 5.45% of total loans at December 31, 20192020 and 2018.2019. This represents an increase of $13.5$94.2 million or 40.67%202.43% for 2019.2020. All other loans were $12.1$10.8 million and $8.5$12.1 million at December 31, 20192020 and 2018.2019. This represents an increasea decrease of $3.6$1.3 million or 42.53%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 $283.4$368.1 million or 43.92%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			643				6,321				8,882				15,846
Secured by 1-4 family residential properties			16,283				61,996				169,967				248,246
Multifamily			958				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			528				5,786				15,007				21,321
All other loans			397				612				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

		December 31, 2019
		Within 1 Year				After 1 Year Within 5 Years				After 5 Years				Total
Loans secured by real estate:
Construction and land development		$	21,759			$	10,306			$	10,496			$	42,561
Secured by farmland		2,996				3,420				7,501				13,917
Secured by 1-4 family residential properties		19,279				67,161				133,140				219,580
Multifamily		752				7,867				5,796				14,415
Commercial		35,047				80,013				171,540				286,600
Commercial and industrial loans		10,349				16,337				19,857				46,543
Consumer installment loans		733				6,111				2,697				9,541
All other loans		713				557				10,780				12,050
		$	91,628			$	191,772			$	361,807			$	645,207
For maturities over one year:
Floating rate loans						$	25,124			$	78,264			$	103,388
Fixed rate loans						166,648				283,543				450,191
						$	191,772			$	361,807			$	553,579

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 $2.4$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, 2019.2020. This is a decreasean increase of $551$3.0 thousand when compared to the December 31, 20182019 balance of $2.9$2.4 million. This decreaseincrease resulted mostly from the decreaseincrease in loans 90 days or more past due and still accruing, which consisted of three loans to two borrowers at December 31, 2018 and no loans at December 31, 2019.nonaccrual loans.

Nonaccrual loans were $2.2$4.8 million at December 31, 20192020 and $2.1$2.2 million at 2018.2019. The gross amount of interest income that would have been recognized on nonaccrual loans was $158 thousand for 2020 and $52 thousand for 2019 and $32 thousand for 2018.2019. None of this interest income was included in net income for 20192020 or 2018.2019.  A total of 2513 loans totaling $4.5$3.8 million were placed in nonaccrual during 2019.2020. The balance of these loans added to nonaccrual status during 20192020 ranged from $4$12 thousand to $1.3$1.5 million with the average outstanding balance being $181$293 thousand.  In addition, sevenfive loans totaling $3.1 million$618 thousand were removed from nonaccrual status during 2019.2020.  Of the $3.1 million$618 thousand in loans removed from nonaccrual status between December 31, 20182019 and December 31, 2019, two loans totaling $1.5 million were2020, one loan was paid off, and fivethree loans totaling $1.6 million were foreclosed on. Of the $1.6 million in loans foreclosed on only $1.2 millionand one loan was placed into OREO. The real estate securing one of the loans foreclosed on was purchased by someone other than he Bank during the foreclosure sale.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, 20192020 totaled $2.2$4.8 million and had $100 thousand inno specific allocations.

allocations assigned.

Other real estate owned increased slightly from $106 thousand at December 31, 2018 to $183 thousand at December 31, 2019. Four2019 to $607 thousand at December 31, 2020.  Three properties were foreclosed on during 2019.2020. The property held at December 31, 2018 and three of the properties foreclosed on during 2019 subsequently 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 and $866 thousand were recognized on other real estate owned during 2019 and 2018, respectively. A net gain of $1 thousand was recognized on the sale of other real estate owned during 2017.

There were no loans past due 90 days or more and still accruing interest as of December 31, 2019. At December 31, 2018, there were $695 thousand or 0.11% of total loans past due 90 days or more and still accruing. The loans past due 90 days or more and still accruing interest are well secured and in the process of collection; therefore, they were not classified as nonaccrual.

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. Formal, standardized loan restructuring programs are not utilized by the Company. 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, 2016, and 2015,2016, the Company had $3.3 million, $3.0 million, $3.8 million, $4.4 million $7.3 million and $7.5$7.3 million in restructured loans, respectively.

Nonperforming Assets

(dollars in thousands)

		December 31,
		2020				2019				2018				2017				2016
Nonaccrual loans		$	4,754			$	2,185			$	2,118			$	6,339			$	6,991
Loans past due 90 days and accruing interest			—				—				695				—				8
Other real estate owned and repossessed assets			607				183				106				106				375
Total nonperforming assets		$	5,361			$	2,368			$	2,919			$	6,445			$	7,374
Allowance for loan losses to nonperforming assets			132	%			210	%			187	%			68	%			61	%
Non-performing assets to period end loans and other real estate owned			0.64	%			0.37	%			0.48	%			1.13	%			1.43	%

		December 31,
		2019				2018				2017				2016				2015
Nonaccrual loans		$	2,185			$	2,118			$	6,339			$	6,991			$	5,285
Loans past due 90 days and accruing interest		—				695				—				8				307
Other real estate owned and repossessed assets		183				106				106				375				571
Total nonperforming assets		$	2,368			$	2,919			$	6,445			$	7,374			$	6,163
Allowance for loan losses to nonperforming assets		210		%		187		%		68		%		61		%		80		%
Non-performing assets to period end loans and other real estate owned		0.37		%		0.48		%		1.13		%		1.43		%		1.24		%

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, 2019,2020, other potential problem loans totaled $3.4$2.7 million. Of the total other potential problem loans, $3.4$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 $236 thousand,for 2020 and $370 thousand for 2019, 2018, and 2017, respectively. Recoveries were $1.1 million and $201 thousand $504 thousand,for 2020 and $9012019, respectively. Net recoveries were $666 thousand for 2019, 2018, and 2017, respectively.2020. Net charge-offs were $1.1 million for 2019. Net recoveries were $268 thousand and $531 thousand for 2018 and 2017, respectively. This represents an increasea decrease in net charge-offs of $1.4$1.8 million or 514.93%159.89% for 2019 and an increase of $263 thousand or 49.53% for 2018.2020. The allowance for loan losses as a percentage of loans was 0.77%, 0.90%,0.85% and 0.78%0.77% at the end of 2020 and 2019, 2018, and 2017, 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 decreaseincrease in allowance for loan losses as a percentage of total loans from December 31, 20182019 to December 31, 20192020 is primarily due to decreasesthe decline in specific reserves. The decreasethe current state of the economy and the related increase in the qualitative factors within our allowance for loan losses, as a percentage of total loans from December 31, 2018 to December 31, 2019 is due decreases in specific reserves and loss history.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 2018 and 20172020 is not considered meaningful due to net recoveries being recognized during those years.recognized. The ratio of net charge-offs (recoveries) to average loans was (0.09)% for 2020 and 0.18% for 2019, (0.05)% for 2018 and (0.10)% for 2017.

2019.

The provision for (recovery of) loan losses for the year ended December 31, 20192020 was $629 thousand,$1.5 million, compared to $777 thousand and $(625)$629 thousand for the yearsyear ended December 31, 20182019. 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 2017, respectively.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 provision for loan losses in 2018 resulted from the growth of the loan portfolio, the expanded loss history, as well as increases in specific reserves.

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, 2016, and 2015.2016. 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,
		2020				2019				2018				2017						2016
Balance, beginning of period		$	4,973			$	5,456			$	4,411			$	4,505					$	4,959
Loans charged-off:
Commercial, financial and agricultural		$	49			$	850			$	139			$	187					$	—
Real estate-construction and land development			119				—				—				19						—
Real estate-mortgage			175				406				24				56						535
Consumer and other loans			122				57				73				108						72
Total loans charged off		$	465			$	1,313			$	236			$	370					$	607
Recoveries:
Commercial, financial and agricultural		$	498			$	52			$	100			$	44					$	11
Real estate-construction and land development			7				8				266				535						144
Real estate-mortgage			577				92				106				277						132
Consumer and other loans			49				49				32				45						54
Total recoveries		$	1,131			$	201			$	504			$	901					$	341
Net charge-offs (recoveries)			(666	)			1,112				(268	)			(531	)					266
Provision for loan losses			1,457				629				777				(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	%

		December 31,
		2019				2018				2017				2016				2015
Balance, beginning of period		$	5,456			$	4,411			$	4,505			$	4,959			$	5,080
Loans charged-off:
Commercial, financial and agricultural		850				139				187				—				—
Real estate-construction and land development		—				—				19				—				166
Real estate-mortgage		406				24				56				535				199
Consumer and other		57				73				108				72				91
Total loans charged off		$	1,313			$	236			$	370			$	607			$	456
Recoveries:
Commercial, financial and agricultural		$	52			$	100			$	44			$	11			$	181
Real estate-construction and land development		8				266				535				144				75
Real estate-mortgage		92				106				277				132				257
Consumer and other		49				32				45				54				49
Total recoveries		$	201			$	504			$	901			$	341			$	562
Net charge-offs (recoveries)		1,112				(268		)		(531		)		266				(106		)
Provision for (recovery of) loan losses		629				777				(625		)		(188		)		(227		)
Balance, end of period		$	4,973			$	5,456			$	4,411			$	4,505			$	4,959
Ratio of allowance for loan losses to loans outstanding at period end		0.77		%		0.90		%		0.78		%		0.87		%		1.00		%
Ratio of net charge offs (recoveries) to average loans outstanding during the period		0.18		%		(0.05		)%		(0.1		)%		0.05		%		(0.02		)%

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	%		$	549				3.8	%
December 31, 2019			565				7.2	%			446				8.8	%			3,592				80.7	%			174				3.3	%
December 31, 2018			919				5.4	%			583				10.2	%			3,776				81.6	%			150				2.8	%
December 31, 2017			570				6.6	%			332				9.2	%			3,381				82.1	%			98				2.1	%
December 31, 2016			235				5.9	%			450				6.1	%			3,514				85.1	%			91				2.9	%

		Commercial, Financial, and Agricultural							Real Estate Construction and Land Development							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, 2019		$	565			7.2	%		$	446			8.8	%		$	3,592			80.7	%		$	174			3.3	%
December 31, 2018		919				5.4	%		583				10.2	%		3,776				81.6	%		150				2.8	%
December 31, 2017		570				6.6	%		332				9.2	%		3,381				82.1	%		98				2.1	%
December 31, 2016		235				5.9	%		450				6.1	%		3,514				85.1	%		91				2.9	%
December 31, 2015		211				5.9	%		775				8.4	%		3,590				82.5	%		162				3.2	%

Deposits

Total deposits were $771.5 million$1.01 billion and $703.1$771.5 million at December 31, 20192020 and 2018,2019, respectively, which represents an increase of $68.4$241.6 million or 9.73%31.31% during 2019.2020. The table titled “Average Deposits and Rates Paid” shows the average deposit balances and average rates paid for 2020, 2019 2018 and 2017.

2018.

