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.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 assetsdeposits 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.

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

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

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

Legal, Regulatory and Compliance Risks

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

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

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

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

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

Changes in accounting standards could impact reported earnings and capital.

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

Risks Relating to Our Securities

There can be no assurances concerning continuing dividend payments.

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

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

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

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

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

$27.60.

The following table details the Company's purchases of its common stock during the fourth quarter pursuant to the Stock Repurchase program renewed on June 21, 2017. The Company authorized 150,000 shares for repurchase under the Stock Repurchase program. The program has an expiration date of June 30, 2018.discussed above.

		Total Number of Shares Purchased				Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Plan				Maximum Number of Shares that may Yet Be Purchased Under the Plan
October 1 - October 31, 2020			—			$	—				—				137,626
November 1 - November 30, 2020			16,201				25.57				16,201				121,425
December 1 - December 31, 2020			—				—				16,201				121,425
			16,201			$	25.57				16,201				121,425

		Total Number of Shares Purchased			Average Price Paid Per Share				Total Number of Shares Purchased as Part of Publicly Announced Plan			Maximum Number of Shares that may Yet Be Purchased Under the Plan
October 1 - October 31, 2017		4,468			$	30.00			4,468			117,475
November 1 - November 30, 2017		6,360			31.10				10,828			111,115
December 1 - December 31, 2017		—			—				10,828			111,115
		10,828			$	30.65			10,828			111,115

Stock Performance

The following line graph compares the cumulative total return to the shareholders of the Company to the returns of the NASDAQ Bank Index and the NASDAQ Composite Index for the last five years. The amounts in the table represent the value of the investment on December 31^st of the year indicated, assuming $100 was initially invested on December 31, 20122015 and the reinvestment of dividends. See Management Discussion and Analysis sections Liquidity and Capital Resources and Note 17,16, “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

		2012				2013				2014				2015				2016				2017
Eagle Financial Services, Inc.		$	100			$	106			$	114			$	116			$	135			$	173
NASDAQ Bank Index		100				139				143				152				206				213
NASDAQ Composite Index		100				138				157				166				178				229

Item 6.     Selected Financial Data

The following table presents selected financial data, which was derived from the Company’s audited financial statements for the periods indicated.

		December 31,
		2020				2019				2018				2017				2016
		(dollars in thousands, except per share amounts)
Income Statement Data:
Interest and dividend income		$	38,908			$	35,454			$	31,923			$	28,351			$	25,785
Interest expense			3,281				4,239				2,515				1,154				1,067
Net interest income		$	35,627			$	31,215			$	29,408			$	27,197			$	24,718
Provision for (recovery of) loan losses			1,457				629				777				(625	)			(188	)
Net interest income after provision for (recovery of) loan losses		$	34,170			$	30,586			$	28,631			$	27,822			$	24,906
Noninterest income			8,579				7,759				3,879				6,780				6,669
Net revenue		$	42,749			$	38,345			$	35,510			$	34,602			$	31,575
Noninterest expenses			29,441				26,776				25,195				23,190				22,652
Income before income taxes		$	13,308			$	11,569			$	10,315			$	11,412			$	8,923
Applicable income taxes			2,136				1,810				1,314				3,626				2,553
Net Income		$	11,172			$	9,759			$	9,001			$	7,786			$	6,370
Performance Ratios:
Return on average assets			1.11	%			1.18	%			1.16	%			1.08	%			0.96	%
Return on average equity			11.03	%			10.60	%			10.67	%			9.50	%			7.98	%
Shareholders’ equity to assets			9.30	%			10.98	%			10.96	%			10.95	%			11.34	%
Dividend payout ratio			31.80	%			35.21	%			36.15	%			39.29	%			45.30	%
Non-performing loans to total loans			0.57	%			0.34	%			0.35	%			1.11	%			1.35	%
Non-performing assets to total assets			0.47	%			0.27	%			0.28	%			0.84	%			1.05	%
Per Share Data:
Net income, basic		$	3.27			$	2.84			$	2.60			$	2.24			$	1.81
Net income, diluted			3.27				2.84				2.60				2.24				1.81
Cash dividends declared			1.04				1.00				0.94				0.88				0.82
Book value			30.86				28.08				25.42				24.30				22.90
Market price			29.50				31.05				30.99				32.00				25.75
Average shares outstanding, basic			3,417,543				3,438,410				3,467,667				3,468,275				3,518,848
Average shares outstanding, diluted			3,417,543				3,438,410				3,467,667				3,468,275				3,518,848
Balance Sheet Data:
Total securities		$	166,222			$	166,200			$	145,468			$	133,673			$	120,330
Total loans			836,334				644,760				606,827				568,817				516,942
Total assets			1,130,152				877,320				799,617				765,751				700,149
Total deposits			1,013,098				771,544				703,104				663,414				603,877
Shareholders’ equity			105,074				96,326				87,599				83,817				79,416

		December 31,
		2017				2016				2015				2014				2013
		(dollars in thousands, except per share amounts)
Income Statement Data:
Interest and dividend income		$	28,351			$	25,785			$	24,493			$	24,850			$	25,036
Interest expense		1,154				1,067				1,347				1,912				2,585
Net interest income		$	27,197			$	24,718			$	23,146			$	22,938			$	22,451
(Recovery of) provision for loan losses		(625		)		(188		)		(227		)		350				—
Net interest income after (recovery of) provision for loan losses		$	27,822			$	24,906			$	23,373			$	22,588			$	22,451
Noninterest income		6,780				6,669				8,438				6,606				7,462
Net revenue		$	34,602			$	31,575			$	31,811			$	29,194			$	29,913
Noninterest expenses		23,190				22,652				22,481				19,986				20,367
Income before income taxes		$	11,412			$	8,923			$	9,330			$	9,208			$	9,546
Income tax expense		3,626				2,553				2,433				2,068				2,388
Net Income		$	7,786			$	6,370			$	6,897			$	7,140			$	7,158
Performance Ratios:
Return on average assets		1.08		%		0.96		%		1.10		%		1.19		%		1.23		%
Return on average equity		9.50		%		7.98		%		9.17		%		10.25		%		11.04		%
Shareholders’ equity to assets		10.95		%		11.34		%		11.97		%		11.67		%		11.32		%
Dividend payout ratio		39.29		%		45.30		%		40.61		%		37.03		%		36.02		%
Non-performing loans to total loans		1.11		%		1.35		%		1.13		%		2.28		%		1.00		%
Non-performing assets to total assets		0.84		%		1.05		%		0.95		%		2.04		%		1.04		%
Per Common Share Data:
Net income, basic		$	2.24			$	1.81			$	1.97			$	2.08			$	2.11
Net income, diluted		2.24				1.81				1.97				2.08				2.11
Cash dividends declared		0.88				0.82				0.80				0.77				0.76
Book value		24.40				23.01				22.25				21.01				19.57
Market price		32.00				25.75				23.00				23.30				22.50
Average shares outstanding, basic		3,468,275				3,518,848				3,495,334				3,438,348				3,386,467
Average shares outstanding, diluted		3,468,275				3,518,848				3,495,334				3,438,646				3,387,212
Balance Sheet Data:
Total securities		$	133,673			$	120,330			$	107,719			$	96,973			$	104,790
Total loans		568,817				516,942				495,573				469,820				444,273
Total assets		765,751				700,149				653,272				630,158				586,444
Total deposits		663,414				603,877				550,718				503,816				487,587
Shareholders’ equity		83,817				79,416				78,221				73,132				66,406

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, 2017,2020, the Company had total assets of $765.8 million,$1.13 billion, net loans of $564.4$829.2 million, total deposits of $663.4 million$1.01 billion and shareholders’ equity of $83.8$105.1 million. The Company’s net income was $7.8$11.2 million for the year ended December 31, 2017.

2020.

COVID-19 and Related Response

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

MANAGEMENT’S STRATEGY

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

OPERATING STRATEGY

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

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

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

LENDING POLICIES

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

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

The Bank uses a tiered approach to approve credit requests consisting of individual lending authorities, a senior management loan committee,joint approval of Category I officers, and a director loan committee. Lending limits for individuals and the Senior Loan Committee 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, Senior LoanChief Revenue Officer and SeniorChief 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 $1,000,000$10.0 million on a secured basis and $500,000$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 $500,000$5.0 million on a secured basis and $250,000$3.0 million unsecured. Loan exposures up to $1,000,000 may be approved with the concurrence of two, Category I officers. Loans to borrowers with total credit exposures between $1,000,000 and $3,000,000 are approved by the Senior Loan Committee consisting of the President, Chief Operating Officer, Senior Loan Officer, Senior Credit Officer, and Chief Financial Officer. Approval of the Senior Loan Committee is required prior to being referred to the Director Loan Committee for approval.  Loans exceeding $3,000,000$15.0 million and up to the Bank’s legal lending limit can be approved by the Director Loan Committee consisting of four directors (three directors constituting a quorum). The Director’s Loan Committee also reviews and approves changes to the Bank’s Loan Policy as presented by management.

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

One-to-Four-Family Residential Real Estate Lending

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

Commercial Real Estate Lending

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

Construction and Land Development Lending

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

Commercial and Industrial Lending

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

Consumer Lending

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

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

CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses

The allowance for loan losses is an estimate of the probable losses inherent in the Company’s loan portfolio. As required by GAAP, the allowance for loan losses is accrued when theirthe occurrence of losses is probable and theylosses can be estimated.  Impairment losses are accrued based on the differences between the loan balance and the value of its collateral, the present value of future cash flows, or the price established in the secondary market. The Company’s allowance for loan losses has three basic components: the general allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when actual events occur. The general allowance uses historical experience and other qualitative factors to estimate future losses and, as a result, the estimated amount of losses can differ significantly from the actual amount of losses which would be incurred in the future. However, the potential for significant differences is mitigated by continuously updating the loss history and qualitative factor analyses of the Company. The specific allowance is based upon the evaluation of specific impaired loans on which a loss may be realized. Factors such as past due history, ability to pay, and collateral value are used to identify those loans on which a loss may be realized. Each of these loans is then evaluated to determine how much loss is estimated to be realized on its disposition. The sum of the losses on the individual loans becomes the Company’s specific allowance. This process is inherently subjective and actual losses may be greater than or less than the estimated specific allowance. The unallocated allowance captures losses that are attributable to various economic events which may affectaccounts for a certain loan type withinmeasure of imprecision in the loan portfolio or a certain industrial or geographic sector within the Company’s market. As the loans, which are affected by these events, are identified or losses are experienced on the loans which are affected by these events, they will be reflected within the specific or general allowances.estimate. Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the 20172020 Form 10-K, provides additional information related to the allowance for loan losses.

Other Real Estate Owned (OREO)

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and our ability and intention with regard to continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further deterioration in market conditions.

Other-Than-Temporary Impairment (OTTI) for Securities

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, we do not intend to sell the security and it is not more-likely-than-not that we will be required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income (loss). We regularly review each investment security for other-than-temporary impairment based on criteria that includes the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity and the likelihood that we would be required to sell the security before recovery.

FORWARD LOOKING STATEMENTS

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

•

difficult market conditions in our industry;

difficult market conditions in our industry;

•

effects of soundness of other financial institutions;

effects of soundness of other financial institutions;

•

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

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

•

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

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

•

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

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

•

the successful management of interest rate risk;

the successful management of interest rate risk;

•

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

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

•

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

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

•

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

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

•

changes in interest rates and interest rate policies;

changes in interest rates and interest rate policies;

•

maintaining capital levels adequate to support growth;

maintaining capital levels adequate to support growth;

•

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

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

•

demand, development and acceptance of new products and services;

demand, development and acceptance of new products and services;

•

problems with technology utilized by the Bank;

problems with technology utilized by the Bank;

•

changing trends in customer profiles and behavior;

changing trends in customer profiles and behavior;

•

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

changes in banking and other laws and regulations; and

•

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

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

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

RESULTS OF OPERATIONS

Net Income

Net income for 20172020 was $7.8$11.2 million, an increase of $1.4 million or 22.23%14.48% from 2016’s2019’s net income of $6.4 million. Net income for 2016 decreased $527 thousand or 7.64% from 2015’s net income of $6.9$9.8 million. Basic and diluted earnings per share were $2.24, $1.81,$3.27 and $1.97$2.84 for 2017, 2016,2020 and 2015,2019, 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 1.08%1.11%, 0.96%1.18%, and 1.10%1.16% for 2017, 2016,2020, 2019, and 2015,2018, 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 9.50%11.03%, 7.98%10.60%, and 9.17%10.67% for 2017, 2016,2020, 2019, and 2015,2018, 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 $27.2$35.6 million for 2017, $24.72020 and $31.2 million for 2016, and $23.1 million for 2015,2019, which represents an increase of $2.5$4.4 million or 10.03% and $1.6 million or 6.79% for 2017 and 2016, respectively.14.13%. Net interest income is derived from the volume of earning assets and the rates earned on those assets as compared to the cost of funds. Total interest income was $28.4$38.9 million for 2017, $25.82020 and $35.5 million for 2016, and $24.5 million for 2015,2019, which represents an increase of $2.6$3.4 million or 9.95% and an increase of $1.3 million or 5.27%9.74% for 2017 and 2016, respectively.2020. Total interest expense was $1.2$3.3 million for 2017, $1.12020 and $4.2 million for 2016, and $1.3 million for 2015,2019, which represents an increase of $87 thousand or 8.15% and a decrease of $280$958 thousand or 20.79%22.60% in 2017 and 2016, respectively.2020. The increase in total interest income and net interest income during 2017 is2020 was driven mainly by the growth in interest-earning assets.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, 2017, 2016,2020, 2019, and 2015.

2018.

The net interest margin was 4.10%3.76% for 2017,2020, 4.02% for 2019, and 4.07% for 2016, and 4.06% for 2015.2018. 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 34% for 2017, 2016, and 2015.21%. 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, 2017, 2016,2020, 2019, and 2015.

2018.

Net interest income and net interest margin may experience some decline due to increasing cost of funds as a result of increasing rates on interest bearing liabilities. Netassets continue to be repriced or replaced more rapidly than interest margin and net interest income may be affected negatively due to the change in corporate tax rate from 34% to 21% as a result of the Tax Cuts and Jobs Act that was signed into law on December 22, 2017.

earning liabilities.

