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EFSI Eagle Financial Services

Filed: 30 Mar 21, 3:10pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

(Mark One)

 

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

For the fiscal year ended December 31, 2020

or

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

Commission File Number: 0-20146

EAGLE FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Virginia

 

54-1601306

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

2 East Main Street

P.O. Box 391

Berryville, Virginia

 

22611

(Address of principal executive offices)

 

(Zip Code)

 

(540) 955-2510

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $2.50

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes       No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

 


 

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   □

 

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



 

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant at June 30, 2020 was $67,812,259.

 

The number of shares of the registrant’s Common Stock ($2.50 par value) outstanding as of March 18, 2021 was 3,429,686.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

 


 

 

EAGLE FINANCIAL SERVICES, INC.

INDEX TO FORM 10-K

 

 

 

 

PART I

 

 

Item 1.

Business

4

Item 1A.

Risk Factors

15

Item 1B.

Unresolved Staff Comments

22

Item 2.

Properties

22

Item 3.

Legal Proceedings

22

Item 4.

Mine Safety Disclosures

22

 

 

 

PART II

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

Item 6.

Selected Financial Data

24

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

47

Item 8.

Financial Statements and Supplementary Data

49

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

93

Item 9A.

Controls and Procedures

94

Item 9B.

Other Information

94

 

 

 

PART III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

95

Item 11.

Executive Compensation

95

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

95

Item 13.

Certain Relationships and Related Transactions, and Director Independence

95

Item 14.

Principal Accounting Fees and Services

95

 

 

 

PART IV

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

96

Item 16.

Form 10-K Summary

97

 

 

 

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PART I

Item 1.     Business

General

Eagle Financial Services, Inc. (the “Company”) is a bank holding company that was incorporated in 1991. The company is headquartered in Berryville, Virginia and conducts its operations through its subsidiary, Bank of Clarke County (the “Bank”). The Bank is chartered under Virginia law.

The Bank has twelve full-service branches, one loan production office and one drive-through only facility. The Bank’s main office is located at 2 East Main Street in Berryville, Virginia. The Bank opened for business on April 1, 1881. The Bank has offices located in Clarke County, Frederick County, Loudoun County and Fairfax County, as well as the Towns of Leesburg and Purcellville and the City of Winchester. This market area is located in the Shenandoah Valley and Northern Virginia.

The Bank offers a wide range of retail and commercial banking services, including demand, savings and time deposits and consumer, mortgage and commercial loans.  The Bank has thirteen ATM locations in its trade area and issues both ATM cards and Debit cards to deposit customers. These cards can be used to withdraw cash at most ATM’s through the Bank’s membership in both regional and national networks. These cards can also be used to make purchases at retailers who accept transactions through the same regional and national networks. The Bank offers telephone banking, internet banking, and mobile banking to its customers. Internet banking also offers online bill payment to consumer and commercial customers. The Bank offers other commercial deposit account services such as ACH origination and remote deposit capture.

Eagle Investment Group (“EIG”), a division of the Bank, offers both a trust department and investment services. The trust services division of EIG offers a full range of personal and retirement plan services, which include serving as agent for bill paying and custody of assets, as investment manager with full authority or advisor, as trustee or co-trustee for trusts under will or under agreement, as trustee of life insurance trusts, as guardian or committee, as agent under a power of attorney, as executor or co-executor for estates, as custodian or investment advisor for individual retirement plans, and as trustee or trust advisor for corporate retirement plans such as profit sharing and 401(k) plans. The brokerage division of EIG offers a full range of investment services, which include tax-deferred annuities, IRAs and rollovers, mutual funds, retirement plans, 529 college savings plans, life insurance, long term care insurance, fixed income investing, brokerage CDs, and full service or discount brokerage services. Non-deposit investment products are offered through a third party provider.

The Bank of Clarke County, is a partner in Bankers Title Shenandoah, LLC, which sells title insurance and is an investor in Virginia Bankers Insurance Center, LLC, which serves as the broker for insurance sales through its member banks.  Bank of Clarke County is also an investor in building rehabilitation projects in surrounding states. These investments generate tax credits for the Bank.

Employees

The Company, including the Bank, had 66 officers, 120 other full-time and 18 part-time employees (or 195 full-time equivalent employees) at December 31, 2020. None of the Company’s employees are represented by a union or covered under a collective bargaining agreement. The Company considers relations with its employees to be excellent.

Securities and Exchange Commission Filings

The Company maintains an internet website at www.bankofclarke.bank. Shareholders of the Company and the public may access, free of charge, the Company’s periodic and current reports (including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports) filed with or furnished to the Securities and Exchange Commission (the "SEC"), through the “Investor Relations” section of the Company’s website. The reports are made available on this website as soon as practicable following the filing of the reports with the SEC. In addition, certain committee charters and the Company's Code of Ethics are available on the Company's website. The information is free of charge and may be reviewed, downloaded and printed from the website at any time. The information on the Company's website is not a part of, and is not incorporated into, this Annual Report on Form 10-K.


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Competition

There is significant competition for both loans and deposits within the Company’s trade area. Competition for loans comes from other commercial banks, savings banks, credit unions, mortgage brokers, finance companies, financial technology firms, insurance companies, and other institutional lenders. Competition for deposits comes from other commercial banks, savings banks, credit unions, brokerage firms, and other financial institutions. Based on total deposits at June 30, 2020 as reported to the FDIC, the Company has 7.93% of the total deposits in its market area. The Company’s market area includes Clarke County, Frederick County, Loudoun County and the City of Winchester.

Supervision and Regulation

General. As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended, and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve"). As a state-chartered commercial bank, the Bank is subject to regulation, supervision and examination by the Virginia State Corporation Commission’s Bureau of Financial Institutions. It is also subject to regulation, supervision and examination by the Federal Reserve. Other federal and state laws, including various consumer and compliance laws, govern the activities of the Bank, the investments that it makes and the aggregate amount of loans that it may grant to one borrower.

The following sections summarize the significant federal and state laws applicable to the Company and its subsidiary. To the extent that statutory or regulatory provisions are described, the description is qualified in its entirety by reference to that particular statutory or regulatory provision.

The Bank Holding Company Act. Under the Bank Holding Company Act, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports regarding its operations and any additional information that the Federal Reserve may require. Activities at the bank holding company level are limited to the following:

 

banking, managing or controlling banks;

 

furnishing services to or performing services for its subsidiaries; and

 

engaging in other activities that the Federal Reserve has determined by regulation or order to be so closely related to banking as to be a proper incident to these activities.

Some of the activities that the Federal Reserve has determined by regulation to be closely related to the business of a banking include making or servicing loans and specific types of leases, performing specific data processing services and acting in some circumstances as a fiduciary or investment or financial adviser.

With some limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

 

acquiring substantially all the assets of any bank;

 

acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares); or

 

merging or consolidating with another bank holding company.

In addition, and subject to some exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with their regulations, require Federal Reserve approval prior to any person or company acquiring 25% or more of any class of voting securities of the bank holding company. Prior notice to the Federal Reserve is required if a person acquires 10% or more, but less than 25%, of any class of voting securities of a bank or bank holding company and either the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities immediately after the transaction.

In November 1999, Congress enacted the Gramm-Leach-Bliley Act (“GLBA”), which made substantial revisions to the statutory restrictions separating banking activities from other financial activities. Under the GLBA, bank holding companies that are well-capitalized and well-managed and meet other conditions can elect to become “financial holding companies.” As financial holding companies, they and their subsidiaries are permitted to acquire or engage in previously impermissible activities such as insurance underwriting, securities underwriting and distribution, travel agency activities, insurance agency activities, merchant banking and other activities that the Federal Reserve determines to be financial in nature or complementary to these activities. Financial holding companies continue to be subject to the overall oversight and supervision of the Federal Reserve, but the GLBA applies the concept of functional regulation to the activities conducted by subsidiaries. For example, insurance activities would be subject to supervision and regulation by state insurance authorities. Although the Company has not elected to become a financial holding company in order to exercise the broader activity powers provided by the GLBA, the Company may elect do so in the future.

5


 

Payment of Dividends. The Company is organized under the Virginia Stock Corporation Act, which prohibits the payment of a dividend if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders. In addition, the Federal Reserve has indicated that a bank holding company should generally pay dividends only if its current earnings are sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.

The Company is a legal entity separate and distinct from its subsidiary. Its ability to distribute cash dividends will depend primarily on the ability of the Bank to pay dividends to it, and the Bank is subject to laws and regulations that limit the amount of dividends that it can pay. As a state member bank, the Bank is subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations. Under Virginia law, a bank may not declare a dividend in excess of its undivided profits. Additionally, the Bank may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by it in any calendar year exceeds the total of its retained net income of that year to date, combined with its retained net income of the two preceding years, unless the dividend is approved by the Federal Reserve.

The Federal Reserve, the FDIC and the state of Virginia have the general authority to limit the dividends paid by insured banks if the payment is deemed an unsafe and unsound practice. These regulators have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice. The Bank may also not declare or pay a dividend without the approval of its board and two-thirds of its shareholders if the dividend would exceed its undivided profits, as reported to the Federal Reserve.

The Company does not expect that any of these laws, regulations or policies will materially affect the Bank's ability to pay dividends to the Company. Refer to Item 5 for additional information on dividend restrictions. During the year ended December 31, 2020, the Bank paid $4.3 million in dividends to the Company.  The Company paid cash dividends of $3.2 million and total dividends of $3.6 million, including cash dividends that were reinvested in Company stock.

Insurance of Accounts, Assessments and Regulation by the FDIC. The Bank’s deposits are insured up to applicable limits by the FDIC.  In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") permanently raised the standard maximum deposit insurance amount to $250,000.  The FDIC has implemented a risk-based assessment system in which assessment rates for insured institutions with under $10 billion in assets are calculated based on supervisory evaluations and certain other financial measures. The assessment base is an institution’s average consolidated total assets less average tangible equity, and the initial base assessment rates are currently between 3 and 30 basis points depending on the institution's composite rating, and subject to potential adjustment based on certain long-term unsecured debt. Once the reserve ratio reaches 2.0% or greater, initial base assessment rates will range from 2 to 28 basis points and, once the reserve ratio reaches 2.5% or greater, the initial base assessment rate will range from 1 to 25 basis points.

Capital Requirements. The Federal Reserve and the other federal banking agencies have issued risk-based and leverage capital guidelines applicable to U.S. banking organizations. Those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Pursuant to the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the Company, are not subject to consolidated regulatory capital requirements.

Effective January 1, 2015, the Federal Reserve adopted capital rules intended to revise and strengthen its risk-based and leverage capital requirements and its method for calculating risk-weighted assets. The rules implemented the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act.


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Under these risk-based capital requirements of the Federal Reserve, the Bank is required to maintain a minimum ratio of total capital (which is defined as core capital and supplementary capital less certain specified deductions from total capital such as reciprocal holdings of depository institution capital instruments and equity investments) to risk-weighted assets of at least 8.0%. At least 6.0% of risk-weighted assets is required to be “Tier 1 capital,” which consists principally of common and certain qualifying preferred shareholders’ equity (including grandfathered trust preferred securities) as well as retained earnings, less certain intangibles and other adjustments. The “Tier 2 capital” consists of cumulative preferred stock, long-term perpetual preferred stock, a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments), and a limited amount of the allowance for loan losses, including reserves for off-balance sheet commitments. A common equity Tier 1 capital ratio of 4.5% of risk-weighted assets also was added with the rules effective January 1, 2015.

Each of the federal bank regulatory agencies also has established a minimum leverage capital ratio of Tier 1 capital to average adjusted assets (“Tier 1 leverage ratio”). The guidelines require a minimum Tier 1 leverage ratio of 3.0% for financial holding companies and banking organizations with the highest supervisory rating. All other banking organizations are required to maintain a minimum Tier 1 leverage ratio of 4.0% unless a different minimum was specified by an appropriate regulatory authority. In addition, for a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 leverage ratio must be at least 5.0%. Banking organizations that have experienced internal growth or made acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve has not advised the Company or the Bank of any specific minimum leverage ratio applicable to either entity.

The capital requirements that became effective January 1, 2015 were phased in over a four-year period. As fully phased in effective January 1, 2019, the rules require the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

The capital conservation buffer requirement was phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until fully implemented at 2.5% effective January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

The Federal Reserve’s final rules also revised the “prompt corrective action” regulations pursuant to Section 38 of the FDIA by (i) introducing a common equity Tier 1 capital ratio requirement at each level (other than critically undercapitalized), with the required ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum ratio for well-capitalized status being 8.0%; and (iii) eliminating the provision that provided that a bank with a composite supervisory rating of 1 may have a 3.0% Tier 1 leverage ratio and still be well-capitalized. These thresholds were effective for the Bank as of January 1, 2015. The minimum total capital to risk-weighted assets ratio (10.0%) and minimum leverage ratio (5.0%) for well-capitalized status were unchanged by the final rules.

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the proposed framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing-in through January 1, 2027. Under the current capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Company. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulatory agencies.