Average Deposits and Rates Paid

(dollars in thousands)

		December 31,
		2020								2019								2018
		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

		December 31,
		2019							2018							2017
		Amount				Rate			Amount				Rate			Amount				Rate
Noninterest-bearing		$	258,176						$	246,056						$	216,044
Interest-bearing:
NOW accounts		89,536				0.5	%		91,353				0.35	%		85,154				0.19	%
Money market accounts		150,291				0.97	%		132,136				0.62	%		128,068				0.23	%
Regular savings accounts		105,176				0.2	%		104,473				0.15	%		100,838				0.07	%
Time deposits:
$250,000 and more		59,550				2.05	%		70,778				0.97	%		57,010				0.6	%
Less than $250,000		61,775				1.38	%		36,808				1.38	%		39,319				0.58	%
Total interest-bearing		$	466,328			0.9	%		$	435,548			0.57	%		$	410,389			0.26	%
Total deposits		$	724,504						$	681,604						$	626,433

Noninterest-bearing demand deposits, which are comprised of checking accounts, increased $18.0$138.4 million or 7.16%51.42% from $251.2 million at December 31, 2018 to $269.2 million at December 31, 2019.2019 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 $50.5$103.1 million or 11.16%20.53% from $451.9 million at December 31, 2018 to $502.4 million at December 31, 2019.2019 to $605.5 million at December 31, 2020. Total money market account balances increased $13.6$53.7 million or 9.64%34.84% from $140.6 million at December 31, 2018 to $154.1 million at December 31, 2019.2019 to $207.8 million at December 31, 2020. Reciprocal money market accounts balances (included in total money market account balances) increased from $18.4$27.0 million and $27.0to $34.6 million at December 31, 20182019 and December 31, 2019,2020, respectively. The reciprocal money market balance at December 31, 20192020 and December 31, 20182019 consists of money market accounts obtained through the ICS network. Total regular savings account balances increased $3.1$29.1 million or 2.92%26.99% from $104.6 million at December 31, 2018 to $107.7 million at December 31, 2019. Time deposits increased $23.1 million or 20.02% from $115.12019 to $136.8 million at December 31, 20182020. 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.

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% and $649.8 million or 92.42% of total deposits at December 31, 2020 and 2019, and 2018, 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, 2019.2020. The total amount maturing within one year is $94.7$89.9 million or 91.96%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	%

		Within Three Months				Three to Six Months				Six to Twelve Months				Over One Year				Total				Percent of Total Deposits
December 31, 2019		$	21,276			$	38,614			$	34,813			$	8,282			$	102,985			13.35	%

CAPITAL RESOURCES

Total shareholders’ equity on December 31, 20192020 was $96.3$105.1 million, reflecting a percentage of total assets of 10.98%9.08% as compared to $87.6$96.3 million and 10.96%10.98% at December 31, 2018.2019. The common stock’s book value per share increased $2.66$2.97 or 10.46%10.58% to $31.05 per share at December 31, 2020 from $28.08 per share at December 31, 2019 from $25.42 per share at December 31, 2018.2019. During 2019,2020, the Company paid $1.00$1.04 per share in dividends as compared to $0.94$1.00 per share for 2018 and $0.88 per share for 2017.2019. 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.  During 2018, the Company purchased 39,333 shares of its Common Stock under its stock repurchase program at an average price of $32.06. During 2017, the Company purchased 52,936 shares of its Common Stock under its stock repurchase program at an average price of $29.54. All of these shares were retired. 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	%

		December 31, 2019				December 31, 2018
Tier 1 Capital:
Common stock		$	1,682			$	1,682
Capital surplus		9,773				9,773
Retained earnings		79,320				74,308
Total Tier 1 capital		$	90,775			$	85,763
Common equity Tier 1 capital		$	90,775			$	85,763
Tier 2 Capital:
Allowance for loan losses, including reserve for unfunded commitments		$	4,997			$	5,474
Total Tier 2 capital		$	4,997			$	5,474
Total risk-based capital		$	95,772			$	91,237
Risk weighted assets		$	665,141			$	613,247
Risk Based Capital Ratios:
Common equity Tier 1 capital ratio		13.65		%		13.99		%
Tier 1 risk-based capital ratio		13.65		%		13.99		%
Total risk-based capital ratio		14.40		%		14.88		%
Tier 1 leverage ratio		10.61		%		10.92		%

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% upon full implementation)), (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% upon full implementation)), (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% upon full implementation)), 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, areis 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 2018.

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, 20192020 liquid assets totaled $290.3$320.4 million as compared to $242.3$290.3 million at December 31, 2018.2019. These amounts represent 37.17%31.26% and 35.50%37.17% of total liabilities at December 31, 20192020 and 2018,2019, 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, 2019.

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		$	319			$	645			$	673			$	4,039			$	5,676
		$	319			$	645			$	673			$	4,039			$	5,676

		December 31, 2019
		Less than One Year				One Year through Three  Years				Three Years through Five Years				More than Five Years				Total
Operating leases		$	215			$	440			$	440			$	4,257			$	5,352
		$	215			$	440			$	440			$	4,257			$	5,352

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

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	%

		Change in Net Interest Income
Assumed Market Interest Rate Shock		Dollars			Percent Change
-100 BP		(796	)		(2.59	)%
+100 BP		(82	)		(0.27	)%
+200 BP		(387	)		(1.26	)%
+300 BP		(635	)		(2.07	)%
+400 BP		(887	)		(2.89	)%

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	%

		Change in EVE
Assumed Market Interest Rate Shift		Dollars			Percent Change
-100 BP Shock		(18,540	)		(19.20	)%
+100 BP Shock		8,833			9.10	%
+200 BP Shock		12,423			12.90	%
+300 BP Shock		14,345			14.90	%
+400 BP Shock		15,071			15.60	%

Item 8.     Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 20192020 and 2018,2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the periodthen ended, December 31, 2019, 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, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the periodthen ended, December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

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 PCAOBPublic 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 auditsaudit 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 13, 2020

30, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Eagle Financial Services, Inc.

Berryville, Virginia

Opinion on the Internal Control Over Financial Reporting

We have audited Eagle Financial Services, Inc. and subsidiary’s (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements of the Company, and our report dated March 13, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (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.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia

March 13, 2020

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 20192020 and 2018

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			222				252
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			607				183
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

	2019				2018
Assets
Cash and due from banks	$	10,920			$	12,358
Interest-bearing deposits with other institutions	22,487				5,995
Federal funds sold	252				—
Total cash and cash equivalents	33,659				18,353
Securities available for sale, at fair value	165,003				144,298
Restricted investments	1,197				1,170
Loans	644,760				606,827
Allowance for loan losses	(4,973		)		(5,456		)
Net loans	639,787				601,371
Bank premises and equipment, net	19,297				19,083
Other real estate owned, net of allowance	183				106
Other assets	18,194				15,236
Total assets	$	877,320			$	799,617
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand deposits	$	269,171			$	251,184
Savings and interest bearing demand deposits	364,175				336,778
Time deposits	138,198				115,142
Total deposits	$	771,544			$	703,104
Federal funds purchased	—				1,871
Other liabilities	9,450				7,043
Total liabilities	$	780,994			$	712,018
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 2019, 3,430,103 including 18,488 unvested restricted stock; issued and outstanding 2018, 3,445,914 including 16,701 unvested restricted stock	8,529				8,573
Surplus	11,406				11,992
Retained earnings	74,909				68,587
Accumulated other comprehensive income (loss)	1,482				(1,553		)
Total shareholders’ equity	$	96,326			$	87,599
Total liabilities and shareholders’ equity	$	877,320			$	799,617

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Income

Years Ended December 31, 2019, 2018,2020 and 2017

2019

(dollars in thousands, except per share amounts)

		2020				2019
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			588				856
Dividends			76				70
Interest on deposits in banks			112				297
Interest on federal funds sold			1				4
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			—				31
Interest on Federal Home Loan Bank advances			25				15
Total interest expense		$	3,281			$	4,239
Net interest income		$	35,627			$	31,215
Provision For Loan Losses			1,457				629
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			920				1,187
Other service charges and fees			4,757				4,893
Gain (loss) on the sale and disposal of bank premises and equipment			5				137
Gain (loss) on sale of securities			687				(7	)
Bank owned life insurance income (expense)			310				(48	)
Other operating income			502				217
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			988				857
Advertising and marketing expenses			707				868
Stationery and supplies			144				172
ATM network fees			1,009				1,141
Other real estate owned expense			9				76
(Gain) loss on other real estate owned			(143	)			443
FDIC assessment			221				105
Computer software expense			679				459
Bank franchise tax			705				656
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

	2019				2018				2017
Interest and Dividend Income
Interest and fees on loans	$	31,138			$	27,890			$	24,821
Interest and dividends on securities available for sale:
Taxable interest income	3,089				2,744				2,278
Interest income exempt from federal income taxes	856				1,051				1,034
Dividends	70				59				61
Interest on deposits in banks	297				176				156
Interest on federal funds sold	4				3				1
Total interest and dividend income	$	35,454			$	31,923			$	28,351
Interest Expense
Interest on deposits	4,193				2,490				1,084
Interest on federal funds purchased	31				25				13
Interest on Federal Home Loan Bank advances	15				—				57
Total interest expense	$	4,239			$	2,515			$	1,154
Net interest income	$	31,215			$	29,408			$	27,197
Provision For (Recovery Of) Loan Losses	629				777				(625		)
Net interest income after provision for (recovery of) loan losses	$	30,586			$	28,631			$	27,822
Noninterest Income
Income from fiduciary activities	$	1,380			$	1,360			$	1,238
Service charges on deposit accounts	1,187				1,218				1,223
Other service charges and fees	4,893				4,173				3,878
Gain (loss) on the sale and disposal of bank premises and equipment	137				(3		)		(12		)
(Loss) gain on sale of securities	(7		)		17				(10		)
Other operating income	169				114				463
Total noninterest income	$	7,759			$	6,879			$	6,780
Noninterest Expenses
Salaries and employee benefits	$	15,025			$	14,083			$	13,643
Occupancy expenses	1,611				1,476				1,473
Equipment expenses	857				915				955
Advertising and marketing expenses	868				761				731
Stationery and supplies	172				195				173
ATM network fees	1,141				912				816
Other real estate owned expense	76				183				11
Loss (gain) on other real estate owned	443				866				(1		)
FDIC assessment	105				225				222
Computer software expense	459				474				647
Bank franchise tax	656				583				534
Professional fees	1,057				1,036				1,007
Data processing fees	1,275				794				564
Other operating expenses	3,031				2,692				2,415
Total noninterest expenses	$	26,776			$	25,195			$	23,190
Income before income taxes	$	11,569			$	10,315			$	11,412
Income Tax Expense	1,810				1,314				3,626
Net income	$	9,759			$	9,001			$	7,786
Earnings Per Share
Net income per common share, basic	$	2.84			$	2.60			$	2.24
Net income per common share, diluted	$	2.84			$	2.60			$	2.24

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2019, 2018,2020 and 2017

2019

(dollars in thousands)

		2020				2019
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

	2019				2018				2017
Net income	$	9,759			$	9,001			$	7,786
Other comprehensive income (loss):
Changes in benefit obligations and plan assets for post retirement benefit plans, net of reclassification adjustments, net of deferred income tax of $0, $0 and ($1) for the years ended December 31, 2019, 2018, and 2017, respectively	—				—				(2		)
Unrealized gain (loss) on available for sale securities, net of reclassification adjustments, net of deferred income tax of $807, ($495), and $147 for the years ended December 31, 2019, 2018 and 2017, respectively	3,035				(1,863		)		285
Total other comprehensive income (loss)	3,035				(1,863		)		283
Total comprehensive income	$	12,794			$	7,138			$	8,069

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Years Ended December 31, 2019, 2018,2020 and 2017

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				(46	)											—
Stock-based compensation expense							562												562
Issuance of common stock, dividend investment plan (14,176 shares)			35				406												441
Issuance of common stock, employee benefit plan (4,064 shares)			10				128												138
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				(48	)											—
Stock-based compensation expense							604												604
Issuance of common stock, dividend investment plan (13,239 shares)			33				326												359
Issuance of common stock, employee benefit plan (7,204 shares)			18				209												227
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