Average Balances, Income and Expenses, Yields and Rates

(dollars in thousands)

		December 31, 2020												December 31, 2019												December 31, 2018
		Average				Interest Income/				Average				Average				Interest Income/				Average				Average				Income/				Average
		Balance				Expense				Rate				Balance				Expense				Rate				Balance				Expense				Rate
Assets:
Securities:
Taxable		$	130,566			$	2,934				2.25	%		$	113,625			$	3,159				2.78	%		$	98,628			$	2,803				2.84	%
Tax-Exempt (1)			21,764				744				3.42	%			31,009				1,084				3.50	%			38,656				1,331				3.44	%
Total Securities		$	152,330			$	3,678				2.41	%		$	144,634			$	4,243				2.93	%		$	137,284			$	4,134				3.01	%
Loans:
Taxable			744,622				34,925				4.69	%			613,884				30,722				5.00	%			573,040				27,482				4.80	%
Non-accrual			3,618				—				—	%			2,723				—				—	%			1,916				—				—	%
Tax-Exempt (1)			9,992				441				4.42	%			11,722				526				4.49	%			11,591				516				4.45	%
Total Loans		$	758,232			$	35,366				4.66	%		$	628,329			$	31,248				4.97	%		$	586,547			$	27,998				4.77	%
Federal funds sold			359				1				0.24	%			194				4				2.06	%			134				3				2.24	%
Interest-bearing deposits in other banks			47,261				112				0.24	%			15,202				297				1.95	%			9,712				176				1.81	%
Total earning assets		$	954,564			$	39,157				4.10	%		$	785,636			$	35,792				4.56	%		$	731,761			$	32,311				4.42	%
Allowance for loan losses			(6,041	)											(5,333	)											(4,661	)
Total non-earning assets			66,007												49,780												48,601
Total assets		$	1,014,530											$	830,083											$	775,701
Liabilities and Shareholders' Equity:
Interest-bearing deposits:
NOW accounts		$	108,965			$	347				0.32	%		$	89,536			$	450				0.50	%		$	91,353			$	320				0.35	%
Money market accounts			184,346				930				0.50	%			150,291				1,463				0.97	%			132,136				815				0.62	%
Savings accounts			122,560				121				0.10	%			105,176				207				0.20	%			104,473				159				0.15	%
Time deposits:
$250,000 and more			75,520				1,203				1.59	%			59,550				1,221				2.05	%			70,778				687				0.97	%
Less than $250,000			60,600				655				1.08	%			61,775				852				1.38	%			36,808				509				1.38	%
Total interest-bearing deposits		$	551,991			$	3,256				0.59	%		$	466,328			$	4,193				0.90	%		$	435,548			$	2,490				0.57	%
Federal  funds purchased and securities sold under agreements to repurchase			1				—				0.60	%			1,074				31				2.89	%			964				25				2.59	%
Federal Home Loan Bank advances			7,650				25				0.33	%			2,547				15				0.59	%			—				—				—	%
Total interest-bearing liabilities		$	559,642			$	3,281				0.59	%		$	469,949				4,239				0.90	%		$	436,512			$	2,515				0.58	%
Noninterest-bearing liabilities:
Demand deposits			341,229												258,176												246,056
Other Liabilities			12,357												9,900												8,811
Total liabilities		$	913,228											$	738,025											$	691,379
Shareholders' equity			101,302												92,058												84,322
Total liabilities and shareholders' equity		$	1,014,530											$	830,083											$	775,701
Net interest income						$	35,876											$	31,553											$	29,796
Net interest spread											3.51	%											3.66	%											3.84	%
Interest expense as a percent of average earning assets											0.34	%											0.54	%											0.34	%
Net interest margin											3.76	%											4.02	%											4.07	%

		December 31, 2017											December 31, 2016											December 31, 2015
		Average Balances				Interest Income/ Expense				Average Yield/ Rate			Average Balances				Interest Income/ Expense				Average Yield/ Rate			Average Balances				Interest Income/ Expense				Average Yield/ Rate
Assets:
Securities:
Taxable		$	90,881			$	2,339			2.57	%		$	72,824			$	1,750			2.40	%		$	71,159			$	1,744			2.45	%
Tax-Exempt (1)		38,432				1,567				4.08	%		32,495				1,401				4.31	%		31,592				1,472				4.66	%
Total Securities		$	129,313			$	3,906			3.02	%		$	105,319			$	3,151			2.99	%		$	102,751			$	3,216			3.13	%
Loans:
Taxable		530,109				24,616				4.64	%		497,720				22,815				4.58	%		465,444				21,523				4.62	%
Non-accrual		5,701				—				—	%		5,891				—				—	%		6,446				—				—	%
Tax-Exempt (1)		5,927				311				5.25	%		6,423				336				5.23	%		7,210				346				4.80	%
Total Loans		$	541,737			$	24,927			4.60	%		$	510,034			$	23,151			4.54	%		$	479,100			$	21,869			4.56	%
Federal funds sold		171				1				0.58	%		36				—				—	%		—				—				—	%
Interest-bearing deposits in other banks		13,870				156				1.12	%		15,179				73				0.48	%		12,174				26				0.21	%
Total earning assets (2)		$	679,390			$	28,990			4.27	%		$	624,677			$	26,375			4.22	%		$	587,579			$	25,111			4.27	%
Allowance for loan losses		(4,548		)									(4,967		)									(5,374		)
Total non-earning assets		48,590											44,440											47,626
Total assets		$	723,432										$	664,150										$	629,831
Liabilities and Shareholders’ Equity:
Interest-bearing deposits:
NOW accounts		$	85,154			$	161			0.19	%		$	81,966			$	93			0.11	%		$	80,809			$	85			0.11	%
Money market accounts		128,068				290				0.23	%		117,210				201				0.17	%		99,088				113				0.11	%
Savings accounts		100,838				66				0.07	%		87,035				51				0.06	%		76,054				41				0.05	%
Time deposits:
$100,000 and more		57,010				340				0.60	%		44,193				255				0.58	%		36,098				170				0.47	%
Less than $100,000		39,319				227				0.58	%		45,133				187				0.41	%		57,992				332				0.57	%
Total interest-bearing deposits		$	410,389			$	1,084			0.26	%		$	375,537			$	787			0.21	%		$	350,041			$	741			0.21	%
Federal funds purchased and securities sold under agreements to repurchase		823				13				1.58	%		73				1				1.37	%		1,154				10				0.87	%
Federal Home Loan Bank advances		5,096				57				1.12	%		10,546				136				1.29	%		24,849				336				1.35	%
Trust preferred capital notes (3)		—				—				—	%		—				—				—	%		4,441				196				4.41	%
Total interest-bearing liabilities		$	416,308			$	1,154			0.28	%		$	386,156			$	924			0.24	%		$	380,485			$	1,283			0.34	%
Noninterest-bearing liabilities:
Demand deposits		216,044											195,428											171,508
Other Liabilities		9,129											2,752											2,599
Total liabilities		$	641,481										$	584,336										$	554,592
Shareholders’ equity		81,951											79,814											75,239
Total liabilities and shareholders’ equity		$	723,432										$	664,150										$	629,831
Net interest income						$	27,836										$	25,451										$	23,828
Net interest spread										3.99	%										3.98	%										3.93	%
Interest expense as a percent of average earning assets										0.17	%										0.15	%										0.22	%
Net interest margin										4.10	%										4.07	%										4.06	%

(1)
(1)	Income and yields are reported on a tax-equivalent basis using a federal tax rate of 34%21%.

(2)
(2)	Non-accrual loans are not included in this total since they are not considered earning assets.

(3)	Interest expense and average yield was adjusted to exclude interest expense related to the interest rate swap incurred after the redemption of the trust preferred capital notes.

Tax-Equivalent Net Interest Income

(dollars in thousands)

		Twelve Months Ended
		December 31,
		2020				2019				2018
		(in thousands)
GAAP Financial Measurements:
Interest Income - Loans		$	35,273			$	31,138			$	27,890
Interest Income - Securities and Other Interest-Earnings Assets			3,635				4,316				4,033
Interest Expense - Deposits			3,256				4,193				2,490
Interest Expense - Other Borrowings			25				46				25
Total Net Interest Income		$	35,627			$	31,215			$	29,408
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans		$	93			$	110			$	108
Add: Tax Benefit on Tax-Exempt Interest Income - Securities			156				228				280
Total Tax Benefit on Tax-Exempt Interest Income		$	249			$	338			$	388
Tax-Equivalent Net Interest Income		$	35,876			$	31,553			$	29,796

		December 31,
		2017				2016				2015
GAAP Financial Measurements:
Interest Income - Loans		$	24,821			$	23,037			$	21,751
Interest Income - Securities and Other Interest-Earnings Assets		3,530				2,748				2,742
Interest Expense - Deposits		1,084				787				741
Interest Expense - Interest Rate Swap		—				143				182
Interest Expense - Other Borrowings		70				137				424
Total Net Interest Income		$	27,197			$	24,718			$	23,146
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans (1)		$	106			$	114			$	118
Add: Tax Benefit on Tax-Exempt Interest Income - Securities (1)		533				476				500
Total Tax Benefit on Tax-Exempt Interest Income		$	639			$	590			$	618
Add: Interest Expense - Interest Rate Swap (2)		—				143				64
Tax-Equivalent Net Interest Income		$	27,836			$	25,451			$	23,828

(1)
(1)	Tax benefit was calculated using the federal statutory tax rate of 34%21%.

(2)	Tax-Equivalent net interest income was adjusted to exclude interest expense related to the interest rate swap incurred after the redemption of the trust preferred capital notes in 2015.

The tax-equivalent yield on earning assets increased fivedecreased 46 basis points from 20162019 to 20172020 and decreased fiveincreased 14 basis points from 20152018 to 2016.2019. The tax-equivalent yield on securities increased threedecreased 52 basis points from 20162019 to 20172020 and decreased 14eight basis pointspoint from 20152018 to 2016.2019. The tax-equivalent yield on loans increased sixdecreased 31 basis points from 20162019 to 20172020 and decreased twoincreased 20 basis points from 20152018 to 2016.2019. The slight increasedecrease in the yield on earning assets, securities, and the loan portfolio and the securities portfolio in 2020 was primarilymainly a result of increasesdecreases in interest rates by the Federal Reserve during 2017.

the first quarter of the year.

The average rate on interest-bearing liabilities increased fourdecreased 31 basis points from 20162019 to 20172020 and decreased 10increased 32 basis points from 20152018 to 2016.2019.  The average rate on total interest-bearing deposits increased fivedecreased 31 basis points from 20162019 to 20172020 and remained steadyincreased 33 basis points from 20152018 to 2016.2019. 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 issues brokered certificates of deposit as a substitute for offering promotional certificates of deposit when their rates are lower. The rates on brokered certificates of deposit are usually comparable with other wholesale funding sources and these funds can be gathered more efficiently without causing existing deposits to reprice. 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 $27.9$70.9 million or 9.75%20.54% from $286.2$345.0 million during 20162019 to $314.1$415.9 million in 20172020 and $30.3$17.0 million or 11.83%5.20% from $256.0$328.0 million atduring the year ended December 31, 2015 during 2016. Changes in2018 as compared to the average rate on interest-bearing liabilities can also be affected by the pricing on other sources of funds, namely borrowings. The Company from time to time will utilize overnight borrowings in the form of federal funds purchased. The average rate on these borrowings increased 21 basis points from 2016 to 2017 and 50 basis points from 2015 to 2016. The cost of federal funds purchased is affected by the Federal Reserve’s changes in the federal funds target rate, which increased to 1.50% during 2017, from 0.75% in 2016. Finally, the Company borrows from the Federal Home Loan Bank through short and long term advances. The average rate on FHLB advances decreased 17 basis points from 2016 to 2017 and six basis points from 2015 to 2016. The average balance on FHLB advances decreased $5.5 million during 2017 and decreased $14.3 million during 2016.

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 $2.4$4.3 million during 2017.2020. The increase in tax-equivalent net interest income during 20172020 is comprised of an increase due to volume of $2.1$5.7 million and a increasedecrease due to rate of $262 thousand.$1.3 million. The increase in tax-equivalent net interest income during 20172020 was primarily affected by the increased volume of taxable loans and taxable securities.

securities, offset in part by decreases in the rates earned from interest-earning assets.

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

Volume and Rate Analysis (Tax-Equivalent Basis)

(dollars in thousands)

		2020 vs 2019 Increase (Decrease) Due to Changes in:												2019 vs 2018 Increase (Decrease) Due to Changes in:
		Volume				Rate				Total				Volume				Rate				Total
Earning Assets:
Securities:
Taxable		$	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

		2017 vs 2016 Increase (Decrease) Due to Changes in:												2016 vs 2015 Increase (Decrease) Due to Changes in:
		Volume				Rate				Total				Volume				Rate				Total
Earning Assets:
Securities:
Taxable		$	458			$	131			$	589			$	47			$	(41	)		$	6
Tax-exempt		234				(68		)		166				44				(115		)		(71		)
Loans:
Taxable		1,499				302				1,801				1,476				(184		)		1,292
Tax-exempt		(26		)		1				(25		)		(56		)		46				(10		)
Federal funds sold		—				1				1				—				—				—
Interest-bearing deposits in other banks		(6		)		89				83				8				39				47
Total earning assets		$	2,159			$	456			$	2,615			$	1,519			$	(255	)		$	1,264
Interest-Bearing Liabilities:
NOW accounts		$	3			$	65			$	68			$	8			$	—			$	8
Money market accounts		19				70				89				22				66				88
Savings accounts		7				8				15				4				6				10
Time deposits:
$100,000 and more		76				9				85				42				43				85
Less than $100,000		(18		)		58				40				(64		)		(81		)		(145		)
Total interest-bearing deposits		$	87			$	210			$	297			$	12			$	34			$	46
Federal funds purchased and securities sold under agreements to repurchase		$	12			$	—			$	12			$	(23	)		$	14			$	(9	)
Federal Home Loan Bank advances		(63		)		(16		)		(79		)		(186		)		(14		)		(200		)
Trust preferred capital notes		—				—				—				(98		)		(98		)		(196		)
Total interest-bearing liabilities		$	36			$	194			$	230			$	(295	)		$	(64	)		$	(359	)
Change in net interest income		$	2,123			$	262			$	2,385			$	1,814			$	(191	)		$	1,623

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 (recovery of)provision for loan losses was $(625)$1.5 million for 2020 and $629 thousand for 2017, $(188) thousand for 2016, and $(227) thousand for 2015.2019. Changes in the amount of provision for loan losses during each period reflect the results of the Bank’sCompany’s analysis used to determine the adequacy of the allowance for loan losses. The recovery ofprovision for loan losses in 2017 is due mainly to a 2020 reflects loan growth in the portfolio during the year as well as decline in the historical loss experience utilizedcurrent state of the economy and the related increase in the qualitative factors within our allowance model.for loan losses, primarily associated with the ongoing COVID-19 pandemic. The recovery ofprovision for loan losses in 2015 and 20162019 reflects lower specific reserves on remaining impaired loansloan growth in the portfolio during the year as well as a declineone large charge-off in the historical loss experience utilized in our allowance model.amount of $850 thousand. The Company is committed to maintaining an allowance that adequately reflects the risk inherent in the loan portfolio.  This commitment is more fully discussed in the “Asset Quality” section.

Noninterest Income

Total noninterest income was $6.8$8.6 million, $6.7$7.8 million, and $8.4$6.9 million during 2017, 2016,2020 and 2015,2019, respectively. This represents an increase of $111$820 thousand or 1.66%10.57% for 2017 and a decrease of $1.8 million or 20.96% for 2016.2020. 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, 2017, 2016,2020 and 2015,2019, which are included within the respective Consolidated Statements of Income headings.  The following paragraphs provide information about activities which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

		December 31,
(dollars in thousands)		2020				2019				$ Change				% Change
Income from fiduciary activities		$	1,398			$	1,380			$	18				1.30	%
Service charges on deposit accounts			920				1,187				(267	)			(22.49	)%
Other service charges and fees			4,757				4,893				(136	)			(2.78	)%
Gain (loss) on sale of bank premises and equipment			5				137				(132	)		NM
Gain (loss) on sale of securities			687				(7	)			694			NM
Bank owned life insurance income			310				(48	)			358			NM
Other operating income			502				217				285				131.34	%
Total noninterest income		$	8,579			$	7,759			$	820				10.57	%

	December 31,
(dollars in thousands)	2017			2016			$ Change			% Change		2016			2015			$ Change			% Change
Income from fiduciary activities	$	1,238		$	1,356		$	(118	)	(8.70	)%	$	1,356		$	1,338		$	18		1.35	%
Service charges on deposit accounts	1,223			1,227			(4		)	(0.33	)%	1,227			1,244			(17		)	(1.37	)%
Other service charges and fees	3,878			3,713			165			4.44	%	3,713			3,375			338			10.01	%
(Loss) on the sale and disposal of premises and equipment	(12		)	(10		)	(2		)	NM		(10		)	(76		)	66			NM
(Loss) gain on sale of securities	(10		)	98			(108		)	NM		98			124			(26		)	NM
Gain on redemption of trust preferred debt	—			—			—			NM		—			2,424			(2,424		)	NM
Other operating income	463			285			178			62.46	%	285			9			276			3,066.67	%
Total noninterest income	$	6,780		$	6,669		$	111		1.66	%	$	6,669		$	8,438		$	(1,769	)	(20.96	)%

NM - Not Meaningful

Income from fiduciary activities, generated by trust services offered through Eagle Investment Group,

Services charges on deposit accounts decreased from 2016$267 thousand or 22.49% when comparing the year ended December 31, 2020 to 2017. The amount of income from fiduciary activities2019. This decrease is determined by the number of active accounts and total assets under management. Also, income can fluctuatemainly due to the number of estates settled within any period.