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As directed by the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”), the federal banking regulators jointly issued a final rule in 2019 that permits qualifying banks that have less than $10 billion in total consolidated assets to elect to be subject to a 9% “community bank leverage ratio.”  A qualifying bank that has chosen the proposed framework is not be required to calculate the existing risk-based and leverage capital requirements and would be considered to have met the capital ratio requirements to be “well capitalized” under prompt corrective action rules, provided it has a community bank leverage ratio greater than 9%. The Bank did not opt into the CBLR framework as of December 31, 2020. The community bank leverage ratio rules were temporarily modified in response to COVID-19.  See “CARES ACT” below.

Other Safety and Soundness Regulations. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event that the depository institution is insolvent or is in danger of becoming insolvent.  For example, under the requirements of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the deposit insurance funds. The FDIC’s claim for reimbursement under the cross guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institutions.

Interstate Banking and Branching. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Effective June 1, 1997, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.

Monetary Policy. The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market transactions in United States government securities, changes in the discount rate on member bank borrowing and changes in reserve requirements against deposits held by all federally insured banks. The Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and international economy and in the money markets, as well as the effect of actions by monetary fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.

Federal Reserve System. In 1980, Congress enacted legislation that imposed reserve requirements on all depository institutions that maintain transaction accounts or nonpersonal time deposits. NOW accounts, money market deposit accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to these reserve requirements, as are any nonpersonal time deposits at an institution.

The reserve percentages are subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets.

However, in March 2020, in an unprecedented move, the Federal Reserve announced that the banking system had ample reserves, and, as reserve requirements no longer played a significant role in this regime, it reduced all reserve tranches to zero percent, thereby freeing banks from the reserve maintenance requirement. The action permits the Bank to loan or invest funds that were previously unavailable. The Federal Reserve has indicated that it expects to continue to operate in an ample reserves regime for the foreseeable future.


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Transactions with Affiliates. Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any bank or entity that controls, is controlled by or is under common control with such bank. Generally, Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the association or subsidiary as those provided to a nonaffiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions.

Transactions with Insiders. The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers and principal shareholders of banks. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a principal shareholder of a bank, and some affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the bank’s loan-to-one borrower limit. Loans in the aggregate to insiders and their related interests as a class may not exceed two times the bank’s unimpaired capital and unimpaired surplus until the bank’s total deposits equal or exceed $100,000,000, at which time the aggregate is limited to the bank’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans, above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and principal shareholders of a bank or bank holding company, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. The FDIC has prescribed the loan amount, which includes all other outstanding loans to such person, as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Section 22(h) requires that loans to directors, executive officers and principal shareholders be made on terms and underwriting standards substantially the same as offered in comparable transactions to other persons.

The Dodd-Frank Act also provides that banks may not “purchase an asset from, or sell an asset to” a bank insider (or their related interests) unless (i) the transaction is conducted on market terms between the parties, and (ii) if the proposed transaction represents more than 10 percent of the capital stock and surplus of the bank, it has been approved in advance by a majority of the bank’s non-interested directors.

Community Reinvestment Act. Under the Community Reinvestment Act and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. The Community Reinvestment Act directs each bank to maintain a public file containing specific information, including all written comments received from the public for the current year and each of the previous two calendar years that specifically relate to the bank’s performance in helping to meet community credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries.

Fair Lending; Consumer Laws. In addition to the Community Reinvestment Act, other federal and state laws regulate various lending and consumer aspects of the banking business. Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice, have become concerned that prospective borrowers experience discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against depository institutions alleging discrimination against borrowers. Many of these suits have been settled, in some cases for material sums, short of a full trial.

These governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a discriminatory effect, unless the practice could be justified as a business necessity.


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Banks and other depository institutions are also subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various disclosure requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.

On September 20, 2017, the Consumer Financial Protection Bureau (the "CFPB") issued a final rule that amends Regulation B to permit creditors additional flexibility in complying with Regulation B in order to facilitate compliance with Regulation C, adds certain model forms and removes others from Regulation B, and makes various other amendments to Regulation B and its commentary to facilitate the collection and retention of information about the ethnicity, sex, and race of certain mortgage applicants.  The rule was effective on January 1, 2018, except that the amendment to Appendix B removing the existing “Uniform Residential Loan Application” form in amendatory instruction 6 is effective January 1, 2022.

 

Privacy Regulations. The GLBA contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, both at the inception of the customer relationship and on an annual basis, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The law provides that, except for specific limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The GLBA also provides that the states may adopt customer privacy protections that are more strict than those contained in the act.

Amendment to the Annual Privacy Notice Requirement Under the Gramm-Leach-Bliley Act (Regulation P). In July 2016 the CFPB proposed to update Regulation P to implement a December 2015 statutory amendment to the Gramm-Leach-Bliley Act. The August 10, 2018 rule finalized that proposal. The rule provides an exception under which financial institutions that meet certain conditions are not required to provide annual privacy notices to customers. To qualify for this exception, a financial institution must not share nonpublic personal information about customers except as described in certain statutory exceptions. In addition, the rule requires that the financial institution must not have changed its policies and practices with regard to disclosing nonpublic personal information from those that the institution disclosed in the most recent privacy notice it sent. As part of its implementation, the CFPB also amended Regulation P to provide timing requirements for delivery of annual privacy notices in the event that a financial institution that qualified for this annual notice exception later changes its policies or practices in such a way that it no longer qualifies for the exception. The CFPB further removed the Regulation P provision that allowed for use of the alternative delivery method for annual privacy notices because the CFPB believes the alternative delivery method will no longer be used in light of the annual notice exception.

Anti-Money Laundering Laws and Regulations.  The Bank is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities (“AML laws”). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020.  The Anti-Money Laundering Act of 2020, the most sweeping anti-money laundering legislation in 20 years, requires various federal agencies to promulgate regulations implementing a number of its provisions.

The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.

 


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Cybersecurity. The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal banking agencies expect financial institutions to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack. If the Bank fails to meet the expectations set forth in this regulatory guidance, it could be subject to various regulatory actions and any remediation efforts may require significant resources of the Bank. In addition, all federal and state bank regulatory agencies continue to increase focus on cybersecurity programs and risks as part of regular supervisory exams.

In December 2020, the federal banking agencies issued a notice of proposed rulemaking that would require banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident” or a “notification incident.” The proposed rule also would require specific and immediate notifications by bank service providers that become aware of similar incidents.

 

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act implemented a number of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act established: (i) requirements for audit committees, including independence, expertise, and responsibilities; (ii) responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) disclosure and reporting obligations for reporting companies and their directors and executive officers; and (v) civil and criminal penalties for violations of the securities laws. Because the Company’s common stock is registered with the SEC, it is currently subject to these requirements.

Incentive Compensation. In June 2010, the Federal Reserve issued a final rule on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. Banking organizations are instructed to review their incentive compensation policies to ensure that they do not encourage excessive risk-taking and implement corrective programs as needed. The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Bank, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.

Dodd-Frank Act. In July 2010, the Dodd-Frank Act was signed into law, incorporating numerous financial institution regulatory reforms.  The Dodd-Frank Act implements far-reaching reforms of major elements of the financial landscape, particularly for larger financial institutions. Many of its provisions do not directly impact community-based institutions like the Bank. For instance, provisions that regulate derivative transactions and limit derivatives trading activity of federally-insured institutions, enhance supervision of “systemically significant” institutions, impose new regulatory authority over hedge funds, limit proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1 capital are among the provisions that do not directly impact the Bank either because of exemptions for institutions below a certain asset size or because of the nature of the Bank’s operations. Certain aspects of the Dodd-Frank Act remain subject to rulemaking and interpretation and will take effect over several years, and their impact on the Company or the financial industry is difficult to predict before such regulations or interpretations are adopted.

In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act") was enacted to modify or remove certain regulatory financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, such as the Bank, and for large banks with assets of more than $50 billion.

Among other matters, the Economic Growth Act expands the definition of qualified mortgages which may be held by a financial institution with total consolidated assets of less than $10 billion, exempts community banks from the Volcker Rule, and includes additional regulatory relief regarding regulatory examination cycles, call reports, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

 

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Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z).  Pursuant to the Dodd-Frank Act, the CFPB issued a final rule on November 20, 2013 (effective on October 3, 2015), combining certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act. The Bureau amended Regulation X (Real Estate Settlement Procedures Act or RESPA) and Regulation Z (Truth in Lending or TILA) to establish new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property. In addition to combining the existing disclosure requirements and implementing new requirements imposed by the Dodd-Frank Act, the final rule provides extensive guidance regarding compliance with those requirements.  The final rule applies to most closed-end consumer mortgages. It does not apply to home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property (in other words, land). The final rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year.

 

On July 7, 2017, the CFPB modified the Federal mortgage disclosure requirements under the Real Estate Settlement Procedures Act and the Truth in Lending Act that are implemented in Regulation Z. This rule memorializes the CFPB’s informal guidance on various issues and makes additional clarifications and technical amendments. This rule also creates tolerances for the total of payments, adjusts a partial exemption mainly affecting housing finance agencies and nonprofits, extends coverage of the TILA-RESPA integrated disclosure (integrated disclosure) requirements to all cooperative units, and provides guidance on sharing the integrated disclosures with various parties involved in the mortgage origination process.

On October 4, 2017, the CFPB issued an interim final rule amending a provision of the Regulation X mortgage servicing rules issued in 2016 relating to the timing for servicers to provide modified written early intervention notices to borrowers who have invoked their cease communication rights under the Fair Debt Collection Practices Act.

On March 8, 2018, the CFPB issued a rule amending certain aspects of the mortgage servicing rule issued in 2016 relating to periodic statements. These amendments revise the timing requirements for servicers transitioning between modified or unmodified periodic statements and coupon books when consumers enter or exit bankruptcy.

On April 26, 2018, the CFPB amended federal mortgage disclosure requirements under RESPA and TILA that are implemented in Regulation Z. The amendments relate to when a creditor may compare charges paid by or imposed on the consumer to amounts disclosed on a Closing Disclosure, instead of a Loan Estimate, to determine if an estimated closing cost was disclosed in good faith.

Flood Insurance Rule.   On July 21, 2015, five federal regulatory agencies announced the approval of a joint final rule that modifies regulations that apply to loans secured by properties located in special flood hazard areas. The final rule implements provisions of the Homeowner Flood Insurance Affordability Act of 2014 relating to the escrowing of flood insurance payments and the exemption of certain detached structures from the mandatory flood insurance purchase requirement. The final rule also implements provisions in the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) relating to the force placement of flood insurance.

On February 20, 2019, an Interagency Final Rule was issued amending regulations regarding loans in areas having special flood hazards to implement the private flood insurance provisions of the Biggert-WatersAct. Specifically, the final rule requires regulated lending institutions to accept policies that meet the statutory definition of "private flood insurance" in the Biggert-Waters Act and permits regulated lending institutions to exercise their discretion to accept flood insurance policies issued by private insurers and plans providing flood coverage issued by mutual aid societies that do not meet the statutory definition of "private flood insurance," subject to certain restrictions.

Home Mortgage Disclosure Act (HMDA) Final Rule. On October 15, 2015, the CFPB issued the final rule aimed at increasing the “quality and type” of HMDA data collected and reported by financial institutions. The HMDA Rule changes: (1) the types of financial institutions that are subject to Regulation C; (2) the types of transactions that are subject to Regulation C; (3) the data that financial institutions are required to collect, record, and report; and (4) the processes for reporting and disclosing HMDA data. On August 24, 2017, the CFPB issued a final rule (2017 HMDA Rule) further amending Regulation C to make technical corrections and to clarify and amend certain requirements adopted by the 2015 HMDA Final Rule. The most significant changes were not effective until January 1, 2018. On or before March 1, 2019, lenders will report the new data they collect in 2018.  On October 10, 2019, the CFPB issued a final rule amending Regulation C to adjust the threshold for reporting data about open-end lines of credit by extending to January 1, 2022 the current temporary threshold of 500 open-end lines of credit. The CFPB also incorporated into Regulation C the interpretations and procedures from the interpretive and procedural rule that was issued on August 31, 2018, implementing provisions of the Economic Growth Act.

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Regulation CC. On September 17, 2018, the Federal Reserve Board adopted final amendments to Regulation CC (Expedited Funds Availability Act) to address situations where there is a dispute as to whether a check has been altered or was issued with an unauthorized signature, and the original paper check is not available for inspection. The rule adopts a presumption of alteration for disputes between banks over whether a substitute check or electronic check contains an alteration or is derived from an original check that was issued with an unauthorized signature of the drawer.

On June 26, 2019, the agencies finalized changes to Regulation CC to adopt a method for making inflationary adjustments to the dollar amounts in Regulation CC every five years pursuant to the Dodd-Frank Act. The first adjustments are effective July 1, 2020.  In addition, the final rule implements a provision of the Economic Growth Act to extend coverage of Regulation CC to American Samoa, the Northern Mariana Islands, and Guam.