	Common Stock				Surplus				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
Balance, December 31, 2016	$	8,633			$	12,642			$	58,165			$	(24	)		$	79,416
Net income									7,786								7,786
Other comprehensive income													283				283
Reclassification of stranded tax effects from change in tax rate									(51		)		51				—
Restricted stock awards, stock incentive plan (14,493 shares)	36				(36		)										—
Stock based compensation expense					382												382
Issuance of common stock, dividend investment plan (13,769 shares)	35				368												403
Issuance of common stock, employee benefit plan (5,958 shares)	15				151												166
Retirement of common stock (52,936 shares)	(132		)		(1,432		)										(1,564		)
Dividends declared ($0.88 per share)									(3,055		)						(3,055		)
Balance, December 31, 2017	$	8,587			$	12,075			$	62,845			$	310			$	83,817
Net income									9,001								9,001
Other comprehensive (loss)													(1,863		)		(1,863		)
Restricted stock awards, stock incentive plan (14,609 shares)	36				(36		)										—
Stock-based compensation expense					518												518
Issuance of common stock, dividend investment plan (14,731 shares)	37				446												483
Issuance of common stock, employee benefit plan (4,580 shares)	11				152												163
Retirement of common stock (39,333 shares)	(98		)		(1,163		)										(1,261		)
Dividends declared ($0.94 per share)									(3,259		)						(3,259		)
Balance, 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				(46		)										—
Stock-based compensation expense					562												562
Issuance of common stock, dividend investment plan (14,176 shares)	35				406												441
Issuance of common stock, employee benefit plan (4,064 shares)	10				128												138
Retirement of common stock (53,988 shares)	(135		)		(1,636		)										(1,771		)
Dividends declared ($1.00 per share)									(3,437		)						(3,437		)
Balance, December 31, 2019	$	8,529			$	11,406			$	74,909			$	1,482			$	96,326

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years Ended December 31, 2019, 2018,2020 and 2017

2019

(dollars in thousands)

		2020				2019
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				957
Amortization of intangible and other assets			411				358
Provision for loan losses			1,457				629
(Gain) loss on other real estate owned			(143	)			443
(Gain) on the sale and disposal of premises and equipment			(5	)			(137	)
Loss on the sale of repossessed assets			5				—
(Gain) loss on the sale of securities			(687	)			7
Stock-based compensation expense			604				562
Premium amortization on securities, net			801				487
Bank owned life insurance (income) expense			(310	)			48
Deferred tax (benefit) expense			(471	)			516
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				425
Purchase of restricted investments			(2,195	)			(452	)
Proceeds for the sale of bank premises and equipment			5				279
Purchases of bank premises and equipment			(456	)			(1,314	)
Proceeds from the sale of other real estate owned			160				631
Proceeds from the sale of repossessed assets			58				16
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			227				138
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		$	503			$	1,167
Issuance of common stock, dividend investment plan		$	359			$	441
Lease liabilities arising from right-of-use assets		$	549			$	3,745

	2019				2018				2017
Cash Flows from Operating Activities
Net income	$	9,759			$	9,001			7,786
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	957				925				946
Amortization of other assets	358				201				200
Provision for (recovery of) loan losses	629				777				(625		)
Loss (gain) on other real estate owned	443				866				(1		)
(Gain) loss on the sale and disposal of premises and equipment	(137		)		3				12
Loss on the sale of repossessed assets	—				—				6
Loss (gain) on the sale of securities	7				(17		)		10
Stock-based compensation expense	562				518				382
Premium amortization on securities, net	487				483				443
Deferred tax expense (benefit)	516				(399		)		532
Changes in assets and liabilities:
(Increase) in other assets	(894		)		(2,404		)		(1,465		)
(Decrease) increase in other liabilities	(1,339		)		(11,477		)		1,141
Net cash provided by (used in) operating activities	$	11,348			$	(1,523	)		$	9,367
Cash Flows from Investing Activities
Proceeds from maturities, calls, and principal payments of securities available for sale	$	24,604			$	16,604			$	10,714
Proceeds from the sale of securities available for sale	12,350				5,374				20,283
Purchases of securities available for sale	(54,310		)		(36,534		)		(43,797		)
Proceeds from the sale of restricted securities	425				—				850
Purchases of restricted securities	(452		)		(63		)		(889		)
Proceeds from the sale of bank premises and equipment	279				—				—
Purchases of bank premises and equipment	(1,314		)		(432		)		(368		)
Proceeds from the sale of other real estate owned	631				1,933				318
Proceeds from the sale of repossessed assets	16				4				3
Net (increase) in loans	(40,211		)		(40,545		)		(51,401		)
Net cash (used in) investing activities	$	(57,982	)		$	(53,659	)		$	(64,287	)
Cash Flows from Financing Activities
Net increase in demand deposits, money market and savings accounts	$	45,384			$	30,024			$	42,143
Net increase in certificates of deposit	23,056				9,666				17,394
Net (decrease) increase in federal funds purchased	(1,871		)		1,871				—
Issuance of common stock, employee benefit plan	138				163				166
Retirement of common stock	(1,771		)		(1,261		)		(1,564		)
Cash dividends paid	(2,996		)		(2,776		)		(2,652		)
Net cash provided by financing activities	$	61,940			$	37,687			$	55,487

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (continued)

Years Ended December 31, 2019, 2018, and 2017

(dollars in thousands)

	2019				2018				2017
Increase (decrease) in cash and cash equivalents	$	15,306			$	(17,495	)		$	567
Cash and Cash Equivalents
Beginning	18,353				35,848				35,281
Ending	$	33,659			$	18,353			$	35,848
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	4,198			$	2,458			$	1,144
Income taxes	$	—			$	2,161			$	2,744
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized gain(loss) on securities available for sale	$	3,842			$	(2,358	)		$	432
Minimum postretirement liability adjustment	$	—			$	—			$	3
Other real estate and repossessed assets acquired in settlement of loans	$	1,167			$	2,803			$	57
Issuance of common stock, dividend investment plan	$	441			$	483			$	403
Purchases of securities available for sale settled subsequent to year end	$	—			$	—			$	10,346
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 and otheradjusted for qualitative factors. Other qualitativeQualitative 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 from10 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 expense 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 20182019 financial statements to conform to reporting for 2019.2020.  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,
		2020				2019
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

	2019			2018			2017
Weighted average number of common shares outstanding used to calculate basic earnings per share	3,438,410			3,467,667			3,468,275
Effect of dilutive common stock	—			—			—
Weighted average number of common shares outstanding used to calculate diluted earnings per share	3,438,410			3,467,667			3,468,275

There were no0 potentially dilutive securities outstanding in 2019, 20182020 or 2017.

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 20, 2019,17, 2020, the Corporation renewed the stock repurchase program to repurchase up to 150,000 shares of its common stock prior to June 30, 2020.2021. 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.  During 2018, the Company purchased 39,333 shares of its Common Stock under its stock repurchase program at an average price of $32.06. During 2017, the Company purchased 52,936 shares of its Common Stock under its stock repurchase program at an average price of $29.54. The maximum number of shares that may yet be purchased under the plan as of December 31, 20192020 are 141,067.

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. For public business entities that meetThe 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 definition of acodification as well as other transition matters.  Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) filer, excluding smaller reporting companies, the standard is effective for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years. Alland all other entities will bewho 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.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.

In April

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119.  SAB 119 updated portions of SEC interpretative guidance to align with FASB issued ASU 2019-04, “Codification Improvements to TopicASC 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various Transition Resource Group (TRG) Meetings. The effective date of each of the amendments depends on the adoption date of ASU 2016-1, ASU 2016-13, and ASU 2017-12. The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief.” The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The effective date and transition methodology for the amendments in ASU 2019-05 are the same as in ASU 2016-13. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.

In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments -– Credit Losses.”  This ASU addresses issues raised by stakeholders during the implementation of ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Among other narrow-scope improvements, the new ASU clarifies guidance around how to reportIt covers topics including (1) measuring current expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basiscredit losses; (2) development, governance, and documentation of a financial asset, but then later determines thatsystematic methodology; (3) documenting the amount written off, orresults of a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The ASU includes effective datessystematic methodology; and transition requirements that vary depending on whether or not an entity has already adopted ASU 2016-13. The Company is currently assessing the impact that ASU 2019-11 will have on its consolidated financial statements.

(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.

Effective November 25, 2019,

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 adopted Stafffinalized 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 Bulletin (SAB) 119. SAB 119 updated portionsStandards 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 SEC interpretativeASU 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 align with FASB ASC 326, “Financial Instruments - Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation ofhave a systematic methodology; (3) documentingmaterial impact on the results of a systematic methodology; and (4) validating a systematic methodology.

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, 20192020 and 20182019 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			$	907			$	—			$	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			$	363			$	(94	)		$	22,186
Mortgage-backed securities			107,410				966				(215	)			108,161
Obligations of states and political subdivisions			33,854				858				(56	)			34,656
		$	163,181			$	2,187			$	(365	)		$	165,003

	Amortized Cost				Gross Unrealized Gains				Gross Unrealized (Losses)				Fair Value
	December 31, 2019
	(in thousands)
Obligations of U.S. government corporations and agencies	$	21,917			$	363			$	(94	)		$	22,186
Mortgage-backed securities	107,410				966				(215		)		108,161
Obligations of states and political subdivisions	33,854				858				(56		)		34,656
	$	163,181			$	2,187			$	(365	)		$	165,003
	December 31, 2018
	(in thousands)
Obligations of U.S. government corporations and agencies	$	22,183			$	29			$	(481	)		$	21,731
Mortgage-backed securities	77,976				145				(1,638		)		76,483
Obligations of states and political subdivisions	46,159				394				(469		)		46,084
	$	146,318			$	568			$	(2,588	)		$	144,298

Carrying amounts of restricted securities at December 31, 20192020 and 20182019 were as follows:

		December 31, 2020				December 31, 2019
		(in thousands)
Federal Reserve Bank Stock		$	344			$	344
Federal Home Loan Bank Stock			783				713
Community Bankers’ Bank Stock			140				140
		$	1,267			$	1,197

	December 31, 2019				December 31, 2018
	(in thousands)
Federal Reserve Bank Stock	$	344			$	344
Federal Home Loan Bank Stock	713				686
Community Bankers’ Bank Stock	140				140
	$	1,197			$	1,170

The amortized cost and fair value of securities available for sale at December 31, 2019,2020, 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		$	751			$	760
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

		Amortized Cost				Fair Value
		(in thousands)
Due in one year or less		$	1,460			$	1,466
Due after one year through five years		12,516				12,707
Due after five years through ten years		37,979				38,843
Due after ten years		111,226				111,987
		$	163,181			$	165,003

During the twelve months endedDecember 31, 2019,2020, the Company sold $12.4$28.3 million in available for sale securities with gross gains of $687 thousand and 0 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. During the twelve months endedDecember 31, 2018, the Company sold $5.4 million in available for sale securities with gross gains of $62 thousand and gross losses of $45 thousand. During the twelve months ended December 31, 2017, the Company sold $20.3 million in available for sale securities with gross gains of $94 thousand and gross losses of $104 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, 20192020 and 20182019 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			$	46			$	—			$	—			$	12,014			$	46
		$	12,014			$	46			$	—			$	—			$	12,014			$	46
		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			$	91			$	1,997			$	3			$	7,463			$	94
Mortgage-backed securities			19,509				176				5,271				39				24,780				215
Obligations of states and political subdivisions			3,127				49				923				7				4,050				56
		$	28,102			$	316			$	8,191			$	49			$	36,293			$	365

	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			$	91			$	1,997			$	3			$	7,463			$	94
Mortgage-backed securities	19,509				176				5,271				39				24,780				215
Obligations of states and political subdivisions	3,127				49				923				7				4,050				56
	$	28,102			$	316			$	8,191			$	49			$	36,293			$	365
	December 31, 2018
	(in thousands)
Obligations of U.S. government corporations and agencies	$	1,973			$	6			$	13,710			$	475			$	15,683			$	481
Mortgage-backed securities	16,659				332				42,966				1,306				59,625				1,638
Obligations of states and political subdivisions	3,594				52				12,864				417				16,458				469
	$	22,226			$	390			$	69,540			$	2,198			$	91,766			$	2,588

Gross unrealized losses on available for sale securities included twenty-eight (28)3 (3) and ninety-five (95)NaN (28) debt securities at December 31, 2020 and December 31, 2019, and December 31, 2018, 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 and December 31, 2018 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 $2.9$3.1 million at December 31, 20192020 were pledged as security for public deposits.

trust accounts.