The amount of other services decreases in overdraft charges. Reduced overdraft
charges and fees is comprised primarily of commissions from the sale of non-deposit investment products, fees received from the Bank’s credit card program, fees generated from the Bank’s ATM/debit card programs, and fees generated from procuring applications for secondary market loans. Other service charges and fees increased by $338 thousand or 10.01% for 2016. This increase can be primarily attributed mostly to an increase of ATM fee income of $172 thousand for 2016.

The $2.4 million gain on redemption of trust preferred capital notes occurredchanges in customer activity during the third quarter of 2015. On July 29, 2015,COVID-19 pandemic.

Bank owned life insurance (BOLI) income increased significantly during 2020 when compared to 2019. During 2020 the pool to which the Company's $7.0Company invested $12 million in outstanding trust preferred capital notes belonged was liquidated by means of auction. The Company was successful in purchasing the outstanding notes at a price of 65.375% of par or $4.6 million in cash, therefore creating a one time gain.

into BOLI.

Other operating income increased during 2017 and 2016.2020.  The increase for 2017 wasfluctuation from 2019 to 2020 is mostly attributed to the receiptcash distributions received from various investments of a $320 thousand bank owned life insurance (BOLI) benefit. During the third quarter of 2015, the Company's cash flow hedge was derecognized upon the retirement of the trust preferred capital note as discussed in the previous paragraph. As a result, the loss on the interest rate swap derivative contract recorded in accumulated other comprehensive income of $237 thousand was reclassified to the income statement during the third quarter of 2015, which was partially offset by the adjustment of the derivative contract to fair value for a gain of $88 thousand. A fair value adjustment (gain) to the derivative contract of $149 thousand was recognized through other operating income during 2016.

Company.

Noninterest Expenses

Total noninterest expenses were $23.2 million, $22.7$29.4 million and $22.5$26.8 million during 2017, 2016,2020 and 2015,2019, respectively. This represents an increase of $538 thousand$2.7 million or 2.38%9.95% during 2017 and an increase of $171 thousand or 0.76% during 2016. The efficiency ratio of the Company was 67.47%, 70.71%, and 75.77% for 2017, 2016, and 2015, 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 certain non-recurring gains and losses. 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.

2020.

The following table provides the components of noninterest expense for the twelve months ended December 31, 2017, 2016,2020 and 2015,2019, which are included within the respective Consolidated Statements of Income headings.  The following paragraphs provide information about activities which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

		December 31,
(dollars in thousands)		2020				2019				$ Change				% Change
Salaries and employee benefits		$	18,074			$	15,025			$	3,049				20.29	%
Occupancy expenses			1,592				1,611				(19	)			(1.18	)%
Equipment expenses			988				857				131				15.29	%
Advertising and marketing expenses			707				868				(161	)			(18.55	)%
Stationery and supplies			144				172				(28	)			(16.28	)%
ATM network fees			1,009				1,141				(132	)			(11.57	)%
Other real estate owned expense			9				76				(67	)			(88.16	)%
(Gain) loss on foreclosure and sale of other real estate owned			(143	)			443				(586	)		NM
FDIC assessment			221				105				116				110.48	%
Computer software expense			679				459				220				47.93	%
Bank franchise tax			705				656				49				7.47	%
Professional fees			1,120				1,057				63				5.96	%
Data processing fees			1,657				1,275				382				29.96	%
Other operating expenses			2,679				3,031				(352	)			(11.61	)%
Total noninterest expenses		$	29,441			$	26,776			$	2,665				9.95	%

	December 31,
(dollars in thousands)	2017			2016			$ Change			% Change		2016			2015			$ Change			% Change
Salaries and employee benefits	$	13,643		$	13,015		$	628		4.83	%	$	13,015		$	12,318		$	697		5.66	%
Occupancy expenses	1,473			1,486			(13		)	(0.87	)%	1,486			1,563			(77		)	(4.93	)%
Equipment expenses	955			889			66			7.42	%	889			751			138			18.38	%
Advertising and marketing expenses	731			633			98			15.48	%	633			612			21			3.43	%
Stationery and supplies	173			201			(28		)	(13.93	)%	201			242			(41		)	(16.94	)%
ATM network fees	816			903			(87		)	(9.63	)%	903			805			98			12.17	%
Other real estate owned expense	11			73			(62		)	(84.93	)%	73			336			(263		)	(78.27	)%
Loss (gain) on foreclosure and sale of other real estate owned	(1		)	90			(91		)	NM		90			(46		)	136			NM
FDIC assessment	222			304			(82		)	(26.97	)%	304			439			(135		)	(30.75	)%
Computer software expense	647			623			24			3.85	%	623			696			(73		)	(10.49	)%
Bank franchise tax	534			501			33			6.59	%	501			505			(4		)	(0.79	)%
Professional fees	1,007			949			58			6.11	%	949			996			(47		)	(4.72	)%
Data processing fees	564			444			120			27.03	%	444			380			64			16.84	%
Other bank services charges	66			209			(143		)	(68.42	)%	209			71			138			194.37	%
Cost to terminate operating lease	—			—			—			NM		—			520			(520		)	NM
Other operating expenses	2,349			2,332			17			0.73	%	2,332			2,293			39			1.70	%
Total noninterest expenses	$	23,190		$	22,652		$	538		2.38	%	$	22,652		$	22,481		$	171		0.76	%

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 20172020. Annual pay increases, newly hired employees, additional bonus/COVID pay for employees that have been unable to work remotely during the pandemic and 2016. The majority of the increase during 2017 was dueadditional bonuses for loan employees originating SBA PPP lending have attributed to the increaseincreases in incentive plan expense of $337 thousand. This expense increased due to meeting and exceeding 2017 corporate goals as well as the adoption of a commercial banker incentive plan during the year. The increase during 2016 was mainly due to branching efforts in the Loudoun County market as well as the decision to bring the internal audit function in-house.

2020.

Advertising and marketing expenses increased during 2017. Television and newspaper advertising have2019. Digital marketing expenses increased around $63approximately $108 thousand year over year due to increased efforts to advertise products and promotions.

Stationery and supplies expense decreasedas the Company strategically began placing more resources into that area during 2017 and 2016 due to efforts to promote paperless statements to customers as well as internal efforts to maintain paperless records where possible.

ATM network fees decreased 9.63% during 2017 and increased 12.17% during 2016. ATM network fees fluctuate based on the usage of ATM and debit cards.

2019.

Other real estate owned expenses and (Gain) loss on other real estate owned decreased significantly during 2017 and 2016. This fluctuation is due mainly to a valuation adjustment of $288 thousand that was recorded during 2015. No valuation allowances were established during 2016 and 2017. The decreases are consistent with decreases in2020. These amounts can fluctuate based on the number of properties foreclosed properties being held.

on and sold during any time period.  

FDIC assessments decreased $82during increased back to regular levels during 2020.  The Company received notification of a Small Bank Credit Assessment for approximately $178 thousand or 26.97% during 2017 and decreased $135 thousand or 30.75%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 2016. As of July 1, 2016 new FDIC assessment changes became effective. The changes included a new lower assessment rate schedule and small institution pricing changes, which caused the subsequent assessments to decrease by approximately 50%.

Computer software2020.  This expense increased only slightly during 2017. Computer software expense decreased during 2016 despite an increase in number of branches and employees. Fees paid to our core software provider have decreased due to a conscious effort to reduce unused services and renegotiate contract amounts.

increases as capital levels increase.

Data processing fees increased during 2017 and 2016.2020.  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 is duecan also be attributed to an increase in both the number of customers and the number of transactions being performed.

Other bank service chargesoperating expenses decreased during 20172020. During the third and increased during 2016.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 electedcalculates 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 prepay a $20.0 million outstanding advance withnet interest income is presented within the Federal Home Loan Bank of Atlanta. A $136 thousand prepayment fee was incurred by the Company in July 2016 in conjunction with the repaymentNet Interest Income section above.

The calculation of the advance.

On June 10, 2015,efficiency ratio for the Company purchased the land on which one of its retail branches resided. The land was purchased subject to an existing leasetwelve months ended December 31, 2020 and subsequently recorded at fair value, resulting in a write down of the total purchase price. This writedown appears in the Consolidated Statement of Income2019 are as a Cost to terminate operating lease.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%.

Income Taxes

Income tax expense was $3.6 million, $2.6$2.1 million and $2.4$1.8 million for the years ended December 31, 2017, 2016,2020 and 2015,2019, respectively. The change in income tax expense can be attributed to changes in taxable earnings at the federal statutory income tax rate of 34%. These amounts correspond to an effective tax rate of 31.77%, 28.62%,16.05% and 26.08%15.65% for 2017, 2016,2020 and 2015,2019, respectively. The effective tax rate increased from 2016 when comparedis below the statutory rate of 21%, due primarily to 2017. The Tax Cutstax 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 Jobs Act was signed into law on December 22, 2017, which required for the Company's deferred tax assets and liabilitiestotal amount of credits to be adjusted at that date, for the effect of the change in the corporate tax rate. This adjustment resulted in a net increase to federal income tax expense of $397 thousand during 2017.received was determined and certified.  The effective tax rate increased from 2015 when compared to 2016 due to a refund received during 2016 related to an amended 2014 tax return. The refund was related to a loss from anis also impacted by tax-exempt income on investment that the Company was not aware of until the K-1 was provided to us.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 2017, 2016,2020 and 2015.

2019.

FINANCIAL CONDITION

Assets, Liabilities and Shareholders’ Equity

The Company’s total assets were $765.8$1.13 billion at  December 31, 2020, an increase of $252.8 million or 28.82% from $877.3 million at December 31, 2017, an increase of $65.6 million or 9.37% from $700.1 million at December 31, 2016.2019. Securities increased $13.3 million or 11.16% from 2016 to 2017.remained relatively stable between 2019 and 2020. Loans, net of allowance for loan losses, increased by $52.0$189.5 million or 10.14%29.61% from 20162019 to 2017.2020. Total liabilities were $681.9$1.03 billion at December 31, 2020, compared to $781.0 million at December 31, 2017, compared to $620.7 million at December 31, 2016.2019. Total shareholders’ equity at year end 20172020 and 20162019 was $83.8$105.1 million and $79.4$96.3 million, respectively.

Securities

Total securities, excluding restricted stock, at December 31, 2017 were $132.6 million as compared to $119.3$165.0 million as of December 31, 2016, which represents an increase of $13.3 million or 11.16% during 2017.2019 and 2020. The table titled “Securities Portfolio” shows the carrying value of securities at December 31, 2017, 2016,2020, 2019, and 2015.2018. The Company purchased $43.8$78.4 million in securities during 2017.2020. This amount includes $4.0$77.2 million or 9.22% in obligations of U.S. government corporations and agencies, $28.4 million or 64.81%98.41% in mortgage-backed securities and $11.4$1.2 million or 25.96%1.59% in obligations of states and political subdivisions.subordinated debt.  The Company had $10.7$52.4 million in maturities, calls, and principal repayments on securities during 2017.2020. This amount includes $41 thousand$5.3 million or 0.38%10.17% in obligations of U.S. government corporations and agencies, $6.0$39.1 million or 56.07%74.58% in mortgage-backed securities and $4.7$8.0 million or 43.54%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, 2017.2020. Note 2 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio as of December 31, 20172020 and 2016.

2019.

Securities Portfolio

(dollars in thousands)

		December 31,
		2020				2019				2018
Securities available for sale:
Obligations of U.S. government corporations and agencies		$	17,483			$	22,186			$	21,731
Mortgage-backed securities			119,009				108,161				76,483
Obligations of states and political subdivisions			27,213				34,656				46,084
Subordinated debt			1,250				—				—
		$	164,955			$	165,003			$	144,298

		December 31,
		2017				2016				2015
Securities available for sale:
Obligations of U.S. government corporations and agencies		$	21,520			$	30,441			$	37,665
Mortgage-backed securities		61,244				42,372				28,931
Obligations of states and political subdivisions		49,802				46,449				39,227
		$	132,566			$	119,262			$	105,823

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 $338 thousand$4.1 million and a net unrealized loss of $94 thousand$1.8 million at December 31, 20172020 and 2016,2019, respectively. Unrealized gains or losses on available for sale securities are reported within shareholders’ equity, net of the related deferred tax effect, as accumulated other comprehensive income (loss).

The table titled “Maturity Distribution and Yields of Securities” shows the maturity period and average yield for the different types of securities in the portfolio at December 31, 2017.2020. Although mortgage-backed securities have definitive maturities, they provide monthly principal curtailments which can be reinvested at a prevailing rate and for a different term.

Maturity Distribution and Yields of Securities

(dollars in thousands)

		December 31, 2020
		Due in one year or less								Due after 1 through 5 years								Due after 5 through 10 years								Due after 10 years and Equity Securities								Total
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
Securities available for sale:
Obligations of U.S. government corporations and agencies		$	—				—	%		$	1,057				3.29	%		$	15,240				2.74	%		$	1,186				2.46	%		$	17,483				2.75	%
Mortgage-backed securities			—				—	%			—				—	%			—				—	%			119,009				1.59	%			119,009				1.59	%
Subordinated debt			—				—	%			—				—	%			1,250				5.00	%			—				—	%			1,250				5.00	%
Obligations of states and political subdivisions, taxable			—				—	%			3,662				2.79	%			4,105				3.10	%			1,065				2.73	%			8,832				2.93	%
Total taxable		$	—				—	%		$	4,719				2.90	%		$	20,595				2.95	%		$	121,260				1.61	%		$	146,574				1.83	%
Obligations of states and political subdivisions, tax-exempt (1)			760				3.85	%			4,160				2.57	%			13,461				2.59	%			—				—	%			18,381				2.64	%
Total		$	760				3.85	%		$	8,879				2.74	%		$	34,056				2.81	%		$	121,260				1.61	%		$	164,955				1.92	%

		December 31, 2017
		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		$	2,023			3.63	%		$	4,110			2.87	%		$	14,389			2.37	%		$	998			3.00	%		$	21,520			2.61	%
Mortgage-backed securities		—				—	%		—				—	%		—				—	%		61,244				2.75	%		61,244				2.75	%
Obligations of states and political subdivisions, taxable		2,362				2.98	%		1,959				4.88	%		5,550				2.80	%		919				2.42	%		10,790				3.18	%
Total taxable		$	4,385			3.28	%		$	6,069			3.52	%		$	19,939			2.49	%		$	63,161			2.75	%		$	93,554			2.77	%
Obligations of states and political subdivisions, tax-exempt (1)		234				4.30	%		8,528				3.10	%		24,988				2.46	%		5,262				2.96	%		39,012				2.68	%
Total		$	4,619			3.33	%		$	14,597			3.28	%		$	44,927			2.47	%		$	68,423			2.77	%		$	132,566			2.74	%

(1)
(1)	Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 34%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 $568.8$836.3 million and $516.9$644.8 million at December 31, 20172020 and 2016,2019, respectively. This represents an increase of $51.9$191.5 million or 10.03%29.71% for 2017.2020. The ratio of net loans to deposits increased only slightlydecreased during the year from 84.86%82.92% to 85.08%81.85% at December 31, 20162019 and December 31, 2017,2020, respectively. This decrease was due to strong deposit growth during the year. The table titled “Loan Portfolio” shows the composition of the loan portfolio over the last five years.