Summaries of Rights Under the Fair Credit Reporting Act (Regulation V). The CFPB issued an interim final rule on September 12, 2018 to update the CFPB’s model forms for the Summary of Consumer Identity Theft Rights and the Summary of Consumer Rights in Appendices I and K to Regulation V to incorporate a notice required by new Fair Credit Reporting Act section 605A(i)(5), added by the Economic Growth Act.

Home Mortgage Disclosure Act. The CFPB issued an interpretive and procedural rule on August 31, 2018 to implement and clarify the requirements of section 104(a) of the Economic Growth Act, which amended certain provisions of the Home Mortgage Disclosure Act (HMDA). The rule clarifies that insured depository institutions and insured credit unions covered by a partial exemption under the Economic Growth Act have the option of reporting exempt data fields as long as they report all data fields within any exempt data point for which they report data; clarifies that only loans and lines of credit that are otherwise HMDA reportable count toward the thresholds for the partial exemptions; clarifies which of the data points in Regulation C are covered by the partial exemptions; designates a non-universal loan identifier for partially exempt transactions for institutions that choose not to report a universal loan identifier; and clarifies the Economic Growth Act’s exception to the partial exemptions for negative Community Reinvestment Act examination history.

Real Estate Appraisal Thresholds. On September 27, 2019, the agencies issued a final rule increasing the appraisal threshold for residential real estate transactions from $250,000 to $400,000. The final rule defines residential real estate transactions as a real estate related financial transaction that is secured by a single 1-to-4 family residential property.  For residential real estate transactions exempted from the appraisal requirement as a result of the revised threshold, regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices. The final rule includes exempted transactions with residential properties in rural areas under the Economic Growth Act and requires evaluations for these transactions. The final rule also amends appraisal regulations requiring regulated institutions to subject appraisals for federally related transactions to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice.

Future Legislation and Regulation.  Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under which the Company and the Bank operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material, adverse effect on the business, financial condition and results of operations of the Company and the Bank. Future legislation, regulation, and government policy could affect the banking industry as a whole, including the business and results of operations of the Company and the Bank, in ways that are difficult to predict. The Company fully expects that the financial institution industry will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.

Employment Transition of Loan Originators.  Section 106 of the Economic Growth Act allows certain state-licensed mortgage loan originators (MLOs) who are licensed in one state to temporarily work in another state while waiting for licensing approval in the new state. It also grants MLOs who move from a depository institution (where loan officers do not need to be state licensed) to a nondepository institution (where they do need to be state licensed) a grace period to complete the necessary licensing.


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Wage and Hour Division, Department of Labor.  On December 16, 2019, the Department of Labor issued a final rule, the rule updates a number of regulations on the calculation of overtime compensation both to provide clarity and to better reflect the 21st-century workplace. These changes will promote compliance with the FLSA, provide appropriate and updated guidance in an area of evolving law and practice, and encourage employers to provide additional and innovative benefits to workers without fear of costly litigation.  This final rule was effective on January 15, 2020.

 

CARES Act. In response to the COVID-19 pandemic, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act on March 27, 2020. Among other things, the CARES Act included the following provisions impacting financial institutions:

 

Community Bank Leverage Ratio. The CARES Act directs federal bank regulators to adopt interim final rules to lower the threshold under the community bank leverage ratio from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulators issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the community bank leverage ratio framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% community bank leverage ratio requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% community bank leverage ratio requirement to a 9% community bank leverage ratio requirement. It establishes a minimum community bank leverage ratio of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable community bank leverage ratio requirement.

 

Temporary Troubled Debt Restructurings (“TDR”) Relief. The CARES Act allows banks to elect to suspend requirements under GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a TDR, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. Federal banking regulators are required to defer to the determination of the banks making such suspension.  The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, extended this temporary relief until the earlier of 60 days after the termination date of the national emergency or January 1, 2022.

 

Small Business Administration (“SBA”) Paycheck Protection Program. The CARES Act created the SBA’s Paycheck Protection Program. Under the Paycheck Protection Program, funds were authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions, including the Bank, that process loan applications and service the loans.

 

 


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Item 1A.     Risk Factors

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:

 

credit losses resulting from financial stress experienced by our borrowers, especially those operating in industries most hard hit by government measures to contain the spread of the virus;

 

operational failures, disruptions or inefficiencies due to changes in our normal business practices necessitated by our
internal measures to protect our employees and government-mandated measures intended to slow the spread of the
virus;

 

possible business disruptions experienced by our vendors and business partners in carrying out work that supports
our operations;

 

decreased demand for our products and services due to economic uncertainty, volatile market conditions and
temporary business closures;

 

any financial liability, credit losses, litigation costs or reputational damage resulting from our origination of PPP loans;
and

 

heightened levels of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and
increased online activity brought about by the pandemic.

The extent to which the pandemic impacts our business, liquidity, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and
severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating
conditions can resume. In addition, the rapidly changing and unprecedented nature of COVID-19 heightens the inherent
uncertainty of forecasting future economic conditions and their impact on our loan portfolio, thereby increasing the risk that
the assumptions, judgments and estimates used to determine the allowance for loan losses and other estimates are
incorrect. Further, our loan deferral program could delay or make it difficult to identify the extent of asset quality deterioration during the deferral period. As a result of these and other conditions, the ultimate impact of the pandemic is highly uncertain and subject to change, and we cannot predict the full extent of the impacts on our business, our operations or the global economy as a whole.


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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.

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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:

 

actual loan loss history;

 

nature, terms, and volume of the loan portfolio;

 

the amount and trends of problems loans and non-performing loans;

 

the effect of changes in the local real estate market on collateral values;

 

the legal and regulatory environment;

 

lending policies and procedures;

 

credit administrations and lending staff;

 

concentrations of credit;

 

the loan review function;

 

the effect of current economic conditions on a borrower’s ability to pay; and

 

other factors deemed relevant by management.

 

These determinations are based upon estimates that are inherently subjective, and their accuracy depends on the outcome of future events; therefore, realized losses may differ from current estimates. Changes in economic, operating, and other conditions, including changes in interest rates, which are generally beyond our control, could increase actual loan losses significantly. As a result, actual losses could exceed our current allowance estimate. We cannot provide assurance that our allowance for loan losses is sufficient to cover actual loan losses should such losses differ significantly from the current estimates.

Liquidity and Interest Rate Risks

The Company’s success depends upon its ability to manage interest rate risk.

The profitability of the Company depends significantly on its net interest income, which is the difference between the interest earned on loans, securities and other interest-earning assets, and the interest paid on deposits and borrowings. Changes in interest rates will affect the rates earned on securities and loans and rates paid on deposits and other borrowings. While the Company believes that its current interest rate exposure does not present any significant negative exposure to interest rate changes, it cannot eliminate its exposure to interest rate risk because the factors which cause interest rate risk are beyond the Company’s control. These factors include competition, federal economic, monetary and fiscal policies, and general economic conditions.

 

The Company may be required to transition from the use of the London Inter Offered Rate (“LIBOR”) index in the future.

The Company has certain variable-rate loans indexed to LIBOR to calculate the loan interest rate. The United Kingdom Financial Conduct Authority, which regulates LIBOR, has previously announced that the continued availability of the LIBOR on the current basis is not guaranteed after 2021. In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one week and two month LIBOR offered rates will cease after December 31, 2021; but, the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, federal bank regulators have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.


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It is difficult to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR, and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based variable-rate loans, as well as LIBOR-based securities, subordinated notes, trust preferred securities, or other securities or financial arrangements. The transition to alternative reference rate for new contracts, or the implementation of a substitute index or indices for the calculation of interest rates under the Company’s existing loan agreements with borrowers or other financial arrangements, could change the Company’s market risk profile, interest margin, interest spread and pricing models, may cause the Company to incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept a substitute index or indices, and may result in disputes or litigation with customers or other counter-parties over the appropriateness or comparability to LIBOR of the substitute index or indices, any of which could have a material adverse effect on the Company’s results of operations.

Market Risks

The Company’s success depends upon its ability to compete effectively in the banking industry.

The Company’s banking subsidiary faces competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area. Certain divisions within the banking subsidiary face competition from wealth management and investment brokerage firms. A number of these banks and other financial institutions are significantly larger and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. In addition, the Company faces competition from market place lenders and other financial technology firms, which may provide competitive services quickly and in innovative ways and may have fewer regulatory constraints and lower cost structures. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.

The Company could be adversely affected by economic conditions in its market area.

The Company’s branches are located in the counties of Clarke, Frederick and Loudoun, the towns of Purcellville, Leesburg and Ashburn, and the City of Winchester. Because our lending is concentrated in this market, we will be affected by the general economic conditions in these areas. Changes in the economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing. A decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact the demand for banking products and services generally, which could negatively affect our financial condition and performance.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.


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Operational Risks

Our exposure to operational risk may adversely affect our business.

We are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.

Reputational risk, or the risk to our earnings and capital from negative public opinion, could result from our actual alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance or the occurrence of any of the events or instances mentioned below, or from actions taken by government regulators or community organizations in response to that conduct.  Negative public opinion could also result from adverse news or publicity that impairs the reputation of the financial services industry generally.

Further, if any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be adversely affected. We depend on internal systems and outsourced technology to support these data storage and processing operations. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. We could be adversely affected if one of our employees causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems.  We are also at risk of the impact of natural disasters, terrorism and international hostilities on our systems or for the effects of outages or other failures involving power or communications systems operated by others.

If any of the foregoing risks materialize, it could have a material adverse affect on our business, financial condition and results of operations.

 

The Company may not be able to successfully manage its growth or implement its growth strategy, which may adversely affect results of operations and financial condition.

 

A key component of the Company’s business strategy is to continue to grow and expand. The Company’s ability to grow and expand depends upon its ability to open new branch locations, attract new deposits to the existing and new branch locations, and identify attractive loan and investment opportunities. The Company may not be able to implement its growth strategy if it is unable to identify attractive markets or branch locations. Once identified, successfully managing growth will depend on integrating the new branch locations while maintaining adequate capital, cost controls and asset quality. As this growth strategy is implemented, the Company will incur construction costs and increased personnel, occupancy and other operating expenses. Because these costs are incurred before new deposits and loans are generated, adding new branch locations will initially decrease earnings, despite efficient execution of this strategy. In addition, the Company could experience difficulties expanding into new markets or product lines.  The Company’s lack of history and familiarity with those markets, clients and lines of business may lead to unexpected challenges or difficulties that inhibit its success and adversely affect the Company’s results of operations.

The Company relies heavily on its senior management team and the unexpected loss of key officers could adversely affect operations.

The Company believes that its growth and success depends heavily upon the skills of its senior management team. The Company also depends on the experience of its subsidiary’s officers and on their relationships with the customers they serve. The loss of one or more of these officers could disrupt the Company’s operations and impair its ability to implement its business strategy, which could adversely affect the Company’s financial condition and performance.


19


 

 

Legal, Regulatory and Compliance Risks

Government measures to regulate the financial industry, including the Dodd-Frank Act, subject us to increased regulation and could adversely affect us.

As a financial institution, we are heavily regulated at the state and federal levels. These laws and regulations are generally intended to benefit consumers, borrowers and depositors, but not investors. Our success depends on our ability to maintain compliance with existing and new laws and regulations. As a result of the financial crisis and related global economic downturn that began in 2007, we have faced, and expect to continue to face, increased public and legislative scrutiny as well as stricter and more comprehensive regulation of our financial services practices. The Dodd-Frank Act includes significant changes in the financial regulatory landscape and has increased our operations and compliance costs in the short-term. Future legislation, regulation and government policy, which are beyond our control, may change rapidly and unpredictably and could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. With the incoming Biden administration, a Democratic controlled Congress, and changes in leadership at federal agencies such as the CFPB, we expect that financial institutions will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices. As a result of the provisions in the Dodd-Frank Act and other current or future laws and regulations applicable to the Bank, we could experience additional costs, as well as limitations on the products and services we offer and on our ability to efficiently pursue business opportunities, which may adversely affect our businesses, financial condition or results of operations.

 

The Bank is subject to more stringent capital and liquidity requirements as a result of the Basel III regulatory capital reforms and the Dodd-Frank Act.

The Bank is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which it must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. Under the Dodd-Frank Act, the federal banking agencies have established stricter capital requirements and leverage limits for banks and bank holding companies that are based on the Basel III regulatory capital reforms. The Basel III Capital Rules require banking organizations to maintain significantly more capital and adopted more demanding regulatory capital risk weightings and calculations. While the recently passed Economic Growth Act requires that federal banking regulators establish a simplified leverage capital framework for smaller banks, these more stringent capital requirements could, among other things, limit banking operations and activities, and growth of loan portfolios, in order to focus on retention of earnings to improve capital levels. The Bank believes that it maintains sufficient levels of Tier 1 and Common Equity Tier 1 capital to comply with the Basel III Final rules. However, if the Bank fails to meet these minimum capital guidelines and/or other regulatory requirements, the Bank could be subject to regulatory restrictions, including limitations on paying dividends to the holding company for shareholder dividends and share repurchases and paying discretionary bonuses, or experience other adverse consequences that could cause its financial condition to be materially and adversely affected.