NOTE 3. Loans

The composition of loans at December 31, 20192020 and 20182019 was as follows:

		December 31,
		2020				2019
		(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)			685				(447	)
Allowance for loan losses			(7,096	)			(4,973	)
		$	829,238			$	639,787

		December 31,
		2019				2018
		(in thousands)
Mortgage loans on real estate:
Construction and land development		$	42,561			$	54,675
Secured by farmland		13,917				7,251
Secured by 1-4 family residential properties		219,580				221,861
Multifamily		14,415				7,923
Commercial		286,600				265,595
Commercial and industrial loans		46,543				33,086
Consumer installment loans		9,541				8,470
All other loans		12,050				8,454
Total loans		$	645,207			$	607,315
Net deferred loan fees		(447		)		(488		)
Allowance for loan losses		(4,973		)		(5,456		)
Net Loans		$	639,787			$	601,371

NOTE 4. Allowance for Loan Losses

Changes in the allowance for loan losses for the years December 31, 2019, 20182020 and 20172019 were as follows:

		December 31,
		2020				2019
		(in thousands)
Balance, beginning		$	4,973			$	5,456
Provision charged to operating expense			1,457				629
Recoveries added to the allowance			1,131				201
Loan losses charged to the allowance			(465	)			(1,313	)
Balance, ending		$	7,096			$	4,973

	December 31,
	2019				2018				2017
					(in thousands)
Balance, beginning	$	5,456			$	4,411			$	4,505
Provision for (recovery of) loan losses	629				777				(625		)
Recoveries added to the allowance	201				504				901
Loan losses charged to the allowance	(1,313		)		(236		)		(370		)
Balance, ending	$	4,973			$	5,456			$	4,411

Nonaccrual and past due loans by class at December 31, 2020 and December 31, 2019 and December 31, 2018 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		$	43			$	—			$	—			$	43			$	140,719			$	140,762			$	—			$	—
Commercial Real Estate:
Owner Occupied			—				—				157				157				165,764				165,921				—				1,227
Non-owner occupied			500				—				122				622				168,118				168,740				—				2,405
Construction and Farmland:
Residential			—				—				—				—				10,644				10,644				—				—
Commercial			—				—				69				69				47,677				47,746				—				69
Consumer:
Installment			5				—				—				5				21,316				21,321				—				5
Residential:
Equity Lines			13				—				—				13				31,239				31,252				—				42
Single family			249				123				581				953				216,041				216,994				—				1,006
Multifamily			—				—				—				—				21,496				21,496				—				—
All Other Loans			—				—				—				—				10,773				10,773				—				—
Total		$	810			$	123			$	929			$	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		$	47			$	—			$	32			$	79			$	46,464			$	46,543			$	—			$	32
Commercial Real Estate:
Owner Occupied			1,078				—				—				1,078				147,879				148,957				—				320
Non-owner occupied			—				—				—				—				137,643				137,643				—				329
Construction and Farmland:
Residential			—				—				—				—				7,867				7,867				—				—
Commercial			—				—				187				187				48,424				48,611				—				187
Consumer:
Installment			55				6				—				61				9,480				9,541				—				8
Residential:
Equity Lines			121				—				—				121				33,127				33,248				—				65
Single family			471				541				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			$	547			$	1,470			$	3,789			$	641,418			$	645,207			$	—			$	2,185

	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 Days Past  Due Still Accruing				Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	47			$	—			$	32			$	79			$	46,464			$	46,543			$	—			$	32
Commercial Real Estate:
Owner Occupied	1,078				—				—				1,078				147,879				148,957				—				320
Non-owner occupied	—				—				—				—				137,643				137,643				—				329
Construction and Farmland:
Residential	—				—				—				—				7,867				7,867				—				—
Commercial	—				—				187				187				48,424				48,611				—				187
Consumer:
Installment	55				6				—				61				9,480				9,541				—				8
Residential:
Equity Lines	121				—				—				121				33,127				33,248				—				65
Single family	471				541				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			$	547			$	1,470			$	3,789			$	641,418			$	645,207			$	—			$	2,185

	December 31, 2018
	(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	$	127			$	—			$	—			$	127			$	32,959			$	33,086			$	—			$	1,081
Commercial Real Estate:
Owner Occupied	—				—				—				—				136,309				136,309				—				—
Non-owner occupied	—				—				—				—				129,286				129,286				—				364
Construction and Farmland:
Residential	—				—				—				—				6,706				6,706				—				—
Commercial	—				—				—				—				55,220				55,220				—				—
Consumer:
Installment	4				—				—				4				8,466				8,470				—				—
Residential:
Equity Lines	—				—				—				—				32,815				32,815				—				92
Single family	960				196				900				2,056				186,990				189,046				695				581
Multifamily	—				—				—				—				7,923				7,923				—				—
All Other Loans	—				—				—				—				8,454				8,454				—				—
Total	$	1,091			$	196			$	900			$	2,187			$	605,128			$	607,315			$	695			$	2,118

Allowance for loan losses by segment at December 31, 2019, December 31, 20182020 and December 31, 20172019 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		$	446			$	1,601			$	1,991			$	565			$	54			$	120			$	196			$	4,973
Charge-Offs			(119	)			(20	)			(155	)			(49	)			(83	)			(39	)			—				(465	)
Recoveries			7				275				302				498				41				8				—				1,131
Provision			1,270				73				(493	)			360				186				257				(196	)			1,457
Ending balance		$	1,604			$	1,929			$	1,645			$	1,374			$	198			$	346			$	—			$	7,096
Ending balance: Individually evaluated for impairment		$	—			$	72			$	—			$	—			$	—			$	—			$	—			$	72
Ending balance: collectively evaluated for impairment		$	1,604			$	1,857			$	1,645			$	1,374			$	198			$	346			$	—			$	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		$	105			$	3,869			$	3,632			$	147			$	15			$	—			$	—			$	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		$	583			$	1,788			$	1,988			$	919			$	53			$	97			$	28			$	5,456
Charge-Offs			—				(406	)			—				(850	)			(5	)			(52	)			—				(1,313	)
Recoveries			8				72				20				52				26				23				—				201
Provision			(145	)			147				(17	)			444				(20	)			52				168				629
Ending balance		$	446			$	1,601			$	1,991			$	565			$	54			$	120			$	196			$	4,973
Ending balance: Individually evaluated for impairment		$	100			$	51			$	149			$	—			$	—			$	—			$	—			$	300
Ending balance: collectively evaluated for impairment		$	346			$	1,550			$	1,842			$	565			$	54			$	120			$	196			$	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		$	433			$	3,681			$	3,053			$	228			$	8			$	—			$	—			$	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.

	As of and for the Twelve Months Ended
	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	$	583			$	1,788			$	1,988			$	919			$	53			$	97			$	28			$	5,456
Charge-Offs	—				(406		)		—				(850		)		(5		)		(52		)		—				(1,313		)
Recoveries	8				72				20				52				26				23				—				201
Provision (recovery)	(145		)		147				(17		)		444				(20		)		52				168				629
Ending balance	$	446			$	1,601			$	1,991			$	565			$	54			$	120			$	196			$	4,973
Ending balance: Individually evaluated for impairment	$	100			$	51			$	149			$	—			$	—			$	—			$	—			$	300
Ending balance: collectively evaluated for impairment	$	346			$	1,550			$	1,842			$	565			$	54			$	120			$	196			$	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	$	433			$	3,681			$	3,053			$	228			$	8			$	—			$	—			$	7,403
Ending balance collectively evaluated for impairment	$	56,045			$	230,314			$	283,547			$	46,315			$	9,533			$	12,050			$	—			$	637,804

	As of and for the Twelve Months Ended
	December 31, 2018
	(in thousands)
	Construction and Farmland				Residential Real Estate				Commercial Real Estate				Commercial				Consumer				All Other Loans				Unallocated				Total
Allowance for credit losses:
Beginning Balance	$	332			$	1,754			$	1,627			$	570			$	69			$	29			$	30			$	4,411
Charge-Offs	—				(24		)		—				(139		)		(33		)		(40		)		—				(236		)
Recoveries	266				28				78				100				19				13				—				504
Provision (recovery)	(15		)		30				283				388				(2		)		95				(2		)		777
Ending balance	$	583			$	1,788			$	1,988			$	919			$	53			$	97			$	28			$	5,456
Ending balance: Individually evaluated for impairment	$	—			$	119			$	193			$	650			$	—							$	—			$	962
Ending balance: collectively evaluated for impairment	$	583			$	1,669			$	1,795			$	269			$	53			$	97			$	28			$	4,494
Loans:
Ending balance	$	61,926			$	229,784			$	265,595			$	33,086			$	8,470			$	8,454			$	—			$	607,315
Ending balance individually evaluated for impairment	$	280			$	4,044			$	2,919			$	1,316			$	—							$	—			$	8,559
Ending balance collectively evaluated for impairment	$	61,646			$	225,740			$	262,676			$	31,770			$	8,470			$	8,454			$	—			$	598,756

(in thousands)		Calculated Provision (Recovery) Based on Current Methodology				Calculation Provision (Recovery) Based on Prior Methodology				Difference
Portfolio Segment:
Construction and Farmland		$	1,270			$	85			$	1,185
Residential Real Estate			73				275				(202	)
Commercial Real Estate			(493	)			444				(937	)
Commercial			360				(262	)			622
Consumer			186				140				46
All Other Loans			257				26				231
Total		$	1,653			$	708			$	945

	As of and for the Twelve Months Ended
	December 31, 2017
	(in thousands)
	Construction and Farmland				Residential Real Estate				Commercial Real Estate				Commercial				Consumer				All Other Loans				Unallocated				Total
Allowance for credit losses:
Beginning Balance	$	450			$	1,992			$	1,522			$	235			$	69			$	22			$	215			$	4,505
Charge-Offs	(19		)		(55		)		(1		)		(187		)		(59		)		(49		)		—				(370		)
Recoveries	535				212				65				44				40				5				—				901
Provision (recovery)	(634		)		(395		)		41				478				19				51				(185		)		(625		)
Ending balance	$	332			$	1,754			$	1,627			$	570			$	69			$	29			$	30			$	4,411
Ending balance: Individually evaluated for impairment	$	—			$	195			$	59			$	195			$	9			$	—			$	—			$	458
Ending balance: collectively evaluated for impairment	$	332			$	1,559			$	1,568			$	375			$	60			$	29			$	30			$	3,953
Loans:
Ending balance	$	52,354			$	227,305			$	239,915			$	37,427			$	10,187			$	2,050			$	—			$	569,238
Ending balance individually evaluated for impairment	$	315			$	8,315			$	1,904			$	858			$	34			$	—			$	—			$	11,426
Ending balance collectively evaluated for impairment	$	52,039			$	218,990			$	238,011			$	36,569			$	10,153			$	2,050			$	—			$	557,812