Loan balances in the table are shown before net deferred costs and fees.

Loan Portfolio

(dollars in thousands)

		2020				2019				2018				2017				2016
Loans secured by real estate:
Construction and land development		$	42,544			$	42,561			$	54,675			$	43,786			$	23,266
Secured by farmland			15,846				13,917				7,251				8,568				8,525
Secured by 1-4 family residential properties			248,246				219,580				221,861				223,210				227,966
Multifamily			21,496				14,415				7,923				4,095				3,566
Commercial			334,661				286,600				265,595				239,915				208,525
Commercial and industrial loans			140,762				46,543				33,086				37,427				30,341
Consumer installment loans			21,321				9,541				8,470				10,187				12,677
All other loans			10,773				12,050				8,454				2,050				2,259
Total loans		$	835,649			$	645,207			$	607,315			$	569,238			$	517,125

		December 31,
		2017				2016				2015				2014				2013
Loans secured by real estate:
Construction and land development		$	43,786			$	23,266			$	35,019			$	25,887			$	27,047
Secured by farmland		8,568				8,525				6,550				10,602				9,886
Secured by 1-4 family residential properties		223,210				227,966				229,651				224,694				218,633
Multifamily		4,095				3,566				3,975				3,016				2,850
Commercial		239,915				208,525				175,172				161,299				148,166
Commercial and industrial loans		37,427				30,341				29,366				28,132				20,865
Consumer installment loans		10,187				12,677				13,530				13,874				13,785
All other loans		2,050				2,259				2,413				2,316				3,041
Total loans		$	569,238			$	517,125			$	495,676			$	469,820			$	444,273

Loans secured by real estate were $519.6$662.8 million or 91.28%79.25% and $471.8$577.1 million or 91.24%89.50% of total loans at December 31, 20172020 and 2016,2019, respectively. This represents an increase of $47.73$85.7 million or 10.11%14.85% for 2017.2020. Consumer installment loans were $10.2$21.3 million or 1.79%2.55% and $12.7$9.5 million or 2.45%1.48% of total loans at December 31, 20172020 and 2016,2019, respectively. This represents a decreasean increase of $2.5$11.8 million or 19.64%123.47% for 2017.2020. Commercial and industrial loans were $37.4$140.8 million or 6.58%16.83% and $30.3$46.5 million or 5.87%7.22% of total loans at December 31, 20172020 and 2016.2019. This represents an increase of $7.1$94.2 million or 23.35%202.43% for 2017.

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 $316.8$368.1 million or 55.66%44.05% of the loan portfolio matures within five years. The floating rate loans maturing after five years are primarily comprised of home equity lines of credit.

loan secured by 1-4 family residential properties.

Maturity Schedule of Selected Loans

(dollars in thousands)

		December 31, 2020
		Within 1 Year				After 1 Year Within 5 Years				After 5 Years				Total
Loans secured by real estate:
Construction and land development		$	17,616			$	15,600			$	9,328			$	42,544
Secured by farmland			643				6,321				8,882				15,846
Secured by 1-4 family residential properties			16,283				61,996				169,967				248,246
Multifamily			958				13,408				7,130				21,496
Commercial			29,311				98,494				206,856				334,661
Commercial and industrial loans			9,825				90,317				40,620				140,762
Consumer installment loans			528				5,786				15,007				21,321
All other loans			397				612				9,764				10,773
		$	75,561			$	292,534			$	467,554			$	835,649
For maturities over one year:
Floating rate loans						$	39,808			$	113,289			$	153,097
Fixed rate loans							252,726				354,265				606,991
						$	292,534			$	467,554			$	760,088

		December 31, 2017
		Within 1 Year				After 1 Year Within 5 Years				After 5 Years				Total
Loans secured by real estate:
Construction and land development		$	14,352			$	13,578			$	15,856			$	43,786
Secured by farmland		4,685				23				3,860				8,568
Secured by 1-4 family residential properties		30,650				76,524				116,036				223,210
Multifamily		861				886				2,348				4,095
Commercial		35,536				100,602				103,777				239,915
Commercial and industrial loans		18,856				8,702				9,869				37,427
Consumer installment loans		846				8,907				434				10,187
All other loans		1,705				121				224				2,050
		$	107,491			$	209,343			$	252,404			$	569,238
For maturities over one year:
Floating rate loans						$	24,304			$	56,687			$	80,991
Fixed rate loans						185,039				195,717				380,756
						$	209,343			$	252,404			$	461,747

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 $6.4$5.4 million in total non-performing assets, which consist of nonaccrual loans, loans 90 days or more past due and still accruing, other real estate owned, and repossessed assets at December 31, 2017.2020. This is a decreasean increase of $920$3.0 thousand when compared to the December 31, 20162019 balance of $7.4$2.4 million. This increase resulted mostly from the decreaseincrease in nonaccrual loans as discussed below.loans.

Nonaccrual loans were $6.3$4.8 million at December 31, 20172020 and $7.0$2.2 million at 2016.2019. The gross amount of interest income that would have been recognized on nonaccrual loans was $369$158 thousand for 20172020 and $147$52 thousand for 2016.2019. None of this interest income was included in net income for 20172020 or 2016.2019.  A total of 13 loans totaling $1.6$3.8 million were placed in nonaccrual during 2017.2020. The balance of these loans added to nonaccrual status during 20172020 ranged from $2$12 thousand to $368 thousand$1.5 million with anthe average outstanding balance being $122$293 thousand.  In addition, 12five loans totaling $2.1 million$618 thousand were removed from nonaccrual status during 2017.2020.  Of the $2.1 million$618 thousand in loans removed from nonaccrual status between December 31, 20162019 and December 31, 2017, 62020, one loan was paid off, three loans totaling $1.1 million were paid off.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, 20172020 totaled $6.3$4.8 million and had $246 thousand inno specific allocations.

allocations assigned.

Other real estate owned decreased to $106increased from $183 thousand at December 31, 2017, compared2019 to $370$607 thousand at December 31, 2016.2020.  Three foreclosed properties were foreclosed on during 2020. The property held at December 31, 2019 sold during 2017, while only one foreclosed properties was acquired.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 $1 thousand and a net loss of $90$143 thousand was recognized on the foreclosure and sale of other real estate owned during 2017 and 2016, respectively. A net gain2020. Net losses of $46$443 thousand waswere recognized on the sale of other real estate owned during 2015.

Total2019.

Nonperforming and Other Assets

Nonperforming assets consist of nonaccrual loans, loans past due 90 days or more and still accruing interest, were zero, $8 thousand or less than one basis point, and $307 thousand or 0.06% of total loans at December 31, 2017, 2016, and 2015, respectively. The loans past due 90 days or more and still accruing interest are well secured and in the process of collection; therefore, they were not classified as nonaccrual.

Nonperforming and Other Assets

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

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

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

In addition, the Company may, under certain circumstances, restructure loans in troubled debt restructurings as a concession to a borrower when the borrower is experiencing financial distress. Formal, standardized loan restructuring programs are not utilized by the Company. Each loan considered for restructuring is evaluated based on customer circumstances and may include modifications to one or more loan provisions. Such restructured loans are included in impaired loans. At December 31, 2020, 2019, 2018, 2017, 2016, 2015, 2014, and 2013,2016, the Company had $3.3 million, $3.0 million, $3.8 million, $4.4 million $7.3 million, $7.5 million, $7.8 million and $6.4$7.3 million in restructured loans, respectively.

Nonperforming Assets

(dollars in thousands)

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

		December 31,
		2017				2016				2015				2014				2013
Nonaccrual loans		$	6,339			$	6,991			$	5,285			$	10,706			$	4,412
Other real estate owned and repossessed assets		106				375				571				2,109				1,646
Total nonperforming assets		$	6,445			$	7,366			$	5,856			$	12,815			$	6,058
Loans past due 90 days and accruing interest		$	—			$	8			$	307			$	6			$	11
Allowance for loan losses to nonperforming assets		68		%		61		%		85		%		40		%		91		%
Non-performing assets to period end loans and other real estate owned		1.13		%		1.42		%		1.18		%		2.72		%		1.36		%

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, 2017,2020, other potential problem loans totaled $2.3$2.7 million. Of the total other potential problem loans, $2.3$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 $370 thousand, $607$465 thousand and $456 thousand$1.3 million for 2017, 2016,2020 and 2015,2019, respectively. Recoveries were $901 thousand, $341 thousand,$1.1 million and $562$201 thousand for 2017, 2016,2020 and 2015,2019, respectively. Net recoveries were $531 thousand and $106$666 thousand for 2017 and 2015, respectively.2020. Net charge-offs were $266 thousand$1.1 million for 2016.2019. This represents a decrease in net charge-offs of $797 thousand$1.8 million or 299.62%159.89% for 2017 and an increase of $372 thousand or 350.94% for 2016.2020. The allowance for loan losses as a percentage of loans was 0.78%, 0.87%,0.85% and 1.00%0.77% at the end of 2017, 2016,2020 and 2015,2019, 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 decreasesincrease in allowance for loan losses as a percentage of total loans from December 31, 20162019 to December 31, 20172020 is primarily due to a the decline in the historical loss experience utilizedcurrent state of the economy and the related increase in our allowance model. In addition, the Company was diligent in maintaining updated appraisals for collateral-dependent impaired loans, which resulted in an overall decrease in specific reserves in thequalitative factors within our allowance for loan losses, during 2017.primarily associated with the current COVID-19 pandemic. The allowance for loan losses at year-end covered net charge-offs during the year by 16.944.47 times for 2016.2019.  This ratio for 2017 and 20152020 is not considered meaningful due to net recoveries being recognized during the year.recognized. The ratio of net charge-offs (recoveries) to average loans was (0.10)(0.09)% for 2017, 0.05%2020 and 0.18% for 2016 ,and (0.02)%2019.

The provision for 2015.

The (recovery of) loan losses for the year ended December 31, 20172020 was $(625) thousand,$1.5 million, compared to $(188) thousand and $(227)$629 thousand for the yearsyear ended December 31, 2016 and 2015, respectively.2019. The recovery ofprovision for loan losses reflects reductions in impaired loans2020 reflected loan growth in the portfolio during the year as well as non-performing assets combineddecline in the current state of the economy and the related increase in the qualitative factors within our allowance for loan losses, primarily associated with a net recovery positionthe current COVID-19 pandemic.  The provision for 2015 and 2017.

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, 2016, 2015, 2014, and 2013.2016. The amount of allowance for loan losses allocated to each loan category is based on the amount of delinquent loans in that loan category, the status of nonperforming assets in that loan category, the historical losses for that loan category, the evaluation of qualitative factors impacting the portfolio and the financial condition of certain borrowers whose financial conditional is monitored on a periodic basis. Management believes that the allowance for loan losses is adequate based on the loan portfolio’s current risk characteristics.

Analysis of Allowance for Loan Losses

(dollars in thousands)

		December 31,
		2020				2019				2018				2017						2016
Balance, beginning of period		$	4,973			$	5,456			$	4,411			$	4,505					$	4,959
Loans charged-off:
Commercial, financial and agricultural		$	49			$	850			$	139			$	187					$	—
Real estate-construction and land development			119				—				—				19						—
Real estate-mortgage			175				406				24				56						535
Consumer and other loans			122				57				73				108						72
Total loans charged off		$	465			$	1,313			$	236			$	370					$	607
Recoveries:
Commercial, financial and agricultural		$	498			$	52			$	100			$	44					$	11
Real estate-construction and land development			7				8				266				535						144
Real estate-mortgage			577				92				106				277						132
Consumer and other loans			49				49				32				45						54
Total recoveries		$	1,131			$	201			$	504			$	901					$	341
Net charge-offs (recoveries)			(666	)			1,112				(268	)			(531	)					266
Provision for loan losses			1,457				629				777				(625	)					(188	)
Balance, end of period		$	7,096			$	4,973			$	5,456			$	4,411					$	4,505
Ratio of allowance for loan losses to loans outstanding at period end			0.85	%			0.77	%			0.90	%			0.78	%					0.87	%
Ratio of net charge offs (recoveries) to average loans outstanding during the period			(0.09	)%			0.18	%			(0.05	)%			(0.10	)%					0.05	%

		December 31,
		2017				2016				2015				2014				2013
Balance, beginning of period		$	4,505			$	4,959			$	5,080			$	5,488			$	6,577
Loans charged-off:
Commercial, financial and agricultural		187				—				—				—				403
Real estate-construction and land development		19				—				166				482				20
Real estate-mortgage		56				535				199				891				796
Consumer		108				72				91				110				103
Total loans charged off		$	370			$	607			$	456			$	1,483			$	1,322
Recoveries:
Commercial, financial and agricultural		$	44			$	11			$	181			$	164			$	47
Real estate-construction and land development		535				144				75				26				5
Real estate-mortgage		277				132				257				444				116
Consumer		45				54				49				91				65
Total recoveries		$	901			$	341			$	562			$	725			$	233
Net (recoveries) charge-offs		(531		)		266				(106		)		758				1,089
(Recovery of) provision for loan losses		(625		)		(188		)		(227		)		350				—
Balance, end of period		$	4,411			$	4,505			$	4,959			$	5,080			$	5,488
Ratio of allowance for loan losses to loans outstanding at period end		0.78		%		0.87		%		1.00		%		1.08		%		1.24		%
Ratio of net charge offs to average loans outstanding during the period		(0.10		)%		0.05		%		(0.02		)%		0.16		%		0.25		%

Allocation of Allowance for Loan Losses

(dollars in thousands)

		Commercial, Financial, and Agricultural								Real Estate Construction								Real Estate Mortgage								Consumer and Other Loans
		Allowance for Loan Losses				Percent of Loans in Category to Total Loans				Allowance for Loan Losses				Percent of Loans in Category to Total Loans				Allowance for Loan Losses				Percent of Loans in Category to Total Loans				Allowance for Loan Losses				Percent of Loans in Category to Total Loans
December 31, 2020		$	1,395				16.9	%		$	1,613				7.0	%		$	3,665				72.3	%		$	549				3.8	%
December 31, 2019			565				7.2	%			446				8.8	%			3,592				80.7	%			174				3.3	%
December 31, 2018			919				5.4	%			583				10.2	%			3,776				81.6	%			150				2.8	%
December 31, 2017			570				6.6	%			332				9.2	%			3,381				82.1	%			98				2.1	%
December 31, 2016			235				5.9	%			450				6.1	%			3,514				85.1	%			91				2.9	%

		Commercial, Financial, and Agricultural							Real Estate Construction							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, 2017		$	570			6.6	%		$	332			9.2	%		$	3,381			82.1	%		$	98			2.1	%
December 31, 2016		235				5.9	%		450				6.1	%		3,514				85.1	%		91				2.9	%
December 31, 2015		211				5.9	%		775				8.4	%		3,590				82.5	%		162				3.2	%
December 31, 2014		464				6.0	%		951				7.8	%		3,324				82.8	%		145				3.4	%
December 31, 2013		555				4.7	%		1,032				8.3	%		3,562				83.2	%		184				3.8	%

Deposits

Total deposits were $663.4 million$1.01 billion and $603.9$771.5 million at December 31, 20172020 and 2016,2019, respectively, which represents an increase of $59.5$241.6 million or 9.86%31.31% during 2017.2020. The table titled “Average Deposits and Rates Paid” shows the average deposit balances and average rates paid for 2017, 20162020, 2019 and 2015.

2018.