 

In addition, there can be no assurance that our methodology for assessing our asset quality will succeed in properly identifying impaired loans or calculating an appropriate loan loss allowance. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. If our assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if bank regulatory authorities require us to increase the allowance for loan losses as a part of their examination process, our earnings and capital could be significantly and adversely affected.


20


 

 

Changes in accounting standards could impact reported earnings and capital.

The authorities that promulgate accounting standards, including the Financial Accounting Standards Board (the “FASB”), the SEC, and other regulatory authorities, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of financial statements for prior periods. Such changes could also impact the capital levels of the Bank, or require the Company to incur additional personnel or technology costs. Most notably, new guidance on the calculation of credit reserves using current expected credit losses, referred to as CECL, was finalized in June 2016. The standard has been delayed for the Company and will now be effective for the Company beginning January 1, 2023. To implement the new standard, the Company has and will incur costs related to data collection and documentation, technology and training.  Although the Company is currently unable to reasonably estimate the impact of the new standard on its financial statements, adoption of the new standard could necessitate, among other things, higher loan loss reserve levels, and the Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses and opening retained earnings as of the beginning of the quarter in which the standard is effective.  If the Company is required to materially increase the level of the allowance for loan losses or incurs additional expenses to determine the appropriate level of the allowance for loan losses, such changes could adversely affect the Company’s capital levels, financial condition and results of operations.

 

Risks Relating to Our Securities

 

There can be no assurances concerning continuing dividend payments.

 

Our common stockholders are only entitled to receive the dividends declared by our Board of Directors. Although we have historically paid quarterly dividends on our common stock, there can be no assurances that we will be able to continue to pay regular quarterly dividends or an annual stock dividend or that any dividends we do declare will be in any particular amount. The primary source of money to pay our cash dividends comes from dividends paid to the Company by the Bank. The Bank’s ability to pay dividends to the Company is subject to, among other things, its earnings, financial condition and applicable regulations, which in some instances limit the amount that may be paid as dividends. In addition, the Company and the Bank are required to maintain a capital conservation buffer of 2.5% of Common Equity Tier 1 Capital on top of minimum risk-weighted asset ratios to pay dividends without additional restrictions.

 

 

 

There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price you paid for them.

 

Although our common shares are listed for trading under the symbol “EFSI,” the trading in our common shares has substantially less liquidity than many other publicly traded companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that volume of trading in our common shares will increase in the future.

 

The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.

 

The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Market fluctuations could adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes, tariffs, government shutdowns, Brexit, or international currency fluctuations, may negatively affect the market price of our common stock. Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein. As a result, period-to-period comparisons should not be relied upon as an indication of future performance. Our stock price could fluctuate significantly in response to our quarterly or annual results, annual projections, and the impact of these risk factors on our operating results or financial position.

 


21


 

 

Item 1B.     Unresolved Staff Comments

None.

Item 2.     Properties

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

All of the Company’s properties are well maintained, are in good operating condition and are adequate for the Company’s present and anticipated future needs.

There are no material pending legal proceedings to which the Company is a party or of which the property of the Company is subject.

Item 4.     Mine Safety Disclosures

None.

22


 

PART II

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is quoted on the OTC Markets Group's OTCQX Market under the symbol “EFSI.” The OTC Markets Group provides information about the common stock to professional market makers who match sellers with buyers. Securities brokers can obtain information from the OTC Markets Group when working with clients. When a client decides to initiate a transaction, the broker will contact one of the stock’s market makers. Any over-the-counter market quotations in the Company’s common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

As of March 18, 2021, the Company had approximately 929 shareholders of record.

The Company has historically paid dividends on a quarterly basis. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of the Company’s Board of Directors. Some of the factors affecting the payment of dividends on the Company’s common stock are operating results, financial condition, capital adequacy, regulatory requirements and shareholders returns.

Issuer Purchases of Equity Securities for the Quarter Ended December 31, 2020

On June 17, 2020, the Corporation renewed the stock repurchase program to repurchase up to 150,000 shares of its common stock prior to June 30, 2021. During 2020, the Company purchased 67,189 shares of its Common Stock under its stock repurchase program at an average price of $27.60.

The following table details the Company's purchases of its common stock during the fourth quarter pursuant to the Stock Repurchase program discussed above.

 

 

 

Total Number

of Shares

Purchased

 

 

Average

Price Paid

Per Share

 

 

Total Number

of Shares

Purchased

as Part of

Publicly

Announced

Plan

 

 

Maximum

Number of

Shares that

may Yet Be

Purchased

Under the

Plan

 

October 1 - October 31, 2020

 

 

 

 

$

 

 

 

 

 

 

137,626

 

November 1 - November 30, 2020

 

 

16,201

 

 

 

25.57

 

 

 

16,201

 

 

 

121,425

 

December 1 - December 31, 2020

 

 

 

 

 

 

 

 

16,201

 

 

 

121,425

 

 

 

 

16,201

 

 

$

25.57

 

 

 

16,201

 

 

 

121,425

 

 

Stock Performance

The following line graph compares the cumulative total return to the shareholders of the Company to the returns of the NASDAQ Bank Index and the NASDAQ Composite Index for the last five years. The amounts in the table represent the value of the investment on December 31st of the year indicated, assuming $100 was initially invested on December 31, 2015 and the reinvestment of dividends. See Management Discussion and Analysis sections Liquidity and Capital Resources and Note 16, “Restrictions on Dividends, Loans and Advances” to the Consolidated Financial Statements for information on Eagle Financial Services, Inc. ability and intent to pay dividends.

 

 

 

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

 

 

 

 

 

23


 

 

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

 

 

24


 

 

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operation

The purpose of this discussion is to focus on the important factors affecting the financial condition, results of operations, liquidity and capital resources of Eagle Financial Services, Inc. (the “Company”). This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

GENERAL

The Company is a bank holding company which owns 100% of the stock of Bank of Clarke County (the “Bank”). Accordingly, the results of operations for the Company are dependent upon the operations of the Bank. The Bank conducts a commercial banking business which consists of attracting deposits from the general public and investing those funds in commercial, consumer and real estate loans and corporate, municipal and U.S. government agency securities. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the extent permitted by law. At December 31, 2020, the Company had total assets of $1.13 billion, net loans of $829.2 million, total deposits of $1.01 billion and shareholders’ equity of $105.1 million. The Company’s net income was $11.2 million for the year ended December 31, 2020.

 

COVID-19 and Related Response

The COVID-19 crisis has changed our communities, both in the way we live and the way we do business. While circumstances continue to change at a rapid pace, the Company is steadfastly working to meet and exceed the needs of its customers, employees and the communities in which it does business. The Company, while considered an essential business, has implemented procedures to protect its employees, customers and the community and still serve their banking needs. Branch lobbies reopened in February 2021, but with enhanced safety features for employees and customers. Our customers also continue to conduct their business via automated teller machines, online banking and our call center. Approximately 50% of our employees are currently working from home with the remaining essential workers showing up every day at our branches and operations centers. In efforts to assist local businesses during this pandemic, the Company has approved 909 Small Business Association Paycheck Protection Program ("SBA PPP") loans, totaling $88.5 million as of December 31, 2020. The Company is also working with local small businesses, consumers and other commercial customers through its loan deferral program whereby customers experiencing hardships due to COVID-19 may be granted a deferral in loan payments for up to six months. During 2020, the Company approved 255 deferrals with loan balances totaling approximately $130.2 million for its customers experiencing hardships related to COVID-19. As of December 31, 2020, 241 loans with loan balances totaling approximately $128.7 million had begun making payments on their loans after the deferral date had passed.

 

MANAGEMENT’S STRATEGY

The Company strives to be an outstanding financial institution in its market by building solid sustainable relationships with: (1) its customers, by providing highly personalized customer service, a network of conveniently placed branches and ATMs, a competitive variety of products/services and courteous, professional employees, (2) its employees, by providing generous benefits, a positive work environment, advancement opportunities and incentives to exceed expectations, (3) its communities, by participating in local concerns, providing monetary support, supporting employee volunteerism and providing employment opportunities, and (4) its shareholders, by providing sound profits and returns, sustainable growth, regular dividends and committing to our local, independent status.

OPERATING STRATEGY

The Bank is a locally owned and managed financial institution. This allows the Bank to be flexible and responsive in the products and services it offers. The Bank grows primarily by lending funds to local residents and businesses at a competitive price that reflects the inherent risk of lending. The Bank attempts to fund these loans through deposits gathered from local residents and businesses. The Bank prices its deposits by comparing alternative sources of funds and selecting the lowest cost available. When deposits are not adequate to fund asset growth, the Bank relies on borrowings, both short and long term. The Bank’s primary source of borrowed funds is the Federal Home Loan Bank of Atlanta which offers numerous terms and rate structures to the Bank.

As interest rates change, the Bank attempts to maintain its net interest margin. This is accomplished by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through Eagle Investment Group, which is the Bank’s investment management division that offers both trust services and investment sales, mortgage originations and deposit operations. The Bank also incurs noninterest expenses associated with compensating employees, maintaining and acquiring fixed assets, and purchasing goods and services necessary to support its daily operations.

25


 

The Bank has a marketing department which seeks to develop new business. This is accomplished through an ongoing calling program whereby account officers visit with existing and potential customers to discuss the products and services offered. The Bank also utilizes traditional advertising such as television commercials, radio ads, newspaper ads, and billboards.

LENDING POLICIES

Administration and supervision over the lending process is provided by the Bank’s Credit Administration Department. The principal risk associated with the Bank’s loan portfolio is the creditworthiness of its borrowers. In an effort to manage this risk, the Bank’s policy gives loan amount approval limits to individual loan officers based on their position and level of experience. Credit risk is increased or decreased, depending on the type of loan and prevailing economic conditions. In consideration of the different types of loans in the portfolio, the risk associated with real estate mortgage loans, commercial loans and consumer loans varies based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay debt.

The Company has written policies and procedures to help manage credit risk. The Company utilizes a loan review process that includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and regular portfolio reviews to establish loss exposure and to ascertain compliance with the Company’s policies.

The Bank uses a tiered approach to approve credit requests consisting of individual lending authorities, joint approval of Category I officers, and a director loan committee. Lending limits for individuals are set by the Board of Directors and are determined by loan purpose, collateral type, and internal risk rating of the borrower. The highest individual authority (Category I) is assigned to the Bank’s President / Chief Executive Officer, Chief Revenue Officer and Chief Credit Officer (approval authority only). Two officers in Category I may combine their authority to approve loan requests to borrowers with credit exposure up to $10.0 million on a secured basis and $6.0 million unsecured. Three Category I officers may combine to approve loan requests to borrowers with credit exposure up to $15.0 million on a secured basis and $9.0 million unsecured. Officers in Category II, III, IV, V, VI and VII have lesser authorities and with approval of a Category I officer may extend loans to borrowers with exposure of $5.0 million on a secured basis and $3.0 million unsecured.  Loans exceeding $15.0 million and up to the Bank’s legal lending limit can be approved by the Director Loan Committee consisting of four directors (three directors constituting a quorum). The Director’s Loan Committee also reviews and approves changes to the Bank’s Loan Policy as presented by management.

The following sections discuss the major loan categories within the total loan portfolio:

One-to-Four-Family Residential Real Estate Lending

Residential lending activity may be generated by the Bank’s loan officer solicitations, referrals by real estate professionals, and existing or new bank customers. Loan applications are taken by a Bank loan officer. As part of the application process, information is gathered concerning income, employment and credit history of the applicant. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Directors Loan Committee. In connection with residential real estate loans, the Bank requires title insurance, hazard insurance and, if applicable, flood insurance. In addition to traditional residential mortgage loans secured by a first or junior lien on the property, the Bank offers home equity lines of credit.

Commercial Real Estate Lending

Commercial real estate loans are secured by various types of commercial real estate in the Bank’s market area, including multi-family residential buildings, commercial buildings and offices, small shopping centers and churches. Commercial real estate loan originations are obtained through broker referrals, direct solicitation of developers and continued business from customers. In its underwriting of commercial real estate, the Bank’s loan to original appraised value ratio is generally 80% or less. Commercial real estate lending entails significant additional risk as compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or the economy, in general. The Bank’s commercial real estate loan underwriting criteria require an examination of debt service coverage ratios, the borrower’s creditworthiness, prior credit history and reputation, and the Bank typically requires personal guarantees or endorsements of the borrowers’ principal owners.

26


 

Construction and Land Development Lending

The Bank makes local construction loans, primarily residential, and land acquisition and development loans. The construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The average life of most construction loans is less than one year and the Bank offers both fixed and variable rate interest structures. The interest rate structure offered to customers depends on the total amount of these loans outstanding and the impact of the interest rate structure on the Bank’s overall interest rate risk. There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of the estimated appraised value of the finished home. The Bank also obtains a first lien on the property as security for its construction loans and typically requires personal guarantees from the borrower’s principal owners. Finally, the Bank performs inspections of the construction projects to ensure that the percentage of construction completed correlates with the amount of draws on the construction line of credit.

Commercial and Industrial Lending

Commercial business loans generally have more risk than residential mortgage loans but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of its business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.