Impaired loans by class at December 31, 2020 and December 31, 2019 and December 31, 2018 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		$	246			$	147			$	—			$	186			$	16
Commercial Real Estate:
Owner Occupied			1,282				1,227				—				1,258				18
Non-owner occupied			2,682				2,405				—				2,444				34
Construction and Farmland:
Residential			—				—				—				—				—
Commercial			233				105				—				109				3
Consumer:
Installment			16				15				—				22				1
Residential
Equity lines			272				42				—				44				—
Single family			2,655				2,413				—				2,514				76
Multifamily			—				—				—				—				—
Other Loans			—				—				—				—				—
		$	7,386			$	6,354			$	—			$	6,577			$	148
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				72				1,448				38
Multifamily			—				—				—				—				—
Other Loans			—				—				—				—				—
		$	1,449			$	1,431			$	72			$	1,448			$	38
Total:
Commercial		$	246			$	147			$	—			$	186			$	16
Commercial Real Estate			3,964				3,632				—				3,702				52
Construction and Farmland			233				105				—				109				3
Consumer			16				15				—				22				1
Residential			4,376				3,886				72				4,006				114
Other			—				—				—				—				—
Total		$	8,835			$	7,785			$	72			$	8,025			$	186

	As of and for the Year Ended
	December 31, 2019
	(in thousands)
	Unpaid Principal Balance				Recorded Investment (1)				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	364			$	228			$	—			$	269			$	21
Commercial Real Estate:
Owner Occupied	369				356				—				358				4
Non-owner occupied	407				329				—				335				—
Construction and Farmland:
Residential	—				—				—				—				—
Commercial	301				246				—				263				25
Consumer:
Installment	9				8				—				9				—
Residential:
Equity lines	276				65				—				68				1
Single family	2,854				2,435				—				2,583				80
Multifamily	366				367				—				375				21
Other Loans	—				—				—				—				—
	$	4,946			$	4,034			$	—			$	4,260			$	152
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	—			$	—			$	—			$	—			$	—
Commercial Real Estate:
Owner Occupied	—				—				—				—				—
Non-owner occupied	2,369				2,377				149				2,405				103
Construction and Farmland:
Residential	—				—				—				—				—
Commercial	187				187				100				187				8
Consumer:
Installment	—				—				—				—				—
Residential:
Equity lines	—				—				—				—				—
Single family	879				822				51				833				38
Multifamily	—				—				—				—				—
Other Loans	—				—				—				—				—
	$	3,435			$	3,386			$	300			$	3,425			$	149
Total:
Commercial	$	364			$	228			$	—			$	269			$	21
Commercial Real Estate	3,145				3,062				149				3,098				107
Construction and Farmland	488				433				100				450				33
Consumer	9				8				—				9				—
Residential	4,375				3,689				51				3,859				140
Other	—				—				—				—				—
Total	$	8,381			$	7,420			$	300			$	7,685			$	301

(1) Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, and any partial charge-offs.

(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		$	364			$	228			$	—			$	269			$	21
Commercial Real Estate:
Owner Occupied			369				356				—				358				4
Non-owner occupied			407				329				—				335				—
Construction and Farmland:
Residential			—				—				—				—				—
Commercial			301				246				—				263				25
Consumer:
Installment			9				8				—				9				—
Residential:
Equity lines			276				65				—				68				1
Single family			2,854				2,435				—				2,583				80
Multifamily			366				367				—				375				21
Other Loans			—				—				—				—				—
		$	4,946			$	4,034			$	—			$	4,260			$	152
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial		$	—			$	—			$	—			$	—			$	—
Commercial Real Estate:
Owner Occupied			—				—				—				—				—
Non-owner occupied			2,369				2,377				149				2,405				103
Construction and Farmland:
Residential			—				—				—				—				—
Commercial			187				187				100				187				8
Consumer:
Installment			—				—				—				—				—
Residential:
Equity lines			—				—				—				—				—
Single family			879				822				51				833				38
Multifamily			—				—				—				—				—
Other Loans			—				—				—				—				—
		$	3,435			$	3,386			$	300			$	3,425			$	149
Total:
Commercial		$	364			$	228			$	—			$	269			$	21
Commercial Real Estate			3,145				3,062				149				3,098				107
Construction and Farmland			488				433				100				450				33
Consumer			9				8				—				9				—
Residential			4,375				3,689				51				3,859				140
Other			—				—				—				—				—
Total		$	8,381			$	7,420			$	300			$	7,685			$	301

(1)	Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, and any partial charge-offs.

	As of and for the Year Ended
	December 31, 2018
	(in thousands)
	Unpaid Principal Balance				Recorded Investment (1)				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	564			$	356			$	—			$	422			$	25
Commercial Real Estate:
Owner Occupied	—				—				—				—				—
Non-owner occupied	558				501				—				511				4
Construction and Farmland:
Residential	—				—				—				—				—
Commercial	332				281				—				297				27
Consumer:
Installment	—				—				—				—				—
Residential:
Equity lines	468				92				—				93				—
Single family	2,616				2,499				—				2,565				101
Multifamily	284				286				—				289				14
Other Loans	—				—				—				—				—
	$	4,822			$	4,015			$	—			$	4,177			$	171
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	971			$	960			$	650			$	1,063			$	60
Commercial Real Estate:
Owner Occupied	—				—				—				—				—
Non-owner occupied	2,418				2,425				193				2,454				101
Construction and Farmland:
Residential	—				—				—				—				—
Commercial	—				—				—				—				—
Consumer:
Installment	—				—				—				—				—
Residential:
Equity lines	—				—				—				—				—
Single family	1,242				1,190				119				1,204				51
Multifamily	—				—				—				—				—
Other Loans	—				—				—				—				—
	$	4,631			$	4,575			$	962			$	4,721			$	212
Total:
Commercial	$	1,535			$	1,316			$	650			$	1,485			$	85
Commercial Real Estate	2,976				2,926				193				2,965				105
Construction and Farmland	332				281				—				297				27
Consumer	—				—				—				—				—
Residential	4,610				4,067				119				4,151				166
Other	—				—				—				—				—
Total	$	9,453			$	8,590			$	962			$	8,898			$	383

(1) Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, and any partial charge-offs.

For the year ended December 31, 2017, the average recorded investment of impaired loans was $11.6 million. The interest income recognized on impaired loans was $322 thousand in 2017.

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		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 and December 31, 2018 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			$	439			$	7			$	—			$	—			$	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				161				—				—				47,746
Residential:
Equity Lines			31,087				124				—				36				5				—				31,252
Single family			193,579				16,639				3,594				3,053				129				—				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			$	134			$	—			$	814,328
																						Performing				Nonperforming
Consumer Credit Exposure by Payment Activity																						$	21,316			$	5
		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			$	105			$	45			$	—			$	—			$	46,543
Commercial Real Estate:
Owner Occupied			103,958				38,989				5,654				356				—				—				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				437				495				—				—				48,611
Residential:
Equity Lines			32,295				889				—				42				22				—				33,248
Single family			162,195				19,427				2,347				2,225				138				—				186,332
Multifamily			11,714				1,337				998				366				—				—				14,415
All other loans			11,963				40				47				—				—				—				12,050
Total		$	490,724			$	123,870			$	15,454			$	5,458			$	160			$	—			$	635,666
																						Performing				Nonperforming
Consumer Credit Exposure by Payment Activity																						$	9,480			$	61

	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			$	105			$	45			$	—			$	—			$	46,543
Commercial Real Estate:
Owner Occupied	103,958				38,989				5,654				356				—				—				148,957
Non-owner occupied	103,909				25,939				5,866				1,929				—				—				137,643
Construction and Farmland:
Residential	5,094				2,773				—				—				—				—				7,867
Commercial	17,018				30,661				437				495				—				—				48,611
Residential:
Equity Lines	32,295				889				—				42				22				—				33,248
Single family	162,195				19,427				2,347				2,225				138				—				186,332
Multifamily	11,714				1,337				998				366				—				—				14,415
All other loans	11,963				40				47				—				—				—				12,050
Total	$	490,724			$	123,870			$	15,454			$	5,458			$	160			$	—			$	635,666

	Performing				Nonperforming
Consumer Credit Exposure by Payment Activity	$	9,480			$	61

	As of
	December 31, 2018
	(in thousands)
INTERNAL RISK RATING GRADES	Pass				Pass Monitored				Special Mention				Substandard				Doubtful				Loss				Total
Commercial - Non Real Estate:
Commercial & Industrial	$	28,699			$	2,292			$	995			$	1,100			$	—			$	—			$	33,086
Commercial Real Estate:
Owner Occupied	110,418				16,665				9,187				39				—				—				136,309
Non-owner occupied	106,658				17,139				3,397				2,092				—				—				129,286
Construction and Farmland:
Residential	2,295				1,120				3,291				—				—				—				6,706
Commercial	16,682				22,533				15,658				347				—				—				55,220
Residential:
Equity Lines	31,813				910				—				16				76				—				32,815
Single family	172,360				11,567				2,704				2,270				145				—				189,046
Multifamily	7,160				479				—				284				—				—				7,923
All other loans	8,435				19				—				—				—				—				8,454
Total	$	484,520			$	72,724			$	35,232			$	6,148			$	221			$	—			$	598,845

	Performing				Nonperforming
Consumer Credit Exposure by Payment Activity	$	8,466			$	4

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 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 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 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 deferral of required payments (principal and/or interest).

•

The borrower receives a reduction of the accrued interest.

The borrower receives a reduction of the accrued interest.

There were eighteen (18)seventeen (17) troubled debt restructured loans totaling $3.0$3.3 million at December 31, 2020.  At December 31, 2019,. At December 31, 2018, there were nineteen (19)eighteen (18) troubled debt restructured loans totaling $3.8 million. Four$3.0 million.  NaN loans, totaling $401 thousand, were in nonaccrual status at December 31, 2019. Two loans, totaling $118$796 thousand, were in nonaccrual status at December 31, 2018.2020.  NaN 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, 20192020 or December 31, 2018.

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, 2019, 20182020 and 2017:2019:

						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			1			$	685			$	685
Consumer:
Installment			1				13				13
Residential
Single family			3				931				935
Total			5			$	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

—

$

—

$

—

				For the Year Ended
				December 31, 2019
				(in thousands)
	Number of Contracts			Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Total	—			$	—			$	—
				For the Year Ended
				December 31, 2018
				(in thousands)
	Number of Contracts			Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Residential:
Single family	1			$	86			$	86
Total	1			$	86			$	86
				For the Year Ended
				December 31, 2017
				(in thousands)
	Number of Contracts			Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Consumer:
Installment	1			$	22			$	22
Total	1			$	22			$	22

During the twelve months ended December 31, 2018,2020, the Company restructured one single family residential loan5 loans by granting a concession to the borrower experiencing financial difficultydifficulty. The Company restructured 1 consumer installment loan and 1 residential single-family loan by extendinggranting three 90-day payment deferment periods. The Company restructured 1 single-family residential loan by reducing the maturity date.

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 1 commercial real estate loan by granting interest-only payments.