Average Deposits and Rates Paid

(dollars in thousands)

		December 31,
		2020								2019								2018
		Amount				Rate				Amount				Rate				Amount				Rate
Noninterest-bearing		$	341,229							$	258,176							$	246,056
Interest-bearing:
NOW accounts			108,965				0.32	%			89,536				0.50	%			91,353				0.35	%
Money market accounts			184,346				0.50	%			150,291				0.97	%			132,136				0.62	%
Regular savings accounts			122,560				0.10	%			105,176				0.20	%			104,473				0.15	%
Time deposits:
$250,000 and more			75,520				1.59	%			59,550				2.05	%			70,778				0.97	%
Less than $250,000			60,600				1.08	%			61,775				1.38	%			36,808				1.38	%
Total interest-bearing		$	551,991				0.59	%		$	466,328				0.90	%		$	435,548				0.57	%
Total deposits		$	893,220							$	724,504							$	681,604

		December 31,
		2017							2016							2015
		Amount				Rate			Amount				Rate			Amount				Rate
Noninterest-bearing		$	216,044						$	195,428						$	171,508
Interest-bearing:
NOW accounts		85,154				0.19	%		81,966				0.11	%		80,809				0.11	%
Money market accounts		128,068				0.23	%		117,210				0.17	%		99,088				0.11	%
Regular savings accounts		100,838				0.07	%		87,035				0.06	%		76,054				0.05	%
Time deposits:
$100,000 and more		57,010				0.60	%		44,193				0.58	%		36,098				0.47	%
Less than $100,000		39,319				0.58	%		45,133				0.41	%		57,992				0.57	%
Total interest-bearing		$	410,389			0.26	%		$	375,537			0.21	%		$	350,041			0.21	%
Total deposits		$	626,433						$	570,965						$	521,549

Noninterest-bearing demand deposits, which are comprised of checking accounts, increased $26.04$138.4 million or 12.46%51.42% from $208.9$269.2 million at December 31, 20162019 to $235.0$407.6 million at December 31, 2017.2020. Interest-bearing deposits, which include NOW accounts, money market accounts, regular savings accounts and time deposits, increased $33.5$103.1 million or 8.48%20.53% from $394.9$502.4 million at December 31, 20162019 to $428.4$605.5 million at December 31, 2017.2020. Total money market account balances increased $2.9$53.7 million or 2.26%34.84% from $126.6$154.1 million at December 31, 20162019 to $129.5$207.8 million at December 31, 2017.2020. 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 $7.9$29.1 million or 8.37%26.99% from $94.3$107.7 million at December 31, 20162019 to $102.2$136.8 million at December 31, 2017. 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 increased $17.4decreased $9.5 million or 19.75%6.90% from $88.1$138.2 million at December 31, 20162019 to $105.5$128.7 million at December 31, 2017. Brokered certificates of deposits decreased $2.0 million from $2.2 million at December 31, 2016 to $210 thousand at December 31, 2017. The brokered certificates balance at December 31, 2017 and December 31, 2016 consists of certificates obtained through the CDARS network. The Bank joined the CDARS network in 2008, which allows it to offer over $50 million in FDIC insurance on a certificate of deposit.

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, including brokered certificates of deposit.$250,000. Core deposits totaled $620.4$944.3 million or 93.52%93.21% and $580.7$692.4 million or 96.17%89.75% of total deposits at December 31, 20172020 and 2016,2019, 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, 2017.2020. The total amount maturing within one year is $60.6$89.9 million or 88.90%95.32% of the total amount outstanding.

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

(dollars in thousands)

		Within Three Months				Three to Six Months				Six to Twelve Months				Over One Year				Total				Percent of Total Deposits
December 31, 2020		$	28,967			$	24,710			$	36,243			$	4,415			$	94,335				9.31	%

		Within Three Months				Three to Six Months				Six to Twelve Months				Over One Year				Total				Percent of Total Deposits
December 31, 2017		$	9,891			$	25,892			$	24,828			$	7,567			$	68,178			10.28	%

CAPITAL RESOURCES

The Company continues to be a well capitalized financial institution.

Total shareholders’ equity on December 31, 20172020 was $83.8$105.1 million, reflecting a percentage of total assets of 10.95%9.08% as compared to $79.4$96.3 million and 11.34%10.98% at December 31, 2016.2019. The common stock’s book value per share increased $1.39$2.97 or 6.04%10.58% to $24.40$31.05 per share at December 31, 20172020 from $23.01$28.08 per share at December 31, 2016.2019. During 2017,2020, the Company paid $0.88$1.04 per share in dividends as compared to $0.82$1.00 per share for 2016 and $0.80 per share for 2015.2019. The Company has a Dividend Investment Plan that allows participating shareholders to reinvest the dividends in Company stock. During 2017,2020, the Company purchased 52,93667,189 shares of its Common Stock under its stock repurchase program at an average price of $29.54.$27.60.  During 2016,2019, the Company purchased 89,60753,988 shares of its Common Stock under its stock repurchase program at an average price of $23.92. All of these shares were retired. There was no repurchase activity during 2015.

$32.79.  As evidenced below, the Bank continues to be a well capitalized financial institution.

Analysis of ConsolidatedBank Capital

(dollars in thousands)

		December 31, 2020				December 31, 2019
Tier 1 Capital:
Common stock		$	1,682			$	1,682
Capital surplus			9,773				9,773
Retained earnings			86,370				79,320
Total Tier 1 capital		$	97,825			$	90,775
Common equity tier 1 capital		$	97,825			$	90,775
Tier 2 Capital:
Allowance for loan losses and reserves for off-balance sheet commitments		$	7,132			$	4,997
Total Tier 2 capital		$	7,132			$	4,997
Total risk-based capital		$	104,957			$	95,772
Risk weighted assets		$	789,773			$	665,141
Risk Based Capital Ratios:
Common equity Tier 1 capital ratio			12.39	%			13.65	%
Tier 1 risk-based capital ratio			12.39	%			13.65	%
Total risk-based capital ratio			13.29	%			14.40	%
Tier 1 leverage ratio			9.06	%			10.61	%

		December 31, 2017				December 31, 2016
Tier 1 Capital:
Common stock		$	8,587			$	8,633
Capital surplus		12,075				12,642
Retained earnings		62,845				58,165
Total Tier 1 capital		$	83,507			$	79,440
Common equity Tier 1 capital		$	83,507			$	79,440
Tier 2 Capital:
Allowance for loan losses, including reserve for unfunded commitments		$	4,452			$	4,537
Total Tier 2 capital		$	4,452			$	4,537
Total risk-based capital		$	87,959			$	83,977
Risk weighted assets		$	577,845			$	506,632
Risk Based Capital Ratios:
Common equity Tier 1 capital ratio		14.45		%		15.68		%
Tier 1 risk-based capital ratio		14.45		%		15.68		%
Total risk-based capital ratio		15.22		%		16.58		%
Tier 1 leverage ratio		11.21		%		11.84		%

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. The $7,000,000 in trust preferred securities, issued by the Company during 2007, qualified as Tier

Effective January 1, capital at December 31, 2014 because this amount does not exceed 25% of total capital, including the trust preferred securities.

In July 2013,2015, the Federal Reserve issued final rules to include technical changes to its market riskrisk-based capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. Effective January 1, 2015, theThe final rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a new 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 (increased from the prior requirement of 4.0%);assets; (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement);assets; and (iv) a leverage ratio of 4.0% of total assets (unchanged from the prior requirement). These are the initialassets. In addition, a capital requirements, which will beconservation buffer requirement was phased in over a four-year period. Whenbeginning 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 oneffective January 1, 2019, the rules will require the Company and 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, as that buffer is phased in, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation)), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation)), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation)), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

The

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 conservation buffer requirement will be 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% on 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.

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 CompanyBank at December 31, 20172020 and 2016. Beginning January2019.

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 2015,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 Company calculates its regulatory capitalFDIC, 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 U.S. Basel III Standardized Approach.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 Company calculated regulatory capital measuresCBLR framework was first available for periods priorbanks to 2015 under previous regulatory requirements.

use beginning in their March 31, 2020, Call Report. The Bank did not opt into the CBLR framework as of December 31, 2020.

Note 1615 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, 20172020 liquid assets totaled $270.1$320.4 million as compared to $248.1$290.3 million at December 31, 2016.2019. These amounts represent 39.61%31.26% and 39.10%37.17% of total liabilities at December 31, 20172020 and 2016,2019, respectively. Securities provide a constant source of liquidity through paydowns and maturities. Also, the Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity. The Bank’s membership with the Federal Home Loan Bank of Atlanta also provides a source of borrowings with numerous rate and term structures. The Company’s senior management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Note 1918 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, 2017.

2020.

Contractual Obligations and Scheduled Payments

(dollars in thousands)

		December 31, 2020
		Less than One Year				One Year through Three Years				Three Years through Five Years				More than Five Years				Total
Operating leases		$	319			$	645			$	673			$	4,039			$	5,676
		$	319			$	645			$	673			$	4,039			$	5,676

		December 31, 2017
		Less than One Year				One Year through Three  Years				Three Years through Five Years				More than Five Years				Total
Operating leases		$	200			$	413			$	440			$	1,724			$	2,777
		$	200			$	413			$	440			$	1,724			$	2,777

The payments due on operating leases are discussed in Note 613 to the Consolidated Financial Statements.

Item 7A.     Quantitative and Qualitative Disclosures about Market Risk

As the holding company of the Bank, the Company’s primary component of market risk is interest rate volatility. Interest rate fluctuations will impact the amount of interest income and expense the Bank receives or pays on almost all of its assets and liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those which have a very short term until maturity. Interest rate risk exposure of the Company is, therefore, experienced at the Bank level. Asset / liability management attempts to maximize the net interest income of the Company by adjusting the volume and price of rate sensitive assets and liabilities. The Company does not subject itself to foreign currency exchange or commodity price risk due to prohibition through policy and the current nature of operations. Note 14 to the Consolidated Financial Statements discusses derivativeDerivative instruments and hedging activities of the Company. The Company entered into an interest rate swap agreement related to the outstanding trust preferred capital notes during 2008. Thehave 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 previously evaluated change in net interest income by gradually ramping rates up or down over a 12 or 24 month period. The Bank now views the immediate shock of rates as a more effective measure of interest rate risk exposure. The analysis assesses the impact on net interest income over a 12 month period after an immediate increase or “shock” in rates, of 100 basis points up to 400 basis points. The shock down 200 to 400 basis points analysis is not meaningful as interest rates are at historic lows and cannot decrease another 200 to 400 basis points and therefore only an immediate decrease or “shock” of 100 basis points is disclosed. The simulation analysis results are presented in the table below:

Year 1 Net Interest Income Simulation

(dollars in thousands)

		Change in Net Interest Income
Assumed Market Interest Rate Shock		Dollars				Percent Change
-100 BP			(427	)			(1.27	)%
+100 BP			1,149				3.42	%
+200 BP			1,555				4.63	%
+300 BP			1,957				5.83	%
+400 BP			2,302				6.85	%

		Change in Net Interest Income
Assumed Market Interest Rate Shock		Dollars				Percent Change
-100 BP		$	(1,359	)		(4.90	)%
+100 BP		(167		)		(0.60	)%
+200 BP		(437		)		(1.60	)%
+300 BP		(616		)		(2.20	)%
+400 BP		(786		)		(2.80	)%

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

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

Static EVE Change

(dollars in thousands)

		Change in EVE
Assumed Market Interest Rate Shift		Dollars				Percent Change
-100 BP Shock			4,502				4.17	%
+100 BP Shock			(13,462	)			(12.46	)%
+200 BP Shock			(256	)			(0.24	)%
+300 BP Shock			10,414				9.64	%
+400 BP Shock			18,700				17.31	%

		Change in EVE
Assumed Market Interest Rate Shift		Dollars				Percent Change
-100 BP Shock		$	(17,842	)		(15.90	)%
+100 BP Shock		5,156				4.60	%
+200 BP Shock		7,045				6.30	%
+300 BP Shock		8,346				7.40	%
+400 BP Shock		8,937				8.00	%

Item 8.     Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Shareholders and 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, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income, changes in shareholders'shareholders’ equity, and cash flows for each of the three years in the periodthen ended, December 31, 2017, 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, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the periodthen ended, December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 15, 2018 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

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

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

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

Critical Audit Matter

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

Allowance for Loan Losses – General Allowance – Qualitative Factors

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

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

How We Addressed the Matter in Our Audit

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

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

•

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

•

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

•

Evaluating the qualitative factors for directional consistency and for reasonableness.

•

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

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

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

Winchester, Virginia

March 15, 2018

30, 2021

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

Eagle Financial Services, Inc.

Berryville, Virginia

Opinion on the Internal Control Over Financial Reporting

We have audited Eagle Financial Services, Inc. and subsidiary’s (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes to the consolidated financial statements of the Company and our report dated March 15, 2018 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

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

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

Winchester, Virginia

March 15, 2018

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 20172020 and 2016

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

	2017				2016
Assets
Cash and due from banks	$	10,578			$	12,515
Interest-bearing deposits with other institutions	22,094				22,610
Federal funds sold	3,176				156
Total cash and cash equivalents	35,848				35,281
Securities available for sale, at fair value	132,566				119,262
Restricted investments	1,107				1,068
Loans	568,817				516,942
Allowance for loan losses	(4,411		)		(4,505		)
Net loans	564,406				512,437
Bank premises and equipment, net	19,579				20,169
Other real estate owned, net of allowance	106				370
Other assets	12,139				11,562
Total assets	$	765,751			$	700,149
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand deposits	$	234,990			$	208,948
Savings and interest bearing demand deposits	322,948				306,847
Time deposits	105,476				88,082
Total deposits	$	663,414			$	603,877
Other liabilities	18,520				16,856
Total liabilities	$	681,934			$	620,733
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 2017, 3,449,027 including 14,401 unvested restricted stock; issued and outstanding 2016, 3,468,243 including 14,901 unvested restricted stock	8,587				8,633
Surplus	12,075				12,642
Retained earnings	62,845				58,165
Accumulated other comprehensive income (loss)	310				(24		)
Total shareholders’ equity	$	83,817			$	79,416
Total liabilities and shareholders’ equity	$	765,751			$	700,149

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Income

Years Ended December 31, 2017, 2016,2020 and 2015

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

	2017				2016				2015
Interest and Dividend Income
Interest and fees on loans	$	24,821			$	23,037			$	21,751
Interest and dividends on securities available for sale:
Taxable interest income	2,278				1,669				1,645
Interest income exempt from federal income taxes	1,034				925				972
Dividends	61				81				99
Interest on deposits in banks	157				73				26
Total interest and dividend income	$	28,351			$	25,785			$	24,493
Interest Expense
Interest on deposits	1,084				787				741
Interest on federal funds purchased and securities sold under agreements to repurchase	13				1				10
Interest on Federal Home Loan Bank advances	57				136				336
Interest on trust preferred capital notes	—				—				78
Interest on interest rate swap	—				143				182
Total interest expense	$	1,154			$	1,067			$	1,347
Net interest income	$	27,197			$	24,718			$	23,146
(Recovery Of) Loan Losses	(625		)		(188		)		(227		)
Net interest income after (recovery of) loan losses	$	27,822			$	24,906			$	23,373
Noninterest Income
Income from fiduciary activities	$	1,238			$	1,356			$	1,338
Service charges on deposit accounts	1,223				1,227				1,244
Other service charges and fees	3,878				3,713				3,375
(Loss) on the sale and disposal of premises and equipment	(12		)		(10		)		(76		)
(Loss) gain on sale of securities	(10		)		98				124
Gain on redemption of trust preferred debt	—				—				2,424
Other operating income	463				285				9
Total noninterest income	$	6,780			$	6,669			$	8,438
Noninterest Expenses
Salaries and employee benefits	$	13,643			$	13,015			$	12,318
Occupancy expenses	1,473				1,486				1,563
Equipment expenses	955				889				751
Advertising and marketing expenses	731				633				612
Stationery and supplies	173				201				242
ATM network fees	816				903				805
Other real estate owned expense	11				73				336
(Gain) loss on foreclosure and sale of other real estate owned	(1		)		90				(46		)
FDIC assessment	222				304				439
Computer software expense	647				623				696
Bank franchise tax	534				501				505
Professional fees	1,007				949				996
Data processing fees	564				444				380
Other bank service charges	66				209				71
Cost to terminate operating lease	—				—				520
Other operating expenses	2,349				2,332				2,293
Total noninterest expenses	$	23,190			$	22,652			$	22,481
Income before income taxes	$	11,412			$	8,923			$	9,330
Income Tax Expense	3,626				2,553				2,433
Net income	$	7,786			$	6,370			$	6,897
Earnings Per Share
Net income per common share, basic	$	2.24			$	1.81			$	1.97
Net income per common share, diluted	$	2.24			$	1.81			$	1.97