Consumer Lending

The Bank offers various secured and unsecured consumer loans, which include personal installment loans, personal lines of credit, automobile loans, and credit card loans. The Bank generally originates its consumer loans within its geographic market area and these loans are largely made to customers with whom the Bank has an existing relationship. Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral on a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and from any verifiable secondary income. Although creditworthiness of the applicant is the primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.


27


 

CRITICAL ACCOUNTING POLICIES

The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within these statements is, to a significant extent, based on measurements of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the probable losses inherent in the Company’s loan portfolio. As required by GAAP, the allowance for loan losses is accrued when the occurrence of losses is probable and losses can be estimated.  Impairment losses are accrued based on the differences between the loan balance and the value of its collateral, the present value of future cash flows, or the price established in the secondary market. The Company’s allowance for loan losses has three basic components: the general allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when actual events occur. The general allowance uses historical experience and other qualitative factors to estimate future losses and, as a result, the estimated amount of losses can differ significantly from the actual amount of losses which would be incurred in the future. However, the potential for significant differences is mitigated by continuously updating the loss history and qualitative factor analyses of the Company. The specific allowance is based upon the evaluation of specific impaired loans on which a loss may be realized. Factors such as past due history, ability to pay, and collateral value are used to identify those loans on which a loss may be realized. Each of these loans is then evaluated to determine how much loss is estimated to be realized on its disposition. The sum of the losses on the individual loans becomes the Company’s specific allowance. This process is inherently subjective and actual losses may be greater than or less than the estimated specific allowance. The unallocated allowance accounts for a measure of imprecision in the estimate. Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the 2020 Form 10-K, provides additional information related to the allowance for loan losses.


28


 

FORWARD LOOKING STATEMENTS

The Company makes forward looking statements in this report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:

 

difficult market conditions in our industry;

 

effects of soundness of other financial institutions;

 

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

 

the ability to successfully manage growth or implement growth strategies if the Bank is unable to identify attractive markets, locations or opportunities to expand in the future or successfully implement new product lines;

 

competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

 

the successful management of interest rate risk;

 

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

 

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

 

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

 

changes in interest rates and interest rate policies;

 

maintaining capital levels adequate to support growth;

 

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

 

demand, development and acceptance of new products and services;

 

problems with technology utilized by the Bank;

 

changing trends in customer profiles and behavior;

 

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

 

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

Because of these uncertainties, actual future results may be materially different from the results indicated by these forward looking statements. In addition, past results of operations do not necessarily indicate future results.


29


 

RESULTS OF OPERATIONS

Net Income

Net income for 2020 was $11.2 million, an increase of $1.4 million or 14.48% from 2019’s net income of $9.8 million. Basic and diluted earnings per share were $3.27 and $2.84 for 2020 and 2019, respectively.

Return on average assets (ROA) measures how efficiently the Company uses its assets to produce net income. Some issues reflected within this efficiency include the Company’s asset mix, funding sources, pricing, fee generation, and cost control. The ROA of the Company, on an annualized basis, was 1.11%, 1.18%, and 1.16% for 2020, 2019, and 2018, respectively.

Return on average equity (ROE) measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by the shareholders. The ROE for the Company was 11.03%, 10.60%, and 10.67% for 2020, 2019, and 2018, respectively.

Net Interest Income

Net interest income, the difference between total interest income and total interest expense, is the Company’s primary source of earnings. Net interest income was $35.6 million for 2020 and $31.2 million for 2019, which represents an increase of $4.4 million or 14.13%. Net interest income is derived from the volume of earning assets and the rates earned on those assets as compared to the cost of funds. Total interest income was $38.9 million for 2020 and $35.5 million for 2019, which represents an increase of $3.4 million or 9.74% for 2020. Total interest expense was $3.3 million for 2020 and $4.2 million for 2019, which represents a decrease of $958 thousand or 22.60% in 2020. The increase in total interest income and net interest income during 2020 was driven by the growth in interest-earning assets and decreases in rates paid on deposit accounts driven by market rate decreases. Refer to the table titled “Volume and Rate Analysis” for further detail.

The table titled “Average Balances, Income and Expenses, Yields and Rates” displays the composition of interest earnings assets and interest bearing liabilities and their respective yields and rates for the years ended December 31, 2020, 2019, and 2018.

The net interest margin was 3.76% for 2020, 4.02% for 2019, and 4.07% for 2018. The net interest margin is calculated by dividing tax-equivalent net interest income by total average earnings assets. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The tax rate used to calculate the tax benefit was 21%. The table titled “Tax-Equivalent Net Interest Income” reconciles net interest income to tax-equivalent net interest income, which is not a measurement under GAAP, for the years ended December 31, 2020, 2019, and 2018.

Net interest income and net interest margin may experience some decline as interest bearing assets continue to be repriced or replaced more rapidly than interest earning liabilities.

 

 

 

 

30


 

 

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

%

 

(1)

Income and yields are reported on a tax-equivalent basis using a federal tax rate of 21%.

(2)

Non-accrual loans are not included in this total since they are not considered earning assets.

 

 

 

 

31


 

 

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

 

 

(1)

Tax benefit was calculated using the federal statutory tax rate of 21%.

The tax-equivalent yield on earning assets decreased 46 basis points from 2019 to 2020 and increased 14 basis points from 2018 to 2019. The tax-equivalent yield on securities decreased 52 basis points from 2019 to 2020 and decreased eight basis point from 2018 to 2019. The tax-equivalent yield on loans decreased 31 basis points from 2019 to 2020 and increased 20 basis points from 2018 to 2019. The decrease in the yield on earning assets, the loan portfolio and the securities portfolio in 2020 was mainly a result of decreases in interest rates by the Federal Reserve during the first quarter of the year.

The average rate on interest-bearing liabilities decreased 31 basis points from 2019 to 2020 and increased 32 basis points from 2018 to 2019.  The average rate on total interest-bearing deposits decreased 31 basis points from 2019 to 2020 and increased 33 basis points from 2018 to 2019. The average rate on interest bearing deposits decreased due to the decreases in rates paid on deposit accounts driven by market rate decreases. In general, deposit pricing is done in response to monetary policy actions and yield curve changes. Local competition for funds affects the cost of time deposits, which are primarily comprised of certificates of deposit. The Company prefers to rely most heavily on non-maturity deposits, which include NOW accounts, money market accounts, and savings accounts. The average balance of non-maturity interest-bearing deposits increased $70.9 million or 20.54% from $345.0 million during 2019 to $415.9 million in 2020 and $17.0 million or 5.20% from $328.0 million during the year ended December 31, 2018 as compared to the year ending 2019.

The table titled “Volume and Rate Analysis” provides information about the effect of changes in financial assets and liabilities and changes in rates on net interest income. Non-accruing loans are excluded from the average outstanding loans.

Tax-equivalent net interest income increased $4.3 million during 2020. The increase in tax-equivalent net interest income during 2020 is comprised of an increase due to volume of $5.7 million and a decrease due to rate of $1.3 million. The increase in tax-equivalent net interest income during 2020 was affected by the increased volume of taxable loans and taxable securities, offset in part by decreases in the rates earned from interest-earning assets.

Tax-equivalent net interest income increased $1.8 million during 2019. The increase in tax-equivalent net interest income during 2019 is comprised of an increase due to volume of $1.9 million and a decrease due to rate of $149 thousand. The increase in tax-equivalent net interest income during 2019 was affected by the increased volume of taxable loans and taxable securities, offset in part by an increase in the rate paid on interest-bearing liabilities.

32


 

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

 

 

Provision for Loan Losses

The provision for loan losses is based upon management’s estimate of the amount required to maintain an adequate allowance for loan losses as discussed within the Critical Accounting Policies section above. The provision for loan losses was $1.5 million for 2020 and $629 thousand for 2019. Changes in the amount of provision for loan losses during each period reflect the results of the Company’s analysis used to determine the adequacy of the allowance for loan losses. The provision for loan losses in 2020 reflects loan growth in the portfolio during the year as well as decline in the current state of the economy and the related increase in the qualitative factors within our allowance for loan losses, primarily associated with the ongoing COVID-19 pandemic. The provision for loan losses in 2019 reflects loan growth in the portfolio during the year as well as one large charge-off in the amount of $850 thousand. The Company is committed to maintaining an allowance that adequately reflects the risk inherent in the loan portfolio.  This commitment is more fully discussed in the “Asset Quality” section.


33


 

Noninterest Income

Total noninterest income was $8.6 million, $7.8 million, and $6.9 million during 2020 and 2019, respectively. This represents an increase of $820 thousand or 10.57% for 2020. Management reviews the activities which generate noninterest income on an ongoing basis.

The following table provides the components of noninterest income for the twelve months ended December 31, 2020 and 2019, which are included within the respective Consolidated Statements of Income headings.  The following paragraphs provide information about activities which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

 

 

 

December 31,

 

(dollars in thousands)

 

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

%

 

NM - Not Meaningful

Services charges on deposit accounts decreased $267 thousand or 22.49% when comparing the year ended December 31, 2020 to 2019. This decrease is mainly due to decreases in overdraft charges. Reduced overdraft
charges can be attributed mostly to changes in customer activity during the COVID-19 pandemic.

Bank owned life insurance (BOLI) income increased significantly during 2020 when compared to 2019. During 2020 the Company invested $12 million into BOLI.

Other operating income increased during 2020.  The fluctuation from 2019 to 2020 is mostly attributed to cash distributions received from various investments of Company.


34


 

Noninterest Expenses

Total noninterest expenses were $29.4 million and $26.8 million during 2020 and 2019, respectively. This represents an increase of $2.7 million or 9.95% during 2020.

The following table provides the components of noninterest expense for the twelve months ended December 31, 2020 and 2019, which are included within the respective Consolidated Statements of Income headings.  The following paragraphs provide information about activities which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

 

 

 

December 31,

 

(dollars in thousands)

 

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

%

 

NM  - Not Meaningful

The COVID-19 pandemic has had and continues to have an impact on noninterest expenses incurred during 2020. Decreases in expenses compared to the prior year were noted in advertising and marketing expenses as well as ATM network fees. These decreases were due to adjustments in the timing of marketing promotions and change in customer activity during this time. Increases in equipment expenses and computer software expenses in comparison to the prior year were largely due to hardware and software purchases to allow for remote work during the COVID-19 pandemic.

Salaries and employee benefits expense increased during 2020. Annual pay increases, newly hired employees, additional bonus/COVID pay for employees that have been unable to work remotely during the pandemic and additional bonuses for loan employees originating SBA PPP lending have attributed to the increases in 2020.

Advertising and marketing expenses increased during 2019. Digital marketing expenses increased approximately $108 thousand as the Company strategically began placing more resources into that area during 2019.

Other real estate owned expenses and (Gain) loss on other real estate owned decreased significantly during 2020. These amounts can fluctuate based on the number of properties foreclosed on and sold during any time period.  

FDIC assessments decreased during increased back to regular levels during 2020.  The Company received notification of a Small Bank Credit Assessment for approximately $178 thousand during the second quarter of 2019.  This credit was received because the Deposit Insurance Fund reserve ratio exceeded the established level as of June 30, 2019. Credits were applied to the successive invoices in 2019.

Bank franchise tax has increased during 2020.  This expense increases as capital levels increase.

Data processing fees increased during 2020.  Much of this increase is related to the Company moving its in-house core banking software to a service bureau environment. The Company migrated to a service bureau environment in late June 2018. This increase can also be attributed to an increase in both the number of customers and the number of transactions being performed.

35


 

Other operating expenses decreased during 2020. During the third and fourth quarters of 2019, $150 thousand was accrued and subsequently paid in connection with the Separation Agreement and Release with James W. McCarty, Jr.'s resignation as Executive Vice President, Chief Administrative Officer and Secretary of the Company.  

The efficiency ratio of the Company was 67.59% and 67.21% for 2020 and 2019, respectively. The efficiency ratio is calculated by dividing total noninterest expenses by the sum of tax-equivalent net interest income and total noninterest income, excluding gains and losses on the investment portfolio and other gains/losses from OREO, repossessed vehicles, disposals of bank premises and equipment, etc. The tax rate utilized is 21%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency. A reconciliation of tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income is presented within the Net Interest Income section above.

The calculation of the efficiency ratio for the twelve months ended December 31, 2020 and 2019 are as follows:

 

 

 

December 31,

 

 

 

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%.


36


 

Income Taxes

Income tax expense was $2.1 million and $1.8 million for the years ended December 31, 2020 and 2019, respectively. These amounts correspond to an effective tax rate of 16.05% and 15.65% for 2020 and 2019, respectively. The effective tax rate is below the statutory rate of 21%, due primarily to tax credits on qualified affordable housing project investments as discussed in Note 25 to the Consolidated Financial Statements as well as qualified rehabilitation credits. During 2020, one of the Company’s tax credit investments was finalized and the total amount of credits to be received was determined and certified.  The effective tax rate is also impacted by tax-exempt income on investment securities and loans. Note 9 to the Consolidated Financial Statements provides a reconciliation between income tax expense computed using the federal statutory income tax rate and the Company’s actual income tax expense during 2020 and 2019.