During the twelve months ended December 31, 2017,2019, the Company restructured one consumer installment loandid not restructure any loans by consolidating debt and reducinggranting a concession to the interest rate.

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			1			$	72
Total			1			$	72

	For the Year Ended
	December 31, 2019
	(in thousands)
	Number of Contracts			Recorded Investment
Residential:
Single family	1			$	72
Total	1			$	72
	For the Year Ended
	December 31, 2018
	(in thousands)
	Number of Contracts			Recorded Investment
Total	—			$	—
	For the Year Ended
	December 31, 2017
	(in thousands)
	Number of Contracts			Recorded Investment
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, 20192020 and 20182019 were as follows:

		December 31,
		2020				2019
		(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

		December 31,
		2019				2018
		(in thousands)
Land		$	6,644			$	6,729
Buildings and improvements		18,472				18,100
Furniture and equipment		7,972				7,312
		$	33,088			$	32,141
Less accumulated depreciation		13,791				13,058
Bank premises and equipment, net		$	19,297			$	19,083

Depreciation expense on buildings and improvements was $494 thousand, $483$500 thousand and $484$494 thousand for the years ended 2019, 2018,2020 and 2017,2019, respectively. Depreciation expense on furniture and equipment was $463 thousand, $442$527 thousand and $462$463 thousand for the years ended 2020 and 2019, 2018, and 2017, respectively.

NOTE 7. Deposits

The composition of deposits at December 31, 2020 and December 31, 2019 and December 31, 2018 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

	December 31,
	2019				2018
	(in thousands)
Noninterest bearing demand deposits	$	269,171			$	251,184
Savings and interest bearing demand deposits:
NOW accounts	$	102,337			$	91,549
Money market accounts	154,133				140,581
Regular savings accounts	107,705				104,648
	$	364,175			$	336,778
Time deposits:
Balances of less than $250,000	$	59,094			$	62,063
Balances of $250,000 and more	79,104				53,079
	$	138,198			$	115,142
	$	771,544			$	703,104

Money market accounts include $27.0$34.6 million and $18.4$27.0 million in reciprocal deposits at December 31, 2020 and 2019, and 2018, respectively. Time deposits with balances of less than $250,000 include zero and $212 thousand in reciprocal certificates of deposit at December 31, 2019 and 2018, respectively. There were no time deposits with balances of $250,000 or more in reciprocal certificates of deposit at December 31, 2019 and 2018, respectively.

The outstanding balance of time deposits at December 31, 20192020 was due as follows:

		December 31, 2020
		(in thousands)
2021		$	117,375
2022			6,484
2023			2,031
2024			1,391
2025			1,214
Thereafter			163
		$	128,658

	December 31, 2019
	(in thousands)
2020	$	122,338
2021	10,698
2022	2,846
2023	1,180
2024	969
Thereafter	167
	$	138,198

Deposit overdrafts reclassified as loans totaled $135$70 thousand and $183$135 thousand at December 31, 2020 and 2019, and 2018, 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, 20192020 and 2018:2019:

		December 31,
		2020				2019
		(dollars in thousands)
Balance at year-end			—				—
Average balance during the year			1				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

		December 31,
		2019				2018
		(dollars in thousands)
Balance at year-end		$	—			$	1,871
Average balance during the year		$	1,074			$	964
Average interest rate during the year		2.91		%		2.63		%
Maximum month-end balance during the year		$	10,780			$	7,820
Gross lines of credit at year-end		$	28,000			$	28,000
Unused lines of credit at year-end		$	28,000			$	26,129

As of December 31, 2019, the Company also had a $5.0 million unused line of credit, in addition to the $28.0 million in federal funds lines of credit listed in the table above.

As of December 31, 2019,2020, Company had remaining credit availability in the amount of $231.8$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 no0 borrowings with the FHLB at December 31, 20192020 or December 31, 2018.2019. The Company had a $45.0$50.0 million irrevocable letter of credit at December 31, 20192020 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 2016.

2017.

The net deferred tax asset at December 31, 20192020 and 20182019 consisted of the following components:

		December 31,
		2020				2019
		(in thousands)
Deferred tax assets:
Allowance for loan losses		$	1,490			$	1,044
Share-based compensation			100				91
Accrued postretirement benefits			21				23
Home equity origination costs			50				52
Nonaccrual interest			76				51
Lease liabilities			864				773
Other			24				23
		$	2,625			$	2,057
Deferred tax liabilities:
Property and equipment		$	713			$	705
Right-of-use assets			843				759
Securities available for sale			867				383
		$	2,423			$	1,847
Net deferred tax asset		$	202			$	210

		December 31,
		2019				2018
		(in thousands)
Deferred tax assets:
Allowance for loan losses		$	1,044			$	1,141
Deferred compensation		91				92
Accrued postretirement benefits		23				23
Home equity origination costs		52				51
Nonaccrual interest		51				41
Securities available for sale		—				424
Credit carryforward		—				216
Other		37				54
		$	1,298			$	2,042
Deferred tax liabilities:
Property and equipment		$	705			$	508
Securities available for sale		383				—
		$	1,088			$	508
Net deferred tax asset		$	210			$	1,534

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, 2019, 20182020 and 20172019 consisted of the following components:

		December 31,
		2020				2019
		(in thousands)
Current tax expense		$	2,607			$	1,294
Deferred tax (benefit) expense			(471	)			516
		$	2,136			$	1,810

		December 31,
		2019				2018				2017
		(in thousands)
Current tax expense		$	1,294			$	1,713			$	3,094
Deferred tax expense (benefit)		516				(399		)		135
Deferred tax adjustment for enacted rate change		—				—				397
		$	1,810			$	1,314			$	3,626

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, 2019, 20182020 and 2017.2019.

		December 31,
		2020				2019
		(in thousands)
Statutory federal corporate tax amount		$	2,795			$	2,429
Tax-exempt interest (income)			(193	)			(260	)
Officer insurance (income) loss			(57	)			15
Net tax credits			(439	)			(379	)
Other, net			30				5
		$	2,136			$	1,810

		December 31,
		2019				2018				2017
		(in thousands)
Statutory federal corporate tax amount		$	2,429			$	2,166			$	3,880
Tax-exempt interest (income)		(260		)		(301		)		(417		)
Officer insurance loss (income)		15				13				(92		)
Net tax credits		(379		)		(605		)		(165		)
Corporate tax rate change		—				—				397
Other, net		5				41				23
		$	1,810			$	1,314			$	3,626

The effective tax rates were 15.65%, 12.74%,16.05% and 31.77%,15.65% for years ended December 31, 2020 and 2019, 2018, and 2017, respectively. The decrease in the 2018 effective tax rate resulted from three factors. First, the corporate income tax rate was reduced from 34% to 21%, effective January 1, 2018 as a result of the Tax Cuts and Jobs Act. The effective tax rate is also 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. During the third quarter of 2018, one of the Company’s rehabilitation tax credit investments was finalized and the total amount of credits to be received was determined and certified. The higher 2017 effective tax rate resulted mostly from the Tax Cuts and Jobs Act that was signed into law on December 22, 2017. The Company's deferred tax assets and liabilities were adjusted at December 31, 2017, for the reduction of our applicable corporate income tax rate from 34% to 21%, effective January 1, 2018. This adjustment resulted in a write-down of our net deferred tax assets and an increase in our federal income tax expense of $397 thousand.

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 2019,2020, 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 3three 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, 2019, 20182020 and 2017:2019:

		Twelve Months Ended
		December 31,
		2020								2019
		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

	Twelve Months Ended
	December 31,
	2019							2018							2017
	Shares			Weighted Average Grant Date Fair Value				Shares			Weighted Average Grant Date Fair Value				Shares			Weighted Average Grant Date Fair Value
Nonvested, beginning of period	16,701			$	29.72			14,401			$	24.68			14,901			$	23.05
Granted	22,488			30.69				16,950			32.84				14,650			27.46
Vested	(18,150	)		30.16				(14,609	)		28.38				(14,493	)		25.90
Forfeited	(2,551	)		30.28				(41	)		25.50				(657	)		23.00
Nonvested, end of period	18,488			$	30.39			16,701			$	29.72			14,401			$	24.68

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 $562 thousand, $518$604 thousand and $382$562 thousand during December 31, 2019, 2018,2020 and 2017,2019, respectively. The total grant date fair value of Restricted Stock which vested was $547 thousand, $415$558 thousand and $375$547 thousand for the years ended December 31, 2019, 20182020 and 2017,2019, respectively. The total vest date fair value of Restricted Stock which vested was $556 thousand, $473$561 thousand and $398$556 thousand for the years ended December 31, 2019, 20182020 and 2017,2019, respectively. Unrecognized compensation cost related to unvested Restricted Stock was $162$184 thousand at December 31, 2019.2020. 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 2019, 2018,2020 and 2017.

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 six6 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 three3 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 one1 percent of salary and a maximum of ten10 percent of salary. Contributions under the plan amounted to $1.5 million in 2020 and $1.1 million in 2019, $1.0 million in 2018, and $1.0 million in 2017.

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 $30$23 thousand and $49$30 thousand at December 31, 20192020 and 2018,2019, 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, $29 thousand in 2018, and $29 thousand in 2017.2019. 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 yearsyear ended December 31, 2019, and 2018, the amount of daily average required balances werewas approximately  $1.7 million and $1.6 million, respectively. For both periods, thesemillion. This required amounts wereamount 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, 20192020 and 2018.

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 onlytwo long-term lease agreement isagreements are classified as an operating lease. This lease offersleases.  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.  TheThese lease agreement doesagreements do not provide for a residual value guaranteeguarantees and hashave 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		$	287			$	261
Variable lease cost			—				—
Short-term lease cost			16				16
Total lease cost		$	303			$	277
Cash paid for amounts included in the measurement of lease liabilities		$	239			$	200

(dollars in thousands)		As of
		December 31, 2019
Lease liability		$	3,680
Right-of-use asset		$	3,618
Weighted average remaining lease term		20 years
Weighted average discount rate		3.62		%
		Twelve Months Ended
Lease Cost		December 31, 2019
Operating lease cost		$	261
Short-term lease cost		16
Total lease cost		$	277
Cash paid for amounts included in the measurement of lease liabilities		$	200

A maturity analysis of operating lease liabilityliabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilityliabilities is as follows:

		As of
Lease payments due		December 31, 2020
Twelve months ending December 31, 2021			319
Twelve months ending December 31, 2022			321
Twelve months ending December 31, 2023			324
Twelve months ending December 31, 2024			327
Twelve months ending December 31, 2025			346
Thereafter			4,039
Total undiscounted cash flows		$	5,676
Discount			(1,563	)
Lease liability		$	4,113

		As of
Lease payments due		December 31, 2019
Twelve months ending December 31, 2020		$	215
Twelve months ending December 31, 2021		220
Twelve months ending December 31, 2022		220
Twelve months ending December 31, 2023		220
Twelve months ending December 31, 2024		220
Thereafter		4,257
Total undiscounted cash flows		$	5,352
Discount		(1,672		)
Lease liability		$	3,680

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 $6.2$5.4 million and $5.9$6.2 million at December 31, 20192020 and 2018,2019, respectively. These balances reflect total principal additions of $4.7$1.9 million and total principal payments of $4.4$2.7 million, during 2019.2020. The aggregate balance of deposits from directors, principal officers and their related parties was $24.3$16.6 million and $21.2$24.3 million at December 31, 2020 and 2019, and 2018, respectively. Adjustments were made to prior year amounts for directors and officers that are now considered to be related parties.