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2017, 2016,2020 and 2015

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

	2017				2016				2015
Net income	$	7,786			$	6,370			$	6,897
Other comprehensive income (loss):
Changes in benefit obligations and plan assets for post retirement benefit plans, net of reclassification adjustments, net of deferred income tax of ($1), $0 and $0 for the years ended December 31, 2017, 2016, and 2015, respectively	(2		)		—				—
Unrealized gain (loss) on available for sale securities, net of reclassification adjustments, net of deferred income tax of $147, ($554), and ($234) for the years ended December 31, 2017, 2016, and 2015, respectively	285				(1,075		)		(454		)
Change in fair value of interest rate swap, net of deferred income tax of $0, $0, and $99 for the years ended December 31, 2017, 2016 and 2015, respectively	—				—				190
Total other comprehensive income (loss)	283				(1,075		)		(264		)
Total comprehensive income	$	8,069			$	5,295			$	6,633

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Years Ended December 31, 2017, 2016,2020 and 2015

2019

(dollars in thousands, except per share amounts)

		Common Stock				Surplus				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
December 31, 2018		$	8,573			$	11,992			$	68,587			$	(1,553	)		$	87,599
Net income											9,759								9,759
Other comprehensive income															3,035				3,035
Restricted stock awards, stock incentive plan (18,150 shares)			46				(46	)											—
Stock-based compensation expense							562												562
Issuance of common stock, dividend investment plan (14,176 shares)			35				406												441
Issuance of common stock, employee benefit plan (4,064 shares)			10				128												138
Retirement of common stock (53,988 shares)			(135	)			(1,636	)											(1,771	)
Dividends declared ($1.00 per share)											(3,437	)							(3,437	)
December 31, 2019		$	8,529			$	11,406			$	74,909			$	1,482			$	96,326
Net income											11,172								11,172
Other comprehensive income															1,797				1,797
Restricted stock awards, stock incentive plan (19,238 shares)			48				(48	)											—
Stock-based compensation expense							604												604
Issuance of common stock, dividend investment plan (13,239 shares)			33				326												359
Issuance of common stock, employee benefit plan (7,204 shares)			18				209												227
Retirement of common stock (67,189 shares)			(168	)			(1,686	)											(1,854	)
Dividends declared ($1.04 per share)											(3,557	)							(3,557	)
December 31, 2020		$	8,460			$	10,811			$	82,524			$	3,279			$	105,074

	Common Stock				Surplus				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
Balance, December 31, 2014	$	8,621			$	12,618			$	50,578			$	1,315			$	73,132
Net income									$	6,897							6,897
Other comprehensive (loss)													(264		)		(264		)
Restricted stock awards, stock incentive plan (14,363 shares)	36				(36		)										—
Income tax expense on vesting of restricted stock					5												5
Stock based compensation expense					328												328
Issuance of common stock, dividend investment plan (32,340 shares)	81				648												729
Issuance of common stock, employee benefit plan (8,030 shares)	20				167												187
Dividends declared ($0.80 per share)									(2,793		)						(2,793		)
Balance, December 31, 2015	$	8,758			$	13,730			$	54,682			$	1,051			$	78,221
Net income									6,370								6,370
Other comprehensive (loss)													(1,075		)		(1,075		)
Restricted stock awards, stock incentive plan (13,196 shares)	33				(33		)										—
Income tax benefit on vesting of restricted stock					2												2
Stock-based compensation expense					314												314
Issuance of common stock, dividend investment plan (23,180 shares)	58				475												533
Issuance of common stock, employee benefit plan (3,326 shares)	8				73												81
Retirement of common stock (89,607 shares)	(224		)		(1,919		)										(2,143		)
Dividends declared ($0.82 per share)									(2,887		)						(2,887		)
Balance, December 31, 2016	$	8,633			$	12,642			$	58,165			$	(24	)		$	79,416
Net income									7,786								7,786
Other comprehensive income													283				283
Reclassification of stranded tax effects from change in tax rate									(51		)		51				—
Restricted stock awards, stock incentive plan (14,493 shares)	36				(36		)										—
Stock-based compensation expense					382												382
Issuance of common stock, dividend investment plan (13,769 shares)	35				368												403
Issuance of common stock, employee benefit plan (5,958 shares)	15				151												166
Retirement of common stock (52,936 shares)	(132		)		(1,432		)										(1,564		)
Dividends declared ($0.88 per share)									(3,055		)						(3,055		)
Balance, December 31, 2017	$	8,587			$	12,075			$	62,845			$	310			$	83,817

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years Ended December 31, 2017, 2016,2020 and 2015

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

	2017				2016				2015
Cash Flows from Operating Activities
Net income	$	7,786			$	6,370			6,897
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	946				932				843
Amortization of intangible and other assets	200				192				198
(Recovery of) loan losses	(625		)		(188		)		(227		)
Valuation adjustments other real estate owned	—				12				288
(Gain) loss on foreclosure and sale of other real estate owned	(1		)		90				(46		)
Loss on the sale and disposal of premises and equipment	12				10				76
Loss on the sale of repossessed assets	6				1				—
Loss (gain) on the sale of securities	10				(98		)		(124		)
(Gain) on the redemption of trust preferred capital notes	—				—				(2,424		)
Loss on derecognition of cash flow hedge	—				—				237
Fair value adjustment on derivative contract	—				(149		)		(88		)
Stock-based compensation expense	382				314				328
Premium amortization on securities, net	443				370				210
Deferred tax expense	532				207				432
Changes in assets and liabilities:
(Increase) decrease in other assets	(1,465		)		(1,095		)		2,085
Increase (decrease) in other liabilities	1,141				2,732				(1,521		)
Net cash provided by operating activities	$	9,367			$	9,700			$	7,164
Cash Flows from Investing Activities
Proceeds from maturities, calls, and principal payments of securities available for sale	$	10,714			$	23,535			$	17,368
Proceeds from the sale of securities available for sale	20,283				11,356				3,653
Purchases of securities available for sale	(43,797		)		(40,418		)		(33,453		)
Proceeds from the sale of restricted securities	850				850				1,325
Purchases of restricted securities	(889		)		(22		)		(413		)
Proceeds from the sale of bank premises and equipment	—				—				7
Purchases of bank premises and equipment	(368		)		(257		)		(2,875		)
Proceeds from the sale of other real estate owned	318				564				1,956
Proceeds from the sale of repossessed assets	3				4				10
Net (increase) in loans	(51,401		)		(21,995		)		(26,317		)
Net cash (used in) investing activities	$	(64,287	)		$	(26,383	)		$	(38,739	)
Cash Flows from Financing Activities
Net increase in demand deposits, money market and savings accounts	$	42,143			$	57,448			$	49,690
Net increase (decrease) in certificates of deposit	17,394				(4,289		)		(2,788		)
Net (decrease) increase in Federal Home Loan Bank advances	—				(20,000		)		(20,000		)
Redemption of trust preferred capital notes	—				—				(4,793		)
Issuance of common stock, employee benefit plan	166				81				187
Retirement of common stock	(1,564		)		(2,143		)		—
Cash dividends paid	(2,652		)		(2,354		)		(2,064		)
Net cash provided by financing activities	$	55,487			$	28,743			$	20,232

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (continued)

Years Ended December 31, 2017, 2016, and 2015

(dollars in thousands)

	2017				2016				2015
Increase (decrease) in cash and cash equivalents	$	567			$	12,060			$	(11,343	)
Cash and Cash Equivalents
Beginning	35,281				23,221				34,564
Ending	$	35,848			$	35,281			$	23,221
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	1,144			$	1,099			$	1,442
Income taxes	$	2,744			$	—			$	583
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized gain (loss) on securities available for sale	$	432			$	(1,629	)		$	(688	)
Minimum postretirement liability adjustment	$	3			$	—			$	—
Change in fair value of interest rate swap	$	—			$	—			$	52
Other real estate and repossessed assets acquired in settlement of loans	$	57			$	675			$	870
Loans made to finance the sale of other real estate owned	$	—			$	315			$	200
Issuance of common stock, dividend investment plan	$	403			$	533			$	729
Purchases of securities available for sale settled subsequent to year end	$	10,346			$	9,826			$	—

See Notes to Consolidated Financial Statements

NOTE 1. Nature of Banking Activities and Significant Accounting Policies

Eagle Financial Services, Inc. (the “Company” or “Corporation”) and Subsidiarythe 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. SecuritiesDebt securities not classified as held to maturity including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in income.  Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be “other than temporary” are reflected in earnings as realized losses. In estimating “other than temporary” impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

The Bank is required to maintain an investment in the capital stock of certain correspondent banks. No readily available market exists for this stock and it has no quoted market value. The investment in these securities is recorded at cost and they are reported on the Company’s consolidated balance sheet as restricted investments.

Loans

The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout the Counties of Clarke, Frederick, and Loudoun, Virginia and the City of Winchester, Virginia. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses. Interest income is accrued on the unpaid principal balance.  Loan fees collected and certain costs incurred related to loan originations are deferred and amortized as an adjustment to interest income over the life of the related loans. Deferred fees and costs are recorded as an adjustment to interest income using a method that approximates a constant yield.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 120 and 90 days delinquent, respectively, unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal and interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Troubled Debt Restructurings (TDR)

In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower’s payment history, past due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on non-accrual status at the time of the TDR, the loan will remain on non-accrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above.

Risks by Loan Portfolio Segments

One-to-Four-Family Residential Real Estate Lending

Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. As part of the application process, information is gathered concerning income, employment and credit history of the applicant. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Directors Loan Committee.

Commercial Real Estate Lending

Commercial real estate lending entails significant additional risk as compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or the economy, in general.

Construction and Land Development Lending

There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of the estimated appraised value of the finished home.

Commercial and Industrial Lending

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

Consumer Lending

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

Paycheck Protection Program Loans

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

Allowance for Loan Losses

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

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

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

agreement or are in a nonaccrual status.

Bank Premises and Equipment

Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range from10 to 39 years for buildings and 3 to 10 years for furniture and equipment.

Other Real Estate Owned

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

(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 12.

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 11.

10.

Income Taxes

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

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

Advertising

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

Reclassifications

Certain reclassifications have been made to the 20162019 financial statements to conform to reporting for 2017.2020.  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

	2017			2016			2015
Weighted average number of common shares outstanding used to calculate basic earnings per share	3,468,275			3,518,848			3,495,334
Effect of dilutive common stock	—			—			—
Weighted average number of common shares outstanding used to calculate diluted earnings per share	3,468,275			3,518,848			3,495,334

There were no0 potentially dilutive securities outstanding in 2017, 20162020 or 2015.

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 unrealized gains or losses on interest rate swaps, and unrealized gains or losses on available for sale securities.

Derivative Financial Instruments

The Company follows GAAP to account for derivative and hedging activities. Accordingly, a derivative is recognized in the balance sheet at its fair value. The fair value of a derivative is determined by quoted market prices and mathematical models using current and historical data. If certain hedging criteria are met, including testing for hedge effectiveness, special hedge accounting may be applied. The Company assesses each hedge, both at inception and on an ongoing basis, to determine whether the derivative used in a hedging transaction is effective in offsetting changes in the fair value or cash flows of the hedged item and whether the derivative is expected to remain effective during subsequent periods. The Company discontinues hedge accounting when (a) it determines that a derivative is no longer effective in offsetting changes in fair value or cash flows of a hedged item; (b) the derivative expires or is sold, terminated or exercised; (c) probability exists that the forecasted transaction will no longer occur or (d) management determines that designating the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued and a derivative remains outstanding, the Company recognizes the derivative in the balance sheet at its fair value and changes in the fair value are recognized in net income.

At inception, the Company designates a derivative as (a) a fair value hedge of recognized assets or liabilities or of unrecognized firm commitments (fair-value hedge) or (b) a hedge of forecasted transactions or variable cash flows to be received or paid in conjunction with recognized assets or liabilities (cash-flow hedge). For a derivative treated as a fair-value hedge, a change in fair value is recorded as an adjustment to the hedged item and recognized in net income. For a derivative treated as a cash flow hedge, the effective portion of a change in fair value is recorded as an adjustment to the hedged item and recognized as a component of accumulated other comprehensive income (loss) within shareholders’ equity. For a derivative treated as a cash flow hedge, the ineffective portion of a change in fair value is recorded as an adjustment to the hedged item and recognized in net income. For more information on derivative financial instruments see Note 14 to the Consolidated Financial Statements.

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. Material estimatesThe material estimate that areis particularly susceptible to significant change in the near term relaterelates to the determination of the allowance for loan losses, valuation of other real estate owned, and the evaluation for other-than-temporary impairment of investment securities.losses.

Stock Repurchase Program

On June 21, 2017,17, 2020, the Corporation renewed the stock repurchase program to repurchase up to 150,000 shares of its common stock prior to June 30, 2018.2021. During 2017,2020, the Company purchased 52,93667,189 shares of its Common Stock under its stock repurchase program at an average price of $29.54.$27.60.  During 2016,2019, the Company purchased 89,60753,988 shares of its Common Stock under its stock repurchase program at an average price of $23.92. All of these shares we retired. There was no repurchase activity during 2015.$32.79.  The maximum number of shares that may yet be purchased under the plan as of December 31, 20172020 are 111,115.

121,425.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The original guidance has been amended through subsequent accounting standard updates that resulted in technical corrections, improvements, and a one-year deferral of the effective date to January 1, 2018. The guidance, as amended, is applicable to all entities and, once effective, will replace significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives, and sales of financial instruments are similarly excluded from the scope. Entities can elect to adopt the guidance either on a full or modified retrospective basis. Full retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the earliest comparative period presented. Modified retrospective adoption will require a cumulative effect adjustment to retained earnings as of the beginning of the reporting period in which the entity first applies the new guidance. The Company plans to adopt this guidance on the effective date, January 1, 2018 via the modified retrospective approach. The Company has completed its assessment of the adoption of this ASU, noting the standard will result in expanded disclosures related to non-interest income and enhance the qualitative disclosures on the revenues within the scope of the new guidance. The Company has concluded the adoption of ASU 2014-09 will not have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU has been discussed with the Company's current vendor to address updated disclosure requirements of 2016-01. The Company does not expect the adoption of ASU 2016-01 to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements. The Company has been gathering the lease agreement data and has begun to analyze the monetary impact to the consolidated financial statements. At December 31, 2017, the Company had only one lease.