FINANCIAL CONDITION

Assets, Liabilities and Shareholders’ Equity

The Company’s total assets were $1.13 billion at  December 31, 2020, an increase of $252.8 million or 28.82% from $877.3 million at December 31, 2019. Securities remained relatively stable between 2019 and 2020. Loans, net of allowance for loan losses, increased by $189.5 million or 29.61% from 2019 to 2020. Total liabilities were $1.03 billion at December 31, 2020, compared to $781.0 million at December 31, 2019. Total shareholders’ equity at year end 2020 and 2019 was $105.1 million and $96.3 million, respectively.

Securities

Total securities, excluding restricted stock, were $165.0 million as of December 31, 2019 and 2020. The table titled “Securities Portfolio” shows the carrying value of securities at December 31, 2020, 2019, and 2018. The Company purchased $78.4 million in securities during 2020. This amount includes $77.2 million or 98.41% in mortgage-backed securities and $1.2 million or 1.59% in subordinated debt.  The Company had $52.4 million in maturities, calls, and principal repayments on securities during 2020. This amount includes $5.3 million or 10.17% in obligations of U.S. government corporations and agencies, $39.1 million or 74.58% in mortgage-backed securities and $8.0 million or 15.25% in obligations of states and political subdivisions. The Company did not have any securities from a single issuer, other than U.S. government agencies, whose amount exceeded 10% of shareholders’ equity as of December 31, 2020. Note 2 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio as of December 31, 2020 and 2019.

Securities Portfolio

(dollars in thousands)

 

 

 

December 31,

 

 

 

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

 

 

The ability to dispose of available for sale securities prior to maturity provides management more options to react to future rate changes and provides more liquidity, when needed, to meet short-term obligations. The Company had a net unrealized gain on available for sale securities of $4.1 million and $1.8 million at December 31, 2020 and 2019, respectively. Unrealized gains or losses on available for sale securities are reported within shareholders’ equity, net of the related deferred tax effect, as accumulated other comprehensive income (loss).


37


 

The table titled “Maturity Distribution and Yields of Securities” shows the maturity period and average yield for the different types of securities in the portfolio at December 31, 2020. Although mortgage-backed securities have definitive maturities, they provide monthly principal curtailments which can be reinvested at a prevailing rate and for a different term.

Maturity Distribution and Yields of Securities

(dollars in thousands)

 

 

 

December 31, 2020

 

 

 

Due in one year

or less

 

 

Due after 1

through 5 years

 

 

Due after 5

through 10 years

 

 

Due after 10 years

and Equity Securities

 

 

Total

 

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and agencies

 

$

 

 

 

%

 

$

1,057

 

 

 

3.29

%

 

$

15,240

 

 

 

2.74

%

 

$

1,186

 

 

 

2.46

%

 

$

17,483

 

 

 

2.75

%

Mortgage-backed securities

 

 

 

 

 

%

 

 

 

 

 

%

 

 

 

 

 

%

 

 

119,009

 

 

 

1.59

%

 

 

119,009

 

 

 

1.59

%

Subordinated debt

 

 

 

 

 

%

 

 

 

 

 

%

 

 

1,250

 

 

 

5.00

%

 

 

 

 

 

%

 

 

1,250

 

 

 

5.00

%

Obligations of states and political subdivisions, taxable

 

 

 

 

 

%

 

 

3,662

 

 

 

2.79

%

 

 

4,105

 

 

 

3.10

%

 

 

1,065

 

 

 

2.73

%

 

 

8,832

 

 

 

2.93

%

Total taxable

 

$

 

 

 

%

 

$

4,719

 

 

 

2.90

%

 

$

20,595

 

 

 

2.95

%

 

$

121,260

 

 

 

1.61

%

 

$

146,574

 

 

 

1.83

%

Obligations of states and political subdivisions, tax-exempt (1)

 

 

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

%

 

(1)

Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 21%.

Loan Portfolio

The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Gross loans net of deferred costs and fees were $836.3 million and $644.8 million at December 31, 2020 and 2019, respectively. This represents an increase of $191.5 million or 29.71% for 2020. The ratio of net loans to deposits decreased during the year from 82.92% to 81.85% at December 31, 2019 and December 31, 2020, respectively. This decrease was due to strong deposit growth during the year. The table titled “Loan Portfolio” shows the composition of the loan portfolio over the last five years. Loan balances in the table are shown before net deferred costs and fees.

Loan Portfolio

(dollars in thousands)

 

 

 

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

 

 


38


 

Loans secured by real estate were $662.8 million or 79.25% and $577.1 million or 89.50% of total loans at December 31, 2020 and 2019, respectively. This represents an increase of $85.7 million or 14.85% for 2020. Consumer installment loans were $21.3 million or 2.55% and $9.5 million or 1.48% of total loans at December 31, 2020 and 2019, respectively. This represents an increase of $11.8 million or 123.47% for 2020. Commercial and industrial loans were $140.8 million or 16.83% and $46.5 million or 7.22% of total loans at December 31, 2020 and 2019. This represents an increase of $94.2 million or 202.43% for 2020. All other loans were $10.8 million and $12.1 million at December 31, 2020 and 2019. This represents a decrease of $1.3 million or 10.60%. During the year ended December 31, 2020, loan growth was mainly concentrated in commercial and industrial loans, resulting from SBA PPP loan originations. SBA PPP loans outstanding as of December 31, 2020 were $81.3 million. There was also strong growth in residential and commercial real estate loans during this period.

The table titled “Maturity Schedule of Selected Loans” shows the different loan categories and the period during which they mature. For loans maturing in more than one year, the table also shows a breakdown between fixed rate loans and floating rate loans. The table indicates that $368.1 million or 44.05% of the loan portfolio matures within five years. The floating rate loans maturing after five years are primarily comprised of loan secured by 1-4 family residential properties.

Maturity Schedule of Selected Loans

(dollars in thousands)

 

 

 

December 31, 2020

 

 

 

Within

1 Year

 

 

After

1 Year

Within

5 Years

 

 

After

5 Years

 

 

Total

 

Loans secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

17,616

 

 

$

15,600

 

 

$

9,328

 

 

$

42,544

 

Secured by farmland

 

 

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

 

 

Asset Quality

The Company has policies and procedures designed to control credit risk and to maintain the quality of its loan portfolio. These include underwriting standards for new originations and ongoing monitoring and reporting of asset quality and adequacy of the allowance for loan losses. There were $5.4 million in total non-performing assets, which consist of nonaccrual loans, loans 90 days or more past due and still accruing, other real estate owned, and repossessed assets at December 31, 2020. This is an increase of $3.0 thousand when compared to the December 31, 2019 balance of $2.4 million. This increase resulted mostly from the increase in nonaccrual loans.


39


 

Nonaccrual loans were $4.8 million at December 31, 2020 and $2.2 million at 2019. The gross amount of interest income that would have been recognized on nonaccrual loans was $158 thousand for 2020 and $52 thousand for 2019. None of this interest income was included in net income for 2020 or 2019.  A total of 13 loans totaling $3.8 million were placed in nonaccrual during 2020. The balance of these loans added to nonaccrual status during 2020 ranged from $12 thousand to $1.5 million with the average outstanding balance being $293 thousand.  In addition, five loans totaling $618 thousand were removed from nonaccrual status during 2020.  Of the $618 thousand in loans removed from nonaccrual status between December 31, 2019 and December 31, 2020, one loan was paid off, three loans were foreclosed on and one loan was charged-off. Management evaluates the financial condition of these borrowers and the value of any collateral on these loans. The results of these evaluations are used to estimate the amount of losses which may be realized on the disposition of these nonaccrual loans. Nonaccrual loans that were evaluated for impairment at December 31, 2020 totaled $4.8 million and had no specific allocations assigned.

Other real estate owned increased from $183 thousand at December 31, 2019 to $607 thousand at December 31, 2020.  Three properties were foreclosed on during 2020. The property held at December 31, 2019 sold during the year. When the property is sold, the difference between the amount of other real estate owned and the settlement proceeds is recognized as a gain or loss on the sale of other real estate owned. A net gain of $143 thousand was recognized on other real estate owned during 2020. Net losses of $443 thousand were recognized on other real estate owned during 2019.

Nonperforming and Other Assets

Nonperforming assets consist of nonaccrual loans, loans past due 90 days and accruing interest, other real estate owned (foreclosed properties), and repossessed assets. The table titled “Nonperforming Assets” shows the amount of nonperforming assets and loans past due 90 days and accruing interest outstanding during the last five years. The table also shows the ratios for the allowance for loan losses as a percentage of nonperforming assets and nonperforming assets as a percentage of loans outstanding and other real estate owned.

Loans are placed on non-accrual status when collection of principal and interest is doubtful, generally when a loan becomes 90 days past due. There are three negative implications for earnings when a loan is placed on non-accrual status. First, all interest accrued but unpaid at the date that the loan is placed on non-accrual status is either deducted from interest income or written off as a loss. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses that require additional provisions for loan losses to be charged against earnings.

For real estate loans, upon foreclosure, the properties are recorded at the fair value of the property based on current appraisals and other current market trends, less selling costs. If a write down of the OREO property is necessary at the time of foreclosure, the amount is charged-off against the allowance for loan losses. A review of the recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair value, additional write downs of the property value are charged directly to operations. Gains on properties acquired through foreclosure where the fair value less costs to sell exceeds the related loan balance and there have been no prior charge-offs are recorded to current earnings.

In addition, the Company may, under certain circumstances, restructure loans in troubled debt restructurings as a concession to a borrower when the borrower is experiencing financial distress. Each loan considered for restructuring is evaluated based on customer circumstances and may include modifications to one or more loan provisions. Such restructured loans are included in impaired loans. At December 31, 2020, 2019, 2018, 2017, and 2016, the Company had $3.3 million, $3.0 million, $3.8 million, $4.4 million and $7.3 million in restructured loans, respectively.

40


 

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

%

 

Other potential problem loans are defined as performing loans that possess certain risks that management has identified that could result in the loans not being repaid in accordance with their terms. Accordingly, these loans are risk rated at a level of substandard or lower. At December 31, 2020, other potential problem loans totaled $2.7 million. Of the total other potential problem loans, $2.7 million or 100.00% are currently considered impaired and are disclosed in Note 4 to the Consolidated Financial Statements.

Allowance for Loan Losses

The purpose and the methods for measuring the allowance for loans are discussed in the Critical Accounting Policies section above. The table titled “Analysis of Allowance for Loan Losses” shows the activity within the allowance during the last five years, including a breakdown of the loan types which were charged-off and recovered.

Charged-off loans were $465 thousand and $1.3 million for 2020 and 2019, respectively. Recoveries were $1.1 million and $201 thousand for 2020 and 2019, respectively. Net recoveries were $666 thousand for 2020. Net charge-offs were $1.1 million for 2019. This represents a decrease in net charge-offs of $1.8 million or 159.89% for 2020. The allowance for loan losses as a percentage of loans was 0.85% and 0.77% at the end of 2020 and 2019, respectively. Excluding outstanding PPP loans of $81.3 million as of December 31, 2020, the allowance for loan losses as a percentage of total loans was 0.94%. The increase in allowance for loan losses as a percentage of total loans from December 31, 2019 to December 31, 2020 is primarily due to the decline in the current state of the economy and the related increase in the qualitative factors within our allowance for loan losses, primarily associated with the current COVID-19 pandemic. The allowance for loan losses at year-end covered net charge-offs during the year by 4.47 times for 2019.  This ratio for 2020 is not considered meaningful due to net recoveries being recognized. The ratio of net charge-offs (recoveries) to average loans was (0.09)% for 2020 and 0.18% for 2019.

The provision for loan losses for the year ended December 31, 2020 was $1.5 million, compared to $629 thousand for the year ended December 31, 2019. The provision for loan losses in 2020 reflected loan growth in the portfolio during the year as well as decline in the current state of the economy and the related increase in the qualitative factors within our allowance for loan losses, primarily associated with the current COVID-19 pandemic.  The provision for loan losses in 2019 resulted from the growth of the loan portfolio as well as one large charge-off in the amount of $850 thousand.

The table titled “Allocation of Allowance for Loan Losses” shows the amount of the allowance for loan losses which is allocated to the indicated loan categories, along with that category’s percentage of total loans, at December 31, 2020, 2019, 2018, 2017, and 2016. The amount of allowance for loan losses allocated to each loan category is based on the amount of delinquent loans in that loan category, the status of nonperforming assets in that loan category, the historical losses for that loan category, the evaluation of qualitative factors impacting the portfolio and the financial condition of certain borrowers whose financial conditional is monitored on a periodic basis. Management believes that the allowance for loan losses is adequate based on the loan portfolio’s current risk characteristics.