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, 20192020 was 6.40%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, 20192020 and 2018.

2019.

At December 31, 2019,2020, 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, 20192020 and 2018:2019:

		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	%

																Minimum To Be Well
									Minimum Capital							Capitalized Under Prompt Corrective
		Actual							Requirement							Action Provisions
		Amount				Ratio			Amount				Ratio			Amount				Ratio
		(dollars in thousands)
December 31, 2019:
Common Equity Tier 1 Capital to Risk
Weighted Assets
Bank of Clarke County		$	90,775			13.65	%		$	29,931			4.50	%		$	43,234			6.50	%
Total Capital to Risk Weighted Assets
Bank of Clarke County		$	95,772			14.40	%		$	53,211			8.00	%		$	66,514			10.00	%
Tier 1 Capital to Risk Weighted Assets
Bank of Clarke County		$	90,775			13.65	%		$	39,908			6.00	%		$	53,211			8.00	%
Tier 1 Capital to Average Assets
Bank of Clarke County		$	90,775			10.61	%		$	34,216			4.00	%		$	42,770			5.00	%
December 31, 2018:
Common Equity Tier 1 Capital to Risk
Weighted Assets
Bank of Clarke County		$	85,763			13.99	%		$	27,596			4.50	%		$	39,861			6.50	%
Total Capital to Risk Weighted Assets
Bank of Clarke County		$	91,237			14.88	%		$	49,060			8.00	%		$	61,325			10.00	%
Tier 1 Capital to Risk Weighted Assets
Bank of Clarke County		$	85,763			13.99	%		$	36,795			6.00	%		$	49,060			8.00	%
Tier 1 Capital to Average Assets
Bank of Clarke County		$	85,763			10.92	%		$	31,424			4.00	%		$	39,280			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, 2019,2020, the Bank’s retained earnings available for the payment of dividends to the Company was $14.7$17.7 million. Accordingly, $77.6$83.4 million of the Company’s equity in the net assets of the Bank was restricted at December 31, 2019.2020. Funds available for loans or advances by the Bank to the Company amounted to $9.6$10.5 million at December 31, 2019.

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. DuringIn 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, 20192020 and 2018,2019, 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

		2019				2018
		(dollar in thousands)
Commitments to extend credit		$	19,939			$	21,616
Unfunded commitments under lines of credit		121,609				105,902
Commercial and standby letters of credit		6,132				6,380

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, 2019, $5.42020, $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, 20192020 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $746 thousand.

$3.7 million.

NOTE 19. Revenue Recognition

On January 1, 2018,

Substantially all of the Company adopted ASU No. 2014-09, “RevenueCompany's revenue from contracts with customers that is within the scope of ASC 606, "Revenue from Contracts with Customers: Topic 606”,Customers" is reported within noninterest income.  A limited amount of other in-scope items such as gains and all subsequent amendments to the ASU No. 2014-09. Using Topic 606 guidelines, the Company concluded that Topic 606 applies tolosses on other real estate owned are recorded in noninterest expense.  The recognition of interest income excludingand certain out-of-scope revenue streamssources 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, 2019, 20182020 and 2017,2019 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			695				961
Monthly and other service charges			225				226
Other service charges and fees:
Interchange fees (1)			372				380
ATM fees (1)			2,578				2,431
Brokerage commissions (1)			916				1,150
Secondary market fees			431				486
Other charges and fees (2)			460				446
Gain (loss) on the sale and disposal of bank premises and equipment (1)			5				137
Gain (loss) on sale of securities			687				(7	)
Bank owned life insurance income			310				(48	)
Other operating income (3)			502				217
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.

	December 31,
	2019				2018				2017
	(dollar in thousands)
Noninterest income:
Income from fiduciary activities(1):
Trust asset management fees	$	1,380			$	1,360			$	1,238
Service charges on deposit accounts(1):
Overdrawn account fees	961				995				999
Monthly and other service charges	226				223				224
Other service charges and fees:
Interchange fees (1)	380				361				331
ATM fees (1)	2,431				2,240				2,046
Brokerage commissions (1)	1,150				831				865
Secondary market fees (1)	486				306				241
Other charges and fees (2)	446				435				395
Gain (loss) on the sale and disposal of bank premises and equipment (1)	137				(3		)		(12		)
(Loss) gain on sale of securities	(7		)		17				(10		)
Other operating income (3)	169				114				463
Total noninterest income	$	7,759			$	6,879			$	6,780

(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.

(1) Income within the scope of Topic 606.

(2) Includes income within the scope of Topic 606 of $412 thousand, $365 thousand, and $342 thousand for the years ended December 31, 2019, 2018, and 2017, respectively. The remaining balance is outside the scope of Topic 606.

(3) Includes income within the scope of Topic 606 of $212 thousand, $153 thousand, and $190 thousand for the years ended December 31, 2019 2018, and 2017, 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, 20192020 and December 31, 2018,2019, 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 2019, 20182020 and 20172019 are summarized as follows:

		2020
		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

		2019
		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

		2019 Quarter Ended
		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
		2018 Quarter Ended
		March 31				June 30				September 30				December 31
		(in thousands, except per share amounts)
Total interest and dividend income		$	7,475			$	7,994			$	8,131			$	8,323
Net interest income after (recovery of) loan losses		6,844				7,518				7,286				6,983
Noninterest income		1,801				1,665				1,804				1,609
Noninterest expenses		5,630				6,166				7,310				6,089
Income before income taxes		3,015				3,017				1,780				2,503
Net income		2,539				2,521				1,860				2,081
Net income per common share, basic		0.73				0.73				0.54				0.60
Net income per common share, diluted		0.73				0.73				0.54				0.60
Dividends per common share		0.23				0.23				0.24				0.24
		2017 Quarter Ended
		March 31				June 30				September 30				December 31
		(in thousands, except per share amounts)
Total interest and dividend income		$	6,566			$	7,004			$	7,458			$	7,323
Net interest income after (recovery of) loan losses		6,890				6,985				7,109				6,838
Noninterest income		1,673				1,598				1,617				1,892
Noninterest expenses		5,711				5,747				5,909				5,823
Income before income taxes		2,852				2,836				2,817				2,907
Net income		2,042				2,027				2,007				1,710
Net income per common share, basic		0.59				0.58				0.58				0.49
Net income per common share, diluted		0.59				0.58				0.58				0.49
Dividends per common share		0.22				0.22				0.22				0.22

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, 20192020 and December 31, 2018:2019:

						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			$	—

					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			$	—
Liabilities:
Total liabilities at fair value	$	—			$	—			$	—			$	—
					Fair Value Measurements at
					December 31, 2018
					Using
	Balance as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
	December 31, 2018				(Level 1)				(Level 2)				(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	21,731			$	—			$	21,731			$	—
Mortgage-backed securities	76,483				—				76,483				—
Obligations of states and political subdivisions	46,084				—				46,084				—
Total assets at fair value	$	144,298			$	—			$	144,298			$	—
Liabilities:
Total liabilities at fair value	$	—			$	—			$	—			$	—

The table below presents a reconciliation for all assets measured and recognized at fair value on a recurring basis using significant unobservable inputs (Level 3) for the twelve months ended December 31, 2019 and 2018.

	Level 3 Recurring Fair Value Measurements
	As of and for the Year Ended
	December 31, 2019			December 31, 2018
	(in thousands)
Beginning balance	$	—		$	543
Purchases	—			—
Sales	—			—
Issuances	—			—
Settlements	—			(543		)
Total assets at fair value	$	—		$	—

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, 20192020 and December 31, 2018:2019:

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%

	Quantitative information about Level 3 Fair Value Measurements for
	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%
	Quantitative information about Level 3 Fair Value Measurements for
	December 31, 2018
	Valuation Technique(s)		Unobservable Input		Range		Weighted Average
Assets:
Impaired loans	Discounted appraised value		Selling cost		0% - 12%		8%
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, 20192020 and December 31, 2018:2019:

						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			607				—				165				442

					Carrying value at
					December 31, 2019
	Balance as of				Identical Assets				Observable Inputs				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	183				—				—				183
					Carrying value at
					December 31, 2018
	Balance as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
	December 31, 2018				(Level 1)				(Level 2)				(Level 3)
	(in thousands)
Financial Assets:
Impaired loans	$	3,598			$	—			$	—			$	3,598
Nonfinancial Assets:
Other real estate owned	106				—				—				106

						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			183				—				—				183

The carrying amount and fair value of the Company’s financial instruments at December 31, 20192020 and 20182019 were as follows:

	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	398				—				398				—				398
Accrued interest receivable	2,237				—				2,237				—				2,237
Financial Liabilities:
Deposits	$	771,544			$	—			$	772,111			$	—			$	772,111
Accrued interest payable	142				—				142				—				142

																					Fair Value Measurements at
																					December 31, 2020
	Fair Value Measurements at																				Using
	December 31, 2018																				Carrying Value as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Fair Value as of
	Using																				December 31, 2020				(Level 1)				(Level 2)				(Level 3)				December 31, 2020
	Carrying Value as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Fair Value as of				(in thousands)
	December 31, 2018				(Level 1)				(Level 2)				(Level 3)				December 31, 2018
	(in thousands)
Financial assets:
Financial Assets:
Cash and short-term investments	$	18,353			$	18,353			$	—			$	—			$	18,353			$	79,920			$	79,920			$	—			$	—			$	79,920
Securities	144,298				—				144,298				—				144,298					164,955				—				164,955				—				164,955
Restricted investments	1,170				—				1,170				—				1,170
Restricted Investments																						1,267				—				1,267				—				1,267
Loans, net	601,371				—				—				592,566				592,566					829,238				—				—				819,691				819,691
Bank owned life insurance	447				—				447				—				447					12,709				—				12,709				—				12,709
Accrued interest receivable	2,222				—				2,222				—				2,222					3,441				—				3,441				—				3,441
Financial liabilities:
Financial Liabilities:
Deposits	$	703,104			$	—			$	703,323			$	—			$	703,323			$	1,013,098			$	—			$	1,013,600			$	—			$	1,013,600
Federal funds purchased	1,871				—				1,871				—				1,871
Accrued interest payable	101				—				101				—				101					72				—				72				—				72

		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			398				—				398				—				398
Accrued interest receivable			2,237				—				2,237				—				2,237
Financial liabilities:
Deposits		$	771,544			$	—			$	772,111			$	—			$	772,111
Accrued interest payable			142				—				142				—				142

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 effect 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, 2019, 2018,2020 and 2017:2019:

		Twelve Months Ended
		December 31,
		2020													2019
		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				$	44			$	1,482			$	(1,597	)			$	44			$	(1,553	)
Other comprehensive income (loss) before reclassifications			2,993					(33	)			2,960				3,835					—				3,835
Reclassifications from other comprehensive income (loss)			(687	)				3				(684	)			7					—				7
Tax effect of current period changes			(484	)				5				(479	)			(807	)				—				(807	)
Current period changes net of taxes			1,822					(25	)			1,797				3,035					—				3,035
December 31		$	3,260				$	19			$	3,279			$	1,438				$	44			$	1,482

	Twelve Months Ended
	December 31,
	2019									2018									2017
	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			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)
January 1	$	(1,597	)	$	44		$	(1,553	)	$	266		$	44		$	310		$	(63	)	$	39		$	(24	)
Other comprehensive income (loss) before reclassifications	3,835			—			3,835			(2,341		)	—			(2,341		)	422			4			426
Reclassifications from other comprehensive income (loss)	7			—			7			(17		)	—			(17		)	10			(7		)	3
Reclassification of stranded tax effects from change in tax rate	—			—			—			—			—			—			44			7			51
Tax effect of current period changes	(807		)	—			(807		)	495			—			495			(147		)	1			(146		)
Current period changes net of taxes	3,035			—			3,035			(1,863		)	—			(1,863		)	329			5			334
December 31	$	1,438		$	44		$	1,482		$	(1,597	)	$	44		$	(1,553	)	$	266		$	44		$	310

For the years ended December 31, 2020 and 2019, 2018, and 2017, $(7) thousand, $17$687 thousand and $(10)$(7) thousand, respectively, was reclassified out of accumulated other comprehensive income and appeared as (Loss) gainGain (loss) on sale of securities in the Consolidated Statement of Income.  The tax expense (benefit) expense related to these reclassifications was $(1) thousand, $4$144 thousand and $(4)$(1) thousand for the years ended December 31, 2019, 2018,2020 and 2017,2019, respectively. The tax is included in Income Tax Expense in the Consolidated Statements of Income.