41


 

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

%

 

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

%

 


42


 

Deposits

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

Average Deposits and Rates Paid

(dollars in thousands)

 

 

 

December 31,

 

 

 

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

 

 

 

 

 

 

Noninterest-bearing demand deposits, which are comprised of checking accounts, increased $138.4 million or 51.42% from $269.2 million at December 31, 2019 to $407.6 million at December 31, 2020. Interest-bearing deposits, which include NOW accounts, money market accounts, regular savings accounts and time deposits, increased $103.1 million or 20.53% from $502.4 million at December 31, 2019 to $605.5 million at December 31, 2020. Total money market account balances increased $53.7 million or 34.84% from $154.1 million at December 31, 2019 to $207.8 million at December 31, 2020. Reciprocal money market accounts balances (included in total money market account balances) increased from $27.0 million to $34.6 million at December 31, 2019 and December 31, 2020, respectively. The reciprocal money market balance at December 31, 2020 and December 31, 2019 consists of money market accounts obtained through the ICS network. Total regular savings account balances increased $29.1 million or 26.99% from $107.7 million at December 31, 2019 to $136.8 million at December 31, 2020. The growth in deposits mainly reflected higher levels of customer balances due to government stimulus and customer spending habits in light of the ongoing pandemic. Time deposits decreased $9.5 million or 6.90% from $138.2 million at December 31, 2019 to $128.7 million at December 31, 2020.

The Company attempts to fund asset growth with deposit accounts and focus upon core deposit growth as its primary source of funding. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, and time deposits of less than $250,000. Core deposits totaled $944.3 million or 93.21% and $692.4 million or 89.75% of total deposits at December 31, 2020 and 2019, respectively.

The table titled “Maturities of Certificates of Deposit and Other Time Deposits of $100,000 and Greater” shows the amount of certificates of deposit of $100,000 and more maturing within the time period indicated at December 31, 2020. The total amount maturing within one year is $89.9 million or 95.32% of the total amount outstanding.

Maturities of Certificates of Deposit and Other Time Deposits of $100,000 and Greater

(dollars in thousands)

 

 

 

Within

Three

Months

 

 

Three

to Six

Months

 

 

Six to

Twelve

Months

 

 

Over

One

Year

 

 

Total

 

 

Percent

of Total

Deposits

 

December 31, 2020

 

$

28,967

 

 

$

24,710

 

 

$

36,243

 

 

$

4,415

 

 

$

94,335

 

 

 

9.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43


 

CAPITAL RESOURCES

Total shareholders’ equity on December 31, 2020 was $105.1 million, reflecting a percentage of total assets of 9.08% as compared to $96.3 million and 10.98% at December 31, 2019. The common stock’s book value per share increased $2.97 or 10.58% to $31.05 per share at December 31, 2020 from $28.08 per share at December 31, 2019. During 2020, the Company paid $1.04 per share in dividends as compared to $1.00 per share for 2019. The Company has a Dividend Investment Plan that allows participating shareholders to reinvest the dividends in Company stock. During 2020, the Company purchased 67,189 shares of its Common Stock under its stock repurchase program at an average price of $27.60.  During 2019, the Company purchased 53,988 shares of its Common Stock under its stock repurchase program at an average price of $32.79.  As evidenced below, the Bank continues to be a well capitalized financial institution.

Analysis of Bank Capital

(dollars in thousands)

 

 

 

December 31, 2020

 

 

December 31, 2019

 

Tier 1 Capital:

 

 

 

 

 

 

 

 

Common stock

 

$

1,682

 

 

$

1,682

 

Capital surplus

 

 

9,773

 

 

 

9,773

 

Retained earnings

 

 

86,370

 

 

 

79,320

 

Total Tier 1 capital

 

$

97,825

 

 

$

90,775

 

Common equity tier 1 capital

 

$

97,825

 

 

$

90,775

 

Tier 2 Capital:

 

 

 

 

 

 

 

 

Allowance for loan losses and reserves for off-balance sheet commitments

 

$

7,132

 

 

$

4,997

 

Total Tier 2 capital

 

$

7,132

 

 

$

4,997

 

Total risk-based capital

 

$

104,957

 

 

$

95,772

 

 

 

 

 

 

 

 

 

 

Risk weighted assets

 

$

789,773

 

 

$

665,141

 

 

 

 

 

 

 

 

 

 

Risk Based Capital Ratios:

 

 

 

 

 

 

 

 

Common equity Tier 1 capital ratio

 

 

12.39

%

 

 

13.65

%

Tier 1 risk-based capital ratio

 

 

12.39

%

 

 

13.65

%

Total risk-based capital ratio

 

 

13.29

%

 

 

14.40

%

Tier 1 leverage ratio

 

 

9.06

%

 

 

10.61

%

 

Federal regulatory risk-based capital guidelines require percentages to be applied to various assets, including off-balance sheet assets, based on their perceived risk in order to calculate risk-weighted assets. Tier 1 capital consists of total shareholders’ equity plus qualifying trust preferred securities outstanding less net unrealized gains and losses on available for sale securities, goodwill and other intangible assets. Total capital is comprised of Tier 1 capital plus the allowable portion of the allowance for loan losses and any excess trust preferred securities that do not qualify as Tier 1 capital.


44


 

Effective January 1, 2015, the Federal Reserve issued final risk-based capital rules to align with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. In addition, a capital conservation buffer requirement was phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increased by the same amount each year until it was fully implemented at 2.5% effective January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with any ratio (excluding the leverage ratio) above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As fully phased in effective January 1, 2019, the rules require the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

Pursuant to the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the Company, is not subject to consolidated regulatory capital requirements.

The table titled “Analysis of Bank Capital” shows the components of Tier 1 capital, Tier 2 capital, the amount of total risk-based capital and risk-weighted assets, and the risk based capital ratios for the Bank at December 31, 2020 and 2019.

On September 17, 2019, the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio “CBLR” framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. On April 6, 2020, in a joint statement, the FDIC, Federal Reserve and the Office of Comptroller of the Currency (“OCC”), issued two interim final rules regarding temporary changes to the CBLR framework to implement provisions of the CARES Act. Under the interim final rules, the community bank leverage ratio will be reduced to 8 percent beginning in the second quarter and for the remainder of calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent thereafter. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk based capital. The CBLR framework was first available for banks to use beginning in their March 31, 2020, Call Report. The Bank did not opt into the CBLR framework as of December 31, 2020.

Note 15 to the Consolidated Financial Statements provides additional discussion and analysis of regulatory capital requirements.

LIQUIDITY

Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, securities classified as available for sale and loans maturing within one year. At December 31, 2020 liquid assets totaled $320.4 million as compared to $290.3 million at December 31, 2019. These amounts represent 31.26% and 37.17% of total liabilities at December 31, 2020 and 2019, respectively. Securities provide a constant source of liquidity through paydowns and maturities. Also, the Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity. The Bank’s membership with the Federal Home Loan Bank of Atlanta also provides a source of borrowings with numerous rate and term structures. The Company’s senior management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.


45


 

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Note 18 to the Consolidated Financial Statements provides information about the off-balance sheet arrangements which arise through the lending activities of the Company. These arrangements increase the degree of both credit and interest rate risk beyond that which is recognized through the financial assets and liabilities on the consolidated balance sheets.

The table titled “Contractual Obligations and Scheduled Payments” presents the Company’s contractual obligations and scheduled payment amounts due within the period indicated at December 31, 2020.

Contractual Obligations and Scheduled Payments

(dollars in thousands)

 

 

 

December 31, 2020

 

 

 

Less

than

One

Year

 

 

One Year

through

Three

Years

 

 

Three

Years

through

Five

Years

 

 

More

than

Five

Years

 

 

Total

 

Operating leases

 

$

319

 

 

$

645

 

 

$

673

 

 

$

4,039

 

 

$

5,676

 

 

 

$

319

 

 

$

645

 

 

$

673

 

 

$

4,039

 

 

$

5,676

 

 

The payments due on operating leases are discussed in Note 13 to the Consolidated Financial Statements.


46


 

 

Item 7A.     Quantitative and Qualitative Disclosures about Market Risk

As the holding company of the Bank, the Company’s primary component of market risk is interest rate volatility. Interest rate fluctuations will impact the amount of interest income and expense the Bank receives or pays on almost all of its assets and liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those which have a very short term until maturity. Interest rate risk exposure of the Company is, therefore, experienced at the Bank level. Asset / liability management attempts to maximize the net interest income of the Company by adjusting the volume and price of rate sensitive assets and liabilities. The Company does not subject itself to foreign currency exchange or commodity price risk due to prohibition through policy and the current nature of operations. Derivative instruments and hedging activities of the Company have historically been minimal and there have been no derivative instruments since a single interest rate swap agreement expired on December 1, 2016.

The Bank’s interest rate management strategy is designed to maximize net interest income and preserve the capital of the Company. The Bank’s financial instruments are periodically subjected to various simulations whose results are discussed in the following paragraphs. These models are based on actual data from the Bank’s financial statements and assumptions about the performance of certain financial instruments. Prepayment assumptions are applied to all mortgage related assets, which includes real estate loans and mortgage-backed securities. Prepayment assumptions are based on a median rate at which principal payments are received on these assets over their contractual term. The rate of principal payback is assumed to increase when rates fall and decrease when rates rise. Term assumptions are applied to non-maturity deposits, which includes demand deposits, NOW accounts, savings accounts, and money market accounts. Demand deposits and NOW accounts are generally assumed to have a term greater than one year since the total amount outstanding does not fluctuate with changes in interest rates. Savings accounts and money market accounts are assumed to be more interest rate sensitive, therefore, a majority of the amount outstanding is assumed to have a term of less than one year.

The simulation analysis evaluates the potential effect of upward and downward changes in market interest rates on future net interest income. The Bank views the immediate shock of rates as a more effective measure of interest rate risk exposure. The analysis assesses the impact on net interest income over a 12 month period after an immediate increase or “shock” in rates, of 100 basis points up to 400 basis points. The shock down 200 to 400 basis points analysis is not meaningful as interest rates are at historic lows and cannot decrease another 200 to 400 basis points and therefore only an immediate decrease or “shock” of 100 basis points is disclosed. The simulation analysis results are presented in the table below:

Year 1 Net Interest Income Simulation

(dollars in thousands)

 

 

 

Change in

Net Interest Income

 

Assumed Market Interest Rate Shock

 

Dollars

 

 

Percent Change

 

-100 BP

 

 

(427

)

 

 

(1.27

)%

+100 BP

 

 

1,149

 

 

 

3.42

%

+200 BP

 

 

1,555

 

 

 

4.63

%

+300 BP

 

 

1,957

 

 

 

5.83

%

+400 BP

 

 

2,302

 

 

 

6.85

%

 

The Bank uses simulation analysis to assess earnings at risk and economic value of equity (EVE) analysis to assess economic value at risk. This analysis method allows management to regularly monitor the direction and magnitude of the Bank’s interest rate risk exposure. The modeling techniques cannot be measured with complete precision. Maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturity deposit sensitivity and loan and deposit pricing are key assumptions used in acquiring this analysis. There is a realm of uncertainty in using these assumptions but the analysis does provide the Bank with the ability to estimate interest rate risk position over time.

The table below examines the Economic Value of Equity (EVE). The EVE of the balance sheet is defined as the discounted present value of expected asset cash flows minus the discounted present value of the expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The model indicates an exposure to falling interest rates.  These results are driven primarily by the relative change in value of the Bank’s core deposit base as rates rise.

47


 

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

%

 

48


 

 

Item 8.     Financial Statements and Supplementary Data

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and Shareholders

Eagle Financial Services, Inc.

Berryville, Virginia

 

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Eagle Financial Services, Inc. and its subsidiary (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

49


 

 

 

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Allowance for Loan Losses – General Allowance – Qualitative Factors

As described in Note 1 (Nature of Banking Activities and Significant Accounting Policies) and Note 4 (Allowance for Loan Losses) to the consolidated financial statements, the Company has established an allowance for loan losses to provide for loan losses which are estimated to have occurred as of the balance sheet date, which totaled $7.10 million at December 31, 2020.  The Company’s allowance for loan losses consists of three components: the specific allowance; the general allowance; and the unallocated allowance. The general component relates to loans that are not considered impaired and is based on historical loss experience adjusted for qualitative factors and totaled $7.02 million at December 31, 2020. The qualitative portion of the general allowance is based on management’s evaluation of specific factors which are used to develop loss percentages applied to the loan portfolio, by loan pool, based on management’s assessment of shared risk characteristics within groups of similar loans. The qualitative factors assessed include: national and local economic trends and conditions; the quality of the Company’s loan review system; changes in lending policies; the experience, ability, and depth of management; concentrations of credit; trends in volume and terms of loans; levels and trends in delinquencies and nonperforming loans; changes in collateral values; and competition and regulatory requirements.

 

Management exercised significant judgment when assessing the considerations which serve as the basis for the qualitative factors used to adjust the Company’s historical loss experience in the general component of the allowance for loan losses estimate. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.  

 

How We Addressed the Matter in Our Audit

The primary audit procedures we performed to address this critical audit matter included:

Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included:

 

Evaluating the completeness and accuracy of data inputs used as the basis for the qualitative factors.

 

Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors.

 

Evaluating the qualitative factors for directional consistency and for reasonableness.

 

Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.

 

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

 

We have served as the Company's auditor since 2015.

 

Winchester, Virginia

March 30, 2021

 

 

50


 

 

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2020 and 2019

(dollars in thousands, except per share amounts)

 

 

 

December 31, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

12,644

 

 

$

10,920

 

Interest-bearing deposits with other institutions

 

 

67,054

 

 

 

22,487

 

Federal funds sold

 

 

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

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

51


 

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Income

Years Ended December 31, 2020 and 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

 

 

See Notes to Consolidated Financial Statements

52


 

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2020 and 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

 

 

See Notes to Consolidated Financial Statements

53


 

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Years Ended December 31, 2020 and 2019

(dollars in thousands, except per share amounts)

 

 

 

Common

Stock

 

 

Surplus

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

December 31, 2018

 

$

8,573

 

 

$

11,992

 

 

$

68,587

 

 

$

(1,553

)

 

$

87,599

 

Net income

 

 

 

 

 

 

 

 

 

 

9,759

 

 

 

 

 

 

 

9,759

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,035

 

 

 

3,035

 

Restricted stock awards, stock incentive plan (18,150 shares)

 

 

46

 

 

 

(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

 

 

See Notes to Consolidated Financial Statements

 

54


 

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years Ended December 31, 2020 and 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

 

 

See Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

55


 

 

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.


56


 

 

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.

57


 

Commercial and Industrial Lending

Commercial business loans generally have more risk than residential mortgage loans, but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of the borrower. Commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.

Consumer Lending

Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral on a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.

 

Paycheck Protection Program Loans

In 2020, the Company participated in the Paycheck Protection Program (PPP).  The PPP commenced subsequent to the passage of the Coronavirus Aid, Relief and Economic Security("CARES") Act in March 2020 and was later expanded by the Paycheck Protection Program and Health Care Enhancement Act of April 2020. The PPP was designed to provide U.S. small businesses with cash-flow assistance during the COVID-19 pandemic through loans that are fully guaranteed by the Small Business Administration (SBA) which may be forgiven upon satisfaction of certain criteria. As of December 31, 2020, the Company had 911 PPP loans with outstanding balances totaling $81.3 million. As compensation for originating the loans, the Company received lender processing fees from the SBA, which were deferred, along with the related loan origination costs. These net fees are being accreted to interest income over the remaining contractual lives of the loans. Upon forgiveness of a PPP loan and repayment by the SBA, which may be prior to the loan's maturity, the remainder of any unrecognized net fees are recognized in interest income.  The Company has continued to participate in the newest round of the PPP during the first quarter of 2021.  Our outstanding PPP loans were included in the commercial and industrial segment at December 31, 2020, and their underlying guarantees were considered in the determination of the allowance for loan losses as discussed below.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for (recovery of) loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are impaired. An allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors considered in the general component include the levels and trends in delinquencies and nonperforming loans, trends in volume and terms of loans, the effects of any changes in lending policies, the experience, ability, and depth of management, national and local economic trends and conditions, changes in collateral values, concentrations of credit, the quality of the Company’s loan review system, competition and regulatory requirements. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.


58


 

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair market value less estimated liquidation costs of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement or are in a nonaccrual status.

Bank Premises and Equipment

Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range from 10 to 39 years for buildings and 3 to 10 years for furniture and equipment.

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs at the date of foreclosure. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less estimated cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in the (gain) loss on other real estate owned line item in the consolidated statements of income.

Retirement Plans

The Company sponsors a 401(k) savings plan under which eligible employees may defer a portion of their compensation on a pretax basis. The Company also provides a match to participants in this plan, as described more fully in Note 11.

Stock-Based Compensation Plan

During 2014, the Company’s shareholders approved a stock incentive plan which allows key employees and directors to increase their personal financial interest in the Company. This plan permits the issuance of incentive stock options and non-qualified stock options and the award of stock appreciation rights, common stock, restricted stock, and phantom stock. The plan, as adopted, authorized the issuance of up to 500,000 shares of common stock. This plan is discussed more fully in Note 10.

 

Income Taxes

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws.


59


 

 

 

When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the applicable taxing authority, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, the Company believes it is “more likely than not” that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the “more likely than not” recognition threshold are measured as the largest amount of tax benefit that is more than fifty percent (50%) likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheet along with any associated interest and penalties that would be payable to the applicable taxing authority upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income. The Company has no uncertain tax positions.

Advertising

The Company follows the policy of charging the costs of advertising to expense as incurred.

Reclassifications

Certain reclassifications have been made to the 2019 financial statements to conform to reporting for 2020.  The results of the reclassifications are not considered material and had no effect on prior years' net income or shareholders' equity.

Earnings Per Common Share

Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period.  Nonvested restricted shares are included in the weighted average number of common shares used to compute basic earnings per share because of dividend participation and voting rights. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The number of potential common shares is determined using the treasury method.

The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock.

 

 

 

Twelve Months Ended

 

 

 

December 31,

 

 

 

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

 

 

There were 0 potentially dilutive securities outstanding in 2020 or 2019.

Comprehensive Income

Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, net of income taxes, are reported within the balance sheet as a separate component of shareholders’ equity. These changes, along with net income, are components of comprehensive income and are reported in the statement of comprehensive income. In addition to net income, the Company’s comprehensive income includes changes in the benefit obligations and plan assets for postretirement benefit plans and unrealized gains or losses on available for sale securities.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.

60


 

Stock Repurchase Program

On June 17, 2020, the Corporation renewed the stock repurchase program to repurchase up to 150,000 shares of its common stock prior to June 30, 2021. During 2020, the Company purchased 67,189 shares of its Common Stock under its stock repurchase program at an average price of $27.60.  During 2019, the Company purchased 53,988 shares of its Common Stock under its stock repurchase program at an average price of $32.79.  The maximum number of shares that may yet be purchased under the plan as of December 31, 2020 are 121,425.

 

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03.  These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters.  Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.  The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company formed a CECL committee during 2016 which continues to meet weekly to address the compliance requirements. Historic loan data has been gathered and reviewed for completeness and accuracy. In addition, the committee has selected a third-party that is assisting in calculating the financial impact of ASU 2016-13 and anticipates running parallel allowance models under the current and new standard in advance of the required implementation date.

 

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119.  SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.”  It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.”  The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects.  For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

 

In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”  The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions.  ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.  Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting.  For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.

 


61


 

 

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is working to identify loans that are directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loans.

 

On March 12, 2020, the SEC finalized amendments to its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and were effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date. Prior to these changes, the Company was required to comply with section 404(b) of the Sarbanes Oxley Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter.  The rule change revises the definition of “accelerated filers” to exclude entities with public float of less than $700 million and less than $100 million in annual revenues.  The Company expects to meet this expanded category of small reporting company and will no longer be considered an accelerated filer.  If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”.  The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (ICFR) and include the opinion on ICFR in its annual report on Form 10-K.  Non-accelerated filers also have additional time to file quarterly and annual financial statements.  All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers.  As the Bank has total assets exceeding $1.0 billion, it remains subject to FDICIA, which requires an auditor attestation concerning internal controls over financial reporting.  As such, other than the additional time provided to file quarterly and annual financial statements, this change does not significantly change the Company’s annual reporting and audit requirements.

 

In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.  For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

 


62


 

 

In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

 

Recently Adopted Accounting Developments

 

In March 2020 (Revised in April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.   In August 2020, a joint statement on additional loan modifications was issued.  Among other things, the Interagency Statement addresses accounting and regulatory reporting considerations for loan modifications, including those accounted for under Section 4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  The CARES Act  was signed into law on March 27, 2020 to help support individuals and businesses through loans, grants, tax changes and other types of relief.  The most significant impacts of the Act related to accounting for loan modifications and establishment of the Paycheck Protection Program (“PPP”).  On December 21, 2020, the Consolidated Appropriates Act of 2021 (“CAA”) was passed.  The CAA extends or modifies many of the relief programs first created by the CARES Act, including the PPP and treatment of certain loan modifications related to the COVID-19 pandemic. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.  

NOTE 2. Securities

Amortized costs and fair values of securities available for sale at December 31, 2020 and 2019 were as follows:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

(Losses)

 

 

Fair

Value

 

 

 

December 31, 2020

 

 

 

(in thousands)

 

Obligations of U.S. government corporations and agencies

 

$

16,576

 

 

$

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

 

 

 


63


 

 

Carrying amounts of restricted securities at December 31, 2020 and 2019 were as follows:

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

(in thousands)

 

Federal Reserve Bank Stock

 

$

344

 

 

$

344

 

Federal Home Loan Bank Stock

 

 

783

 

 

 

713

 

Community Bankers’ Bank Stock

 

 

140

 

 

 

140

 

 

 

$

1,267

 

 

$

1,197

 

 

The amortized cost and fair value of securities available for sale at December 31, 2020, by contractual maturity, are shown below. Maturities may differ from contractual maturities primarily (others could be called) in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.

 

 

 

Amortized Cost

 

 

Fair Value

 

 

 

(in thousands)

 

Due in one year or less

 

$

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

 

 

During the twelve months ended December 31, 2020, the Company sold $28.3 million in available for sale securities with gross gains of $687 thousand and 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.

The fair value and gross unrealized losses for securities available for sale, totaled by the length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2020 and 2019 were as follows:

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

 

December 31, 2020

 

 

 

(in thousands)

 

Mortgage-backed securities

 

$

12,014

 

 

$

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

 

 


64


 

 

Gross unrealized losses on available for sale securities included 3 (3) and NaN (28) debt securities at December 31, 2020 and December 31, 2019, respectively. The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company’s mortgage-backed securities are issued by U.S. government agencies, which guarantee payments to investors regardless of the status of the underlying mortgages. Consideration is given to the length of time and the amount of an unrealized loss, the financial condition of the issuer, and the intent and ability of the Company to retain its investment in the issuer long enough to allow for an anticipated recovery in fair value. The fair value of a security reflects its liquidity as compared to similar instruments, current market rates on similar instruments, and the creditworthiness of the issuer. Absent any change in the liquidity of a security or the creditworthiness of the issuer, prices will decline as market rates rise and vice-versa. The primary cause of the unrealized losses at December 31, 2020 and December 31, 2019 was changes in market interest rates. Since the losses can be primarily attributed to changes in market interest rates and not expected cash flows or an issuer’s financial condition, the unrealized losses are deemed to be temporary and management does not intend to sell and it is unlikely that management will be required to sell the securities prior to their anticipated recovery. The Company monitors the financial condition of these issuers continuously and will record other-than-temporary impairment if the recovery of value is unlikely.

Securities having a carrying value of $3.1 million at December 31, 2020 were pledged as security for trust accounts.

NOTE 3. Loans

The composition of loans at December 31, 2020 and 2019 was as follows:

 

 

 

December 31,

 

 

 

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

 

 

NOTE 4. Allowance for Loan Losses

Changes in the allowance for loan losses for the years December 31, 2020 and 2019 were as follows:

 

 

 

December 31,

 

 

 

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

 

 

65


 

 

Nonaccrual and past due loans by class at December 31, 2020 and December 31, 2019 were as follows:

 

 

 

December 31, 2020

 

 

 

(in thousands)

 

 

 

30 - 59

Days

Past Due

 

 

60 - 89

Days

Past Due

 

 

90 or More

Days Past

Due

 

 

Total Past

Due

 

 

Current

 

 

Total Loans

 

 

90 or More

Days Past Due

Still Accruing

 

 

Nonaccrual

Loans

 

Commercial - Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

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

 

 

66


 

 

Allowance for loan losses by segment at December 31, 2020 and December 31, 2019 were as follows:

 

 

 

Twelve Months Ended

 

 

 

December 31, 2020

 

 

 

(in thousands)

 

 

 

Construction

and Farmland

 

 

Residential

Real Estate

 

 

Commercial

Real Estate

 

 

Commercial

 

 

Consumer

 

 

All Other

Loans

 

 

Unallocated

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

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

 

 

 


67


 

 

Beginning with the three months ended September 30, 2020, the Company changed its allowance methodology for the risk scale used in calculating the environmental factors portion of the general reserves assigned to unimpaired credits. During that quarter, management determined it necessary to adjust each of the risk scores assigned to all nine current qualitative factors due to changes that had occurred both internally and outside of the Company that have an impact on payment defaults, collateral values, risk ratings, etc. Management also determined it necessary to adjust the loss history period from 28 quarters to 12 quarters. The Company believes that the revised risk scale and loss history period is more indicative of the losses and risks inherent in the portfolio.

The following table represents the effect on the loan loss provision for year ended December 31, 2020 as a result of the change in allowance methodology from that used in prior periods.

 

 

(in thousands)

 

Calculated Provision (Recovery) Based on Current Methodology

 

 

Calculation Provision (Recovery) Based on Prior Methodology

 

 

Difference

 

Portfolio Segment:

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Farmland

 

$

1,270

 

 

$

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

 

68


 

 

Impaired loans by class at December 31, 2020 and December 31, 2019 were as follows:

 

 

 

As of

 

 

 

December 31, 2020

 

 

 

(in thousands)

 

 

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial - Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

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

 

 

(1)

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

69


 

 

 

 

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