For the twelve monthsyear ended December 31, 2017, $72020, $(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 Salaries and employee benefitsOther noninterest expense in the Consolidated Statements of Income.  Tax related to this reclassification was $2less 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, 20192020 and 2018

2019

(dollars in thousands)

		2020				2019
Assets
Cash held in subsidiary bank		$	902			$	989
Loans, net of allowance			2,932				2,939
Investment in subsidiary			101,104				92,257
Other assets			136				141
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

		2019				2018
Assets
Cash held in subsidiary bank		$	989			$	402
Loans, net of allowance		2,939				2,896
Investment in subsidiaries, at cost, plus undistributed net income		92,257				84,210
Other assets		141				91
Total assets		$	96,326			$	87,599
Liabilities and Shareholders’ Equity
Total liabilities		$	—			$	—
Shareholders’ Equity
Preferred stock		$	—			$	—
Common stock		8,529				8,573
Surplus		11,406				11,992
Retained earnings		74,909				68,587
Accumulated other comprehensive income (loss)		1,482				(1,553		)
Total shareholders’ equity		$	96,326			$	87,599
Total liabilities and shareholders’ equity		$	96,326			$	87,599

EAGLE FINANCIAL SERVICES, , INC.

(Parent Company Only)

Statements of Income

Years Ended December 31, 2019, 2018,2020 and 2017

2019

(dollars in thousands)

		2020				2019
Income
Dividends from subsidiary bank		$	4,250			$	5,000
Interest and fees on loans			133				134
Total income		$	4,383			$	5,134
Expenses
Other operating expenses		$	295			$	457
Total expenses		$	295			$	457
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

		2019				2018				2017
Income
Dividends from subsidiary bank		$	5,000			$	3,500			$	3,800
Interest and fees on loans		134				115				106
Total income		$	5,134			$	3,615			$	3,906
Expenses
Other operating expenses		$	457			$	272			$	255
Total expenses		$	457			$	272			$	255
Income before income tax (benefit) and equity in undistributed earnings of subsidiary bank		$	4,677			$	3,343			$	3,651
Income Tax (Benefit)		(70		)		(45		)		(58		)
Income before equity in undistributed earnings of subsidiary bank		$	4,747			$	3,388			$	3,709
Equity in Undistributed Net Income of Subsidiary Bank		5,012				5,613				4,077
Net income		$	9,759			$	9,001			$	7,786
Comprehensive income		$	12,794			$	7,138			$	8,069

EAGLE FINANCIAL SERVICES, , INC.

(Parent Company Only)

Statements of Cash Flows

Years Ended December 31, 2019, 2018,2020 and 2017

2019

(dollars in thousands)

		2020				2019
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			604				562
Undistributed earnings of subsidiary bank			(7,050	)			(5,012	)
Changes in assets and liabilities:
Decrease (increase) in other assets			5				(50	)
Net cash provided by operating activities		$	4,731			$	5,259
Cash Flows from Investing Activities
Net decrease (increase) in loans		$	7			$	(43	)
Net cash provided by (used in) investing activities		$	7			$	(43	)
Cash Flows from Financing Activities
Cash dividends paid			(3,198	)			(2,996	)
Issuance of common stock, employee benefit plan			227				138
Retirement of common stock			(1,854	)			(1,771	)
Net cash (used in) financing activities		$	(4,825	)		$	(4,629	)
(Decrease) increase in cash		$	(87	)		$	587
Cash
Beginning		$	989			$	402
Ending		$	902			$	989

		2019				2018				2017
Cash Flows from Operating Activities
Net Income		$	9,759			$	9,001			$	7,786
Adjustments to reconcile net income to net cash provided by operating activities
Provision for (Recovery of) loan losses		—				2				(2		)
Stock-based compensation expense		562				518				382
Undistributed earnings of subsidiary bank		(5,012		)		(5,613		)		(4,077		)
Changes in assets and liabilities:
(Increase) decrease in other assets		(50		)		15				(62		)
Net cash provided by operating activities		$	5,259			$	3,923			$	4,027
Cash Flows from Investing Activities
Net (increase) decrease in loans		$	(43	)		$	(73	)		$	58
Net cash (used in) provided by investing activities		$	(43	)		$	(73	)		$	58
Cash Flows from Financing Activities
Cash dividends paid		$	(2,996	)		$	(2,776	)		$	(2,652	)
Issuance of common stock, employee benefit plan		138				163				166
Retirement of common stock		(1,771		)		(1,261		)		(1,564		)
Net cash (used in) financing activities		$	(4,629	)		$	(3,874	)		$	(4,050	)
Increase (decrease) in cash		$	587			$	(24	)		$	35
Cash
Beginning		$	402			$	426			$	391
Ending		$	989			$	402			$	426

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, 20192020 and 2018:2019:

		Year Ended				Year Ended
		December 31,				December 31,
		2020				2019
Balance, beginning		$	183			$	106
Net loans transferred to OREO			441				1,151
Gain on foreclosure			166				192
Sales			(183	)			(1,266	)
Balance, ending		$	607			$	183

	Year Ended				Year Ended
	December 31,				December 31,
	2019				2018
Balance, beginning	$	106			$	106
Net loans transferred to OREO	1,151				2,799
Gain on foreclosure	192				—
Sales	(1,266		)		(2,799		)
Valuation adjustments	—				—
Balance, ending	$	183			$	106

The major classifications of other real estate owned in the consolidated balance sheets at December 31, 20192020 and 20182019 were as follows:

		As of
		December 31, 2020				December 31, 2019
		(in thousands)
Construction and Farmland		$	—			$	—
Residential Real Estate			165				183
Commercial Real Estate			442				—
Subtotal		$	607			$	183
Less valuation allowance			—				—
Total		$	607			$	183

	As of
	December 31, 2019				December 31, 2018
	(in thousands)
Construction and Farmland	$	—			$	106
Residential Real Estate	183				—
Commercial Real Estate	—				—
Subtotal	$	183			$	106
Less valuation allowance	—				—
Total	$	183			$	106

There was 1 consumer mortgage loan totaling $68 thousand collateralized by residential real estate in the process of foreclosure at December 31, 2020.  There were two2 consumer mortgage loans totaling $334 thousand collateralized by residential real estate in the process of foreclosure at December 31, 2019. There was one consumer mortgage loan totaling $71 thousand collateralized by residential real estate in the process of foreclosure at December 31, 2018.

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, 20192020 and 2018,2019, the balance of the investment for qualified affordable housing projects was $3.0$2.8 million and $3.3$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 $798$446 thousand and $1.9 million$798 thousand at December 31, 20192020 and 2018.2019. 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, 20192020 and 2018,2019, the Company recognized amortization expense of $229 thousand and $196 thousand, respectively.thousand. The amortization expense was included in Other operating expenses on the Consolidated Statements of Income.

Total estimated credits to be received during 20192020 are $379$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 2018 were $415 thousand, and $324 thousand, respectively.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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, 20192020 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, 2019,2020, 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, 2019,2020, 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, 20192020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The effectiveness

This annual report does not include an attestation report of the Company'scompany’s registered public accounting firm, regarding internal control over financial reporting as of December 31, 2019 has been auditedreporting. Management’s report was not subject to attestation by Yount, Hyde& Barbour, P.C., the independentCompany’s registered public accounting firm which also auditedpursuant to rules of the Company's consolidated financial statements includedSecurities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K. Yount, Hyde & Barbour's attestation report on the Company's internal control over financial reporting is included in Item 8 "Financial Statements and Supplementary Data" of this Form 10-K.

annual report.

Item 9B.    Other Information

None.

PART III

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 20202021 Annual Meeting of Shareholders to be held May 19, 2020.

18, 2021.

Item 11.    Executive Compensation

The information required by Part III, Item 11. is incorporated herein by reference to the Proxy Statement for the 20202021 Annual Meeting of Shareholders to be held May 19, 2020.

18, 2021.

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 20202021 Annual Meeting of Shareholders to be held May 19, 2020.

18, 2021.

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 20202021 Annual Meeting of Shareholders to be held May 19, 2020.

18, 2021.

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 20202021 Annual Meeting of Shareholders to be held May 19, 2020.

18, 2021.

PART IV

Item 15.

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
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 3.2312 of the Company’s Registration StatementCurrent Report on Form S-4, Registration No. 33-43681).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.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. 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.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.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.*
10.11			Separation Agreement and Release, dated October 29, 2019, of James W. McCarty, Jr.Zmitrovich (incorporated herein by reference to Exhibit 10.210.10 of the Company's QuarterlyCompany’s Annual Report on Form 10-Q10-K for the periodyear ended September 30,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
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.
101			The following materials from the Eagle Financial Service, Inc. Annual Report on Form 10-K for the year ended December 31, 20192020 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)
(b)	See Item 15(a)(3) above.

(c)
(c)	See Item 15(a)(2) above.

Item 16.Form 10-K Summary

Not applicable.

Item 16.    Form 10-K Summary

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Eagle Financial Services, Inc.
By:		/s/ BRANDON C. LOREY
		Brandon C. Lorey
		President and Chief Executive Officer

Date: March 13, 2020

30, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 13, 2020.

30, 2021.

Signature		Title
Signature		Title
/s/ BRANDON C. LOREY		President, Chief Executive Officer, and Director (principal executive officer)
Brandon C. Lorey
/s/ KATHLEEN J. CHAPPELL		Executive Vice President and Chief Financial Officer (principal financial and accounting officer)
Kathleen J. Chappell
/s/ THOMAS T. GILPIN		Chairman of the Board and Director
Thomas T. Gilpin
/s/ ROBERT W. SMALLEY, JR.		Vice Chairman of the Board and Director
Robert W. Smalley, Jr.
/s/ DEBORAH E. ADDO		Director
Deborah E. Addo
/s/ THOMAS T. BYRD		Director
Thomas T. Byrd
/s/ CARY R. CLAYTOR		Director
Cary R. Claytor
/s/ MARY BRUCE GLAIZE		Director
Mary Bruce Glaize
/s/ SCOTT HAMBERGER		Director
Scott Hamberger
/s/ JOHN R. MILLESON		Director
John R. Milleson
/s/ DOUGLAS C. RINKER		Director
Douglas C. Rinker
/s/ ROBERT E. SEVILA		Director
Robert E. Sevila
/s/ JOHN D. STOKELY, JR.		Director
John D. Stokely, Jr.
/s/ RANDALL G. VINSON		Director
Randall G. Vinson
/s/ JAMES R. WILKINS, JR		Director
James R. Wilkins, Jr.

100

99