In June 2016, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting 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 amendmentsFASB has issued multiple updates to ASU 2016-13 as codified in this ASUTopic 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 effective for SEC filersrequired to apply the guidance for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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 monthlyweekly to address the compliance requirements. Historic loan data is currently beinghas been gathered and reviewed for completeness and accuracy. In addition, the committee has selected a third-party that is in the process of selecting a model that will assistassisting in calculating the financial impact of ASU 2016-13 and anticipates running parallel allowance models under the current and new standard well 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 August 2016,December 2019, the FASB issued ASU No. 2016-15, “Statement2019-12, “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 Cash Flows (Topic 230): Classificationcertain income tax-related guidance. This ASU is part of Certain Cash Receiptsthe FASB’s simplification initiative to make narrow-scope simplifications and Cash Payments”,improvements to address diversity in how certain cash receipts and cash payments are presented and classified inaccounting standards through a series of short-term projects.  For public business entities, the statement of cash flows. The amendments are effective for fiscal years beginning after December 15, 2017,2020, and interim periods within those fiscal years.  The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable.Early adoption is permitted, including adoption in an interim period.permitted. The Company does not expectis currently assessing the adoption ofimpact that ASU 2016-15 to2019-12 will have a material impact on its consolidated financial statements.

In January 2017,2020, the FASB issued ASU No. 2017-01, “Business Combinations2020-01, “Investments – Equity Securities (Topic 805):321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the DefinitionInteractions between Topic 321, Topic 323, and Topic 815.”  The ASU is based on a consensus of a Business”. The amendmentsthe Emerging Issues Task Force and is expected to increase comparability in thisaccounting for these transactions.  ASU clarify the definition of a business with the objective of adding guidance2016-01 made targeted improvements to assist entities with evaluating whether transactions should be accountedaccounting for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business-inputs, processes, and outputs. Whilefinancial instruments, including providing an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute toentity the ability to create output and (2) removemeasure 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 evaluationidentical or a similar investment of whether a market participant could replace missing elements. The ASU provides a frameworkthe same issuer.  Among other topics, the amendments clarify that an entity should consider observable transactions that require it to assisteither apply or discontinue the equity method of accounting.  For public business entities, in evaluating whether both an input and a substantive process are present. Thethe amendments in thisthe ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are U.S. Securities and Exchange Commission (SEC) filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost2020, and Net Periodic Postretirement Benefit Cost.” The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.fiscal years.  Early adoption is permitted. The Company does not expect the adoption of ASU 2017-072020-01 to have a material impact on its consolidated financial statements.

In March 2017,2020, the FASBFinancial 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 2017‐08, “Receivables-Nonrefundable Feesprovides 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 CostsOptions (Subtopic 310‐20), Premium Amortization on Purchased Callable Debt Securities.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 thisthe ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018,2021, and interim periods within those fiscal years.  For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.

In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period. Upon transition,not permitted. All entities should apply the guidanceASU No. 2020-08 on a modified retrospectiveprospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017‐08 will have on its consolidated financial statements.

During May 2017, the FASB issued ASU 2017‐09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.  The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The Company is currently assessing the impact that ASU 2017‐09 will have on its consolidated)financial statements.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period.existing or newly purchased callable debt securities. The Company does not expect the adoption of ASU 2017-122020-06 to have a material impact on its consolidated financial statements.

Recently Adopted Accounting Developments

In February 2018,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 issued ASU 2018-02, “Incomethat 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 - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The amendments provide financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effectaddresses accounting and regulatory reporting considerations for loan modifications, including those accounted for under Section 4013 of the change in the U.S. federal corporate incomeCoronavirus 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 rate in the Tax Cutschanges and Jobs Act (or portion thereof) is recorded.other types of relief.  The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effectmost significant impacts of the change inAct related to accounting for loan modifications and establishment of the U.S. federal corporate income tax rate inPaycheck Protection Program (“PPP”).  On December 21, 2020, the Tax CutsConsolidated 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 Jobs Acttreatment of certain loan modifications related to the COVID-19 pandemic. This interagency guidance is recognized. The Company has electedexpected to reclassifyhave a material impact on the stranded income tax effects from the Tax Cuts and Jobs Act in the consolidatedCompany’s financial statements for the period ending December 31, 2017. The amount ofstatements; however, this reclassification in 2017 was $51 thousand.

impact cannot be quantified at this time.  

NOTE 2. Securities

Amortized costs and fair values of securities available for sale at December 31, 20172020 and 20162019 were as follows:

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized (Losses)				Fair Value
		December 31, 2020
		(in thousands)
Obligations of U.S. government corporations and agencies		$	16,576			$	907			$	—			$	17,483
Mortgage-backed securities			117,161				1,894				(46	)			119,009
Obligations of states and political subdivisions			25,840				1,373				—				27,213
Subordinated debt			1,250				—				—				1,250
		$	160,827			$	4,174			$	(46	)		$	164,955

		December 31, 2019
		(in thousands)
Obligations of U.S. government corporations and agencies		$	21,917			$	363			$	(94	)		$	22,186
Mortgage-backed securities			107,410				966				(215	)			108,161
Obligations of states and political subdivisions			33,854				858				(56	)			34,656
		$	163,181			$	2,187			$	(365	)		$	165,003

	Amortized Cost				Gross Unrealized Gains				Gross Unrealized (Losses)				Fair Value
	December 31, 2017
	(in thousands)
Obligations of U.S. government corporations and agencies	$	21,565			$	213			$	(258	)		$	21,520
Mortgage-backed securities	61,464				126				(346		)		61,244
Obligations of states and political subdivisions	49,199				789				(186		)		49,802
	$	132,228			$	1,128			$	(790	)		$	132,566
	December 31, 2016
	(in thousands)
Obligations of U.S. government corporations and agencies	$	30,404			$	316			$	(279	)		$	30,441
Mortgage-backed securities	42,681				147				(456		)		42,372
Obligations of states and political subdivisions	46,271				770				(592		)		46,449
	$	119,356			$	1,233			$	(1,327	)		$	119,262

Carrying amounts of restricted securities at December 31, 20172020 and 20162019 were as follows:

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

	December 31, 2017				December 31, 2016
	(in thousands)
Federal Reserve Bank Stock	$	344			$	344
Federal Home Loan Bank Stock	623				584
Community Bankers’ Bank Stock	140				140
	$	1,107			$	1,068

The amortized cost and fair value of securities available for sale at December 31, 2017,2020, by contractual maturity, are shown below. Maturities may differ from contractual maturities primarily (others could be called) in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.

		Amortized Cost				Fair Value
		(in thousands)
Due in one year or less		$	751			$	760
Due after one year through five years			8,587				8,879
Due after five years through ten years			32,281				34,056
Due after ten years			119,208				121,260
		$	160,827			$	164,955

		Amortized Cost				Fair Value
		(in thousands)
Due in one year or less		$	4,596			$	4,619
Due after one year through five years		14,275				14,597
Due after five years through ten years		44,832				44,927
Due after ten years		68,525				68,423
		$	132,228			$	132,566

During the twelve months endedDecember 31, 2017, the Company sold $20.3 million in available for sale securities with gross gains of $94 thousand and gross losses of $104 thousand. During the twelve months endedDecember 31, 2016, the Company sold $11.4 million in available for sale securities with gross gains of $108 thousand and gross losses of $10 thousand.

During the twelve months ended December 31, 2015,2020, the Company sold $3.7$28.3 million in available for sale securities with gross gains of $124$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 gross unrealized loss position, at December 31, 20172020 and 20162019 were as follows:

		Less than 12 months								12 months or more								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
		December 31, 2020
		(in thousands)
Mortgage-backed securities		$	12,014			$	46			$	—			$	—			$	12,014			$	46
		$	12,014			$	46			$	—			$	—			$	12,014			$	46
		Less than 12 months								12 months or more								Total
		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
		December 31, 2019
		(in thousands)
Obligations of U.S. government corporations and agencies		$	5,466			$	91			$	1,997			$	3			$	7,463			$	94
Mortgage-backed securities			19,509				176				5,271				39				24,780				215
Obligations of states and political subdivisions			3,127				49				923				7				4,050				56
		$	28,102			$	316			$	8,191			$	49			$	36,293			$	365

	Less than 12 months								12 months or more								Total
	Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
	December 31, 2017
	(in thousands)
Obligations of U.S. government corporations and agencies	$	4,455			$	58			$	7,810			$	200			$	12,265			$	258
Mortgage-backed securities	11,885				59				17,931				287				29,816				346
Obligations of states and political subdivisions	4,071				27				4,692				159				8,763				186
	$	20,411			$	144			$	30,433			$	646			$	50,844			$	790
	December 31, 2016
	(in thousands)
Obligations of U.S. government corporations and agencies	$	19,129			$	279			$	—			$	—			$	19,129			$	279
Mortgage-backed securities	28,013				456				—				—				28,013				456
Obligations of states and political subdivisions	16,823				592				—				—				16,823				592
	$	63,965			$	1,327			$	—			$	—			$	63,965			$	1,327

Gross unrealized losses on available for sale securities included fifty-four (54)3 (3) and eighty (80)NaN (28) debt securities at December 31, 20172020 and December 31, 2016,2019, 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, 20172020 and December 31, 20162019 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.

The Company’s securities are exposed to various risks, such as interest rate, market, currency and credit risks. Due to the level of risk associated with certain securities and the level of uncertainty related to changes in the value of securities, it is at least reasonably possible that changes in risks in the near term would materially affect securities reported in the financial statements. In addition, recent economic uncertainty and market events have led to unprecedented volatility in currency, commodity, credit and equity markets culminating in failures of some banking and financial services firms and government intervention to solidify others. These events underscore the level of investment risk associated with the current economic environment, and accordingly the level of risk in the Company’s securities.

Securities having a carrying value of $2.6$3.1 million at December 31, 20172020 were pledged as security for various purposes required by law.

trust accounts.

NOTE 3. Loans

The composition of loans at December 31, 20172020 and 20162019 was as follows:

		December 31,
		2020				2019
		(in thousands)
Mortgage loans on real estate:
Construction and land development		$	42,544			$	42,561
Secured by farmland			15,846				13,917
Secured by 1-4 family residential properties			248,246				219,580
Multifamily			21,496				14,415
Commercial			334,661				286,600
Commercial and industrial loans			140,762				46,543
Consumer installment loans			21,321				9,541
All other loans			10,773				12,050
Total loans		$	835,649			$	645,207
Net deferred loan costs (fees)			685				(447	)
Allowance for loan losses			(7,096	)			(4,973	)
		$	829,238			$	639,787

		December 31,
		2017				2016
		(in thousands)
Mortgage loans on real estate:
Construction and land development		$	43,786			$	23,266
Secured by farmland		8,568				8,525
Secured by 1-4 family residential properties		223,210				227,966
Multifamily		4,095				3,566
Commercial		239,915				208,525
Commercial and industrial loans		37,427				30,341
Consumer installment loans		10,187				12,677
All other loans		2,050				2,259
Total loans		$	569,238			$	517,125
Net deferred loan fees		(421		)		(183		)
Allowance for loan losses		(4,411		)		(4,505		)
Net Loans		$	564,406			$	512,437

NOTE 4. Allowance for Loan Losses

Changes in the allowance for loan losses for the years December 31, 2017, 20162020 and 20152019 were as follows:

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

	December 31,
	2017				2016				2015
					(in thousands)
Balance, beginning	$	4,505			$	4,959			$	5,080
(Recovery of) loan losses	(625		)		(188		)		(227		)
Recoveries added to the allowance	901				341				562
Loan losses charged to the allowance	(370		)		(607		)		(456		)
Balance, ending	$	4,411			$	4,505			$	4,959

Nonaccrual and past due loans by class at December 31, 20172020 and December 31, 20162019 were as follows:

		December 31, 2020
		(in thousands)
		30 - 59 Days Past Due				60 - 89 Days Past Due				90 or More Days Past Due				Total Past Due				Current				Total Loans				90 or More Days Past Due Still Accruing				Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial		$	43			$	—			$	—			$	43			$	140,719			$	140,762			$	—			$	—
Commercial Real Estate:
Owner Occupied			—				—				157				157				165,764				165,921				—				1,227
Non-owner occupied			500				—				122				622				168,118				168,740				—				2,405
Construction and Farmland:
Residential			—				—				—				—				10,644				10,644				—				—
Commercial			—				—				69				69				47,677				47,746				—				69
Consumer:
Installment			5				—				—				5				21,316				21,321				—				5
Residential:
Equity Lines			13				—				—				13				31,239				31,252				—				42
Single family			249				123				581				953				216,041				216,994				—				1,006
Multifamily			—				—				—				—				21,496				21,496				—				—
All Other Loans			—				—				—				—				10,773				10,773				—				—
Total		$	810			$	123			$	929			$	1,862			$	833,787			$	835,649			$	—			$	4,754
		December 31, 2019
		(in thousands)
		30 - 59 Days Past Due				60 - 89 Days Past Due				90 or More Days Past Due				Total Past Due				Current				Total Loans				90 or More Past Due Still Accruing				Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial		$	47			$	—			$	32			$	79			$	46,464			$	46,543			$	—			$	32
Commercial Real Estate:
Owner Occupied			1,078				—				—				1,078				147,879				148,957				—				320
Non-owner occupied			—				—				—				—				137,643				137,643				—				329
Construction and Farmland:
Residential			—				—				—				—				7,867				7,867				—				—
Commercial			—				—				187				187				48,424				48,611				—				187
Consumer:
Installment			55				6				—				61				9,480				9,541				—				8
Residential:
Equity Lines			121				—				—				121				33,127				33,248				—				65
Single family			471				541				1,251				2,263				184,069				186,332				—				1,244
Multifamily			—				—				—				—				14,415				14,415				—				—
All Other Loans			—				—				—				—				12,050				12,050				—				—
Total		$	1,772			$	547			$	1,470			$	3,789			$	641,418			$	645,207			$	—			$	2,185

	December 31, 2017
	(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	$	75			$	10			$	142			$	227			$	37,200			$	37,427			$	—			$	594
Commercial Real Estate:
Owner Occupied	—				—				—				—				127,018				127,018				—				—
Non-owner occupied	—				368				—				368				112,529				112,897				—				767
Construction and Farmland:
Residential	—				—				—				—				3,214				3,214				—				—
Commercial	187				—				—				187				48,953				49,140				—				—
Consumer:
Installment	17				—				2				19				10,168				10,187				—				13
Residential:
Equity Lines	18				—				—				18				32,820				32,838				—				44
Single family	829				572				4,060				5,461				184,911				190,372				—				4,921
Multifamily	—				—				—				—				4,095				4,095				—				—
All Other Loans	—				—				—				—				2,050				2,050				—				—
Total	$	1,126			$	950			$	4,204			$	6,280			$	562,958			$	569,238			$	—			$	6,339

	December 31, 2016
	(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	$	69			$	49			$	—			$	118			$	30,223			$	30,341			$	—			$	278
Commercial Real Estate:
Owner Occupied	150				384				—				534				114,820				115,354				—				431
Non-owner occupied	—				54				135				189				92,982				93,171				—				1,066
Construction and Farmland:
Residential	50				—				—				50				4,627				4,677				—				—
Commercial	499				—				—				499				26,615				27,114				—				—
Consumer:
Installment	23				2				11				36				12,641				12,677				8				8
Residential:
Equity Lines	66				—				—				66				31,240				31,306				—				132
Single family	444				51				166				661				195,999				196,660				—				5,076
Multifamily	—				—				—				—				3,566				3,566				—				—
All Other Loans	—				—				—				—				2,259				2,259				—				—
Total	$	1,301			$	540			$	312			$	2,153			$	514,972			$	517,125			$	8			$	6,991

Allowance for loan losses by segment at December 31, 2017, December 31, 20162020 and December 31, 20152019 were as follows:

		Twelve Months Ended
		December 31, 2020
		(in thousands)
		Construction and Farmland				Residential Real Estate				Commercial Real Estate				Commercial				Consumer				All Other Loans				Unallocated				Total
Allowance for credit losses:
Beginning Balance		$	446			$	1,601			$	1,991			$	565			$	54			$	120			$	196			$	4,973
Charge-Offs			(119	)			(20	)			(155	)			(49	)			(83	)			(39	)			—				(465	)
Recoveries			7				275				302				498				41				8				—				1,131
Provision			1,270				73				(493	)			360				186				257				(196	)			1,457
Ending balance		$	1,604			$	1,929			$	1,645			$	1,374			$	198			$	346			$	—			$	7,096
Ending balance: Individually evaluated for impairment		$	—			$	72			$	—			$	—			$	—			$	—			$	—			$	72
Ending balance: collectively evaluated for impairment		$	1,604			$	1,857			$	1,645			$	1,374			$	198			$	346			$	—			$	7,024
Loans:
Ending balance		$	58,390			$	269,742			$	334,661			$	140,762			$	21,321			$	10,773			$	—			$	835,649
Ending balance individually evaluated for impairment		$	105			$	3,869			$	3,632			$	147			$	15			$	—			$	—			$	7,768
Ending balance collectively evaluated for impairment		$	58,285			$	265,873			$	331,029			$	140,615			$	21,306			$	10,773			$	—			$	827,881
		December 31, 2019
		(in thousands)
		Construction and Farmland				Residential Real Estate				Commercial Real Estate				Commercial				Consumer				All Other Loans				Unallocated				Total
Allowance for credit losses:
Beginning Balance		$	583			$	1,788			$	1,988			$	919			$	53			$	97			$	28			$	5,456
Charge-Offs			—				(406	)			—				(850	)			(5	)			(52	)			—				(1,313	)
Recoveries			8				72				20				52				26				23				—				201
Provision			(145	)			147				(17	)			444				(20	)			52				168				629
Ending balance		$	446			$	1,601			$	1,991			$	565			$	54			$	120			$	196			$	4,973
Ending balance: Individually evaluated for impairment		$	100			$	51			$	149			$	—			$	—			$	—			$	—			$	300
Ending balance: collectively evaluated for impairment		$	346			$	1,550			$	1,842			$	565			$	54			$	120			$	196			$	4,673
Loans:
Ending balance		$	56,478			$	233,995			$	286,600			$	46,543			$	9,541			$	12,050			$	—			$	645,207
Ending balance individually evaluated for impairment		$	433			$	3,681			$	3,053			$	228			$	8			$	—			$	—			$	7,403
Ending balance collectively evaluated for impairment		$	56,045			$	230,314			$	283,547			$	46,315			$	9,533			$	12,050			$	—			$	637,804

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

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

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

	As of and for the Twelve Months Ended
	December 31, 2016
	(in thousands)
	Construction and Farmland				Residential Real Estate				Commercial Real Estate				Commercial				Consumer				All Other Loans				Unallocated				Total
Allowance for credit losses:
Beginning Balance	$	775			$	2,322			$	1,268			$	211			$	109			$	53			$	221			$	4,959
Charge-Offs	—				(535		)		—				—				(30		)		(42		)		—				(607		)
Recoveries	144				124				8				11				49				5				—				341
Provision (recovery)	(469		)		81				246				13				(59		)		6				(6		)		(188		)
Ending balance	$	450			$	1,992			$	1,522			$	235			$	69			$	22			$	215			$	4,505
Ending balance: Individually evaluated for impairment	$	—			$	268			$	102			$	15			$	—			$	—			$	—			$	385
Ending balance: collectively evaluated for impairment	$	450			$	1,724			$	1,420			$	220			$	69			$	22			$	215			$	4,120
Loans:
Ending balance	$	31,791			$	231,532			$	208,525			$	30,341			$	12,677			$	2,259			$	—			$	517,125
Ending balance individually evaluated for impairment	$	1,320			$	8,608			$	2,864			$	581			$	7			$	—			$	—			$	13,380
Ending balance collectively evaluated for impairment	$	30,471			$	222,924			$	205,661			$	29,760			$	12,670			$	2,259			$	—			$	503,745

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

	As of and for the Twelve Months Ended
	December 31, 2015
	(in thousands)
	Construction and Farmland				Residential Real Estate				Commercial Real Estate				Commercial				Consumer				All Other Loans				Unallocated				Total
Allowance for credit losses:
Beginning Balance	$	951			$	1,977			$	1,347			$	464			$	103			$	42			$	196			$	5,080
Charge-Offs	(166		)		(152		)		(47		)		—				(66		)		(25		)		—				(456		)
Recoveries	75				142				115				181				33				16				—				562
Provision (recovery)	(85		)		355				(147		)		(434		)		39				20				25				(227		)
Ending balance	$	775			$	2,322			$	1,268			$	211			$	109			$	53			$	221			$	4,959
Ending balance: Individually evaluated for impairment	$	10			$	423			$	141			$	2			$	—			$	—			$	—			$	576
Ending balance: collectively evaluated for impairment	$	765			$	1,899			$	1,127			$	209			$	109			$	53			$	221			$	4,383
Loans:
Ending balance	$	41,569			$	233,626			$	175,172			$	29,366			$	13,530			$	2,413			$	—			$	495,676
Ending balance individually evaluated for impairment	$	1,392			$	7,209			$	4,555			$	847			$	—			$	—			$	—			$	14,003
Ending balance collectively evaluated for impairment	$	40,177			$	226,417			$	170,617			$	28,519			$	13,530			$	2,413			$	—			$	481,673

Impaired loans by class at December 31, 20172020 and December 31, 20162019 were as follows:

		As of
		December 31, 2020
		(in thousands)
		Unpaid Principal Balance				Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial		$	246			$	147			$	—			$	186			$	16
Commercial Real Estate:
Owner Occupied			1,282				1,227				—				1,258				18
Non-owner occupied			2,682				2,405				—				2,444				34
Construction and Farmland:
Residential			—				—				—				—				—
Commercial			233				105				—				109				3
Consumer:
Installment			16				15				—				22				1
Residential
Equity lines			272				42				—				44				—
Single family			2,655				2,413				—				2,514				76
Multifamily			—				—				—				—				—
Other Loans			—				—				—				—				—
		$	7,386			$	6,354			$	—			$	6,577			$	148
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial		$	—			$	—			$	—			$	—			$	—
Commercial Real Estate:
Owner Occupied			—				—				—				—				—
Non-owner occupied			—				—				—				—				—
Construction and Farmland:
Residential			—				—				—				—				—
Commercial			—				—				—				—				—
Consumer:
Installment			—				—				—				—				—
Residential
Equity lines			—				—				—				—				—
Single family			1,449				1,431				72				1,448				38
Multifamily			—				—				—				—				—
Other Loans			—				—				—				—				—
		$	1,449			$	1,431			$	72			$	1,448			$	38
Total:
Commercial		$	246			$	147			$	—			$	186			$	16
Commercial Real Estate			3,964				3,632				—				3,702				52
Construction and Farmland			233				105				—				109				3
Consumer			16				15				—				22				1
Residential			4,376				3,886				72				4,006				114
Other			—				—				—				—				—
Total		$	8,835			$	7,785			$	72			$	8,025			$	186

	As of and for the Year Ended
	December 31, 2017
	(in thousands)
	Unpaid Principal Balance				Recorded Investment (1)				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	626			$	304			$	—			$	342			$	23
Commercial Real Estate:
Owner Occupied	330				331				—				336				15
Non-owner occupied	805				767				—				785				20
Construction and Farmland:
Residential	—				—				—				—				—
Commercial	362				316				—				330				28
Consumer:
Installment	25				25				—				27				1
Residential:
Equity lines	—				—				—				—				—
Single family	7,371				6,985				—				7,069				124
Multifamily	—				—				—				—				—
Other Loans	—				—				—				—				—
	$	9,519			$	8,728			$	—			$	8,889			$	211
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	595			$	556			$	195			$	567			$	17
Commercial Real Estate:
Owner Occupied	—				—				—				—				—
Non-owner occupied	806				809				59				817				37
Construction and Farmland:
Residential	—				—				—				—				—
Commercial	—				—				—				—				—
Consumer:
Installment	9				9				9				9				—
Residential:
Equity lines	217				44				44				45				—
Single family	1,349				1,299				151				1,315				57
Multifamily	—				—				—				—				—
Other Loans	—				—				—				—				—
	$	2,976			$	2,717			$	458			$	2,753			$	111
Total:
Commercial	$	1,221			$	860			$	195			$	909			$	40
Commercial Real Estate	1,941				1,907				59				1,938				72
Construction and Farmland	362				316				—				330				28
Consumer	34				34				9				36				1
Residential	8,937				8,328				195				8,429				181
Other	—				—				—				—				—
Total	$	12,495			$	11,445			$	458			$	11,642			$	322

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

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

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

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

	As of and for the Year Ended
	December 31, 2016
	(in thousands)
	Unpaid Principal Balance				Recorded Investment (1)				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	311			$	299			$	—			$	356			$	21
Commercial Real Estate:
Owner Occupied	869				772				—				778				15
Non-owner occupied	1,298				1,066				—				1,137				13
Construction and Farmland:
Residential	—				—				—				—				—
Commercial	1,320				1,324				—				1,358				75
Consumer:
Installment	8				8				—				9				—
Residential:
Equity lines	17				17				—				18				—
Single family	7,072				6,849				—				6,930				170
Multifamily	—				—				—				—				—
Other Loans	—				—				—				—				—
	$	10,895			$	10,335			$	—			$	10,586			$	294
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	283			$	283			$	15			$	298			$	14
Commercial Real Estate:
Owner Occupied	203				203				37				205				10
Non-owner occupied	824				826				65				834				37
Construction and Farmland:
Residential	—				—				—				—				—
Commercial	—				—				—				—				—
Consumer:
Installment	—				—				—				—				—
Residential:
Equity lines	458				115				56				120				—
Single family	1,678				1,638				212				1,676				60
Multifamily	—				—				—				—				—
Other Loans	—				—				—				—				—
	$	3,446			$	3,065			$	385			$	3,133			$	121
Total:
Commercial	$	594			$	582			$	15			$	654			$	35
Commercial Real Estate	3,194				2,867				102				2,954				75
Construction and Farmland	1,320				1,324				—				1,358				75
Consumer	8				8				—				9				—
Residential	9,225				8,619				268				8,744				230
Other	—				—				—				—				—
Total	$	14,341			$	13,400			$	385			$	13,719			$	415

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

For the year ended December 31, 2015, the average recorded investment of impaired loans was $14.4 million. The interest income recognized on impaired loans was $404 thousand in 2015.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in nonaccrual loans is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.

The Company uses a rating system for evaluating the risks associated with non-consumer loans. Consumer loans are not evaluated for risk unless the characteristics of the loan fall within classified categories. Descriptions of these ratings are as follows:

Pass
Pass		Pass loans exhibit acceptable history of profits, cash flow ability and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.
Pass Monitored		Pass monitored loans may be experiencing income and cash volatility, inconsistent operating trends, nominal liquidity and/or a leveraged balance sheet. A higher level of supervision is required for these loans as the potential for a negative event could impact the borrower’s ability to repay the loan.
Special mention		Special mention loans exhibit negative trends and potential weakness that, if left uncorrected, may negatively affect the borrower’s ability to repay its obligations. The risk of default is not imminent and the borrower still demonstrates sufficient financial strength to service debt.
Substandard		Substandard loans exhibit well defined weaknesses resulting in a higher probability of default. The borrowers exhibit adverse financial trends and a diminishing ability or willingness to service debt.
Doubtful		Doubtful loans exhibit all of the characteristics inherent in substandard loans; however given the severity of weaknesses, the collection of 100% of the principal is unlikely under current conditions.
Loss		Loss loans are considered uncollectible over a reasonable period of time and of such little value that its continuance as a bankable asset is not warranted.

Credit quality information by class at December 31, 20172020 and December 31, 20162019 was as follows:

		As of
		December 31, 2020
		(in thousands)
INTERNAL RISK RATING GRADES		Pass				Pass Monitored				Special Mention				Substandard				Doubtful				Loss				Total
Commercial - Non Real Estate:
Commercial & Industrial		$	137,566			$	2,750			$	439			$	7			$	—			$	—			$	140,762
Commercial Real Estate:
Owner Occupied			126,839				31,927				5,929				1,226				—				—				165,921
Non-owner occupied			101,026				42,338				22,555				2,821				—				—				168,740
Construction and Farmland:
Residential			8,131				2,513				—				—				—				—				10,644
Commercial			19,599				24,982				3,004				161				—				—				47,746
Residential:
Equity Lines			31,087				124				—				36				5				—				31,252
Single family			193,579				16,639				3,594				3,053				129				—				216,994
Multifamily			10,923				8,700				1,873				—				—				—				21,496
All other loans			8,438				—				2,335				—				—				—				10,773
Total		$	637,188			$	129,973			$	39,729			$	7,304			$	134			$	—			$	814,328
																						Performing				Nonperforming
Consumer Credit Exposure by Payment Activity																						$	21,316			$	5
		As of
		December 31, 2019
		(in thousands)
INTERNAL RISK RATING GRADES		Pass				Pass Monitored				Special Mention				Substandard				Doubtful				Loss				Total
Commercial - Non Real Estate:
Commercial & Industrial		$	42,578			$	3,815			$	105			$	45			$	—			$	—			$	46,543
Commercial Real Estate:
Owner Occupied			103,958				38,989				5,654				356				—				—				148,957
Non-owner occupied			103,909				25,939				5,866				1,929				—				—				137,643
Construction and Farm land:
Residential			5,094				2,773				—				—				—				—				7,867
Commercial			17,018				30,661				437				495				—				—				48,611
Residential:
Equity Lines			32,295				889				—				42				22				—				33,248
Single family			162,195				19,427				2,347				2,225				138				—				186,332
Multifamily			11,714				1,337				998				366				—				—				14,415
All other loans			11,963				40				47				—				—				—				12,050
Total		$	490,724			$	123,870			$	15,454			$	5,458			$	160			$	—			$	635,666
																						Performing				Nonperforming
Consumer Credit Exposure by Payment Activity																						$	9,480			$	61

	As of
	December 31, 2017
	(in thousands)
INTERNAL RISK RATING GRADES	Pass				Pass Monitored				Special Mention				Substandard				Doubtful				Loss				Total
Commercial - Non Real Estate:
Commercial & Industrial	$	33,279			$	1,788			$	1,748			$	612			$	—			$	—			$	37,427
Commercial Real Estate:
Owner Occupied	112,649				10,893				3,146				330				—				—				127,018
Non-owner occupied	82,050				17,992				12,088				767				—				—				112,897
Construction and Farmland:
Residential	2,614				600				—				—				—				—				3,214
Commercial	30,093				17,069				1,663				315				—				—				49,140
Residential:
Equity Lines	32,495				299				—				—				44				—				32,838
Single family	177,829				5,869				155				6,327				192				—				190,372
Multifamily	3,588				—				507				—				—				—				4,095
All other loans	2,050				—				—				—				—				—				2,050
Total	$	476,647			$	54,510			$	19,307			$	8,351			$	236			$	—			$	559,051

	Performing				Nonperforming
Consumer Credit Exposure by Payment Activity	$	10,168			$	19

	As of
	December 31, 2016
	(in thousands)
INTERNAL RISK RATING GRADES	Pass				Pass Monitored				Special Mention				Substandard				Doubtful				Loss				Total
Commercial - Non Real Estate:
Commercial & Industrial	$	25,951			$	3,858			$	170			$	362			$	—			$	—			$	30,341
Commercial Real Estate:
Owner Occupied	99,365				13,050				1,766				742				431				—				115,354
Non-owner occupied	60,259				30,515				891				1,506				—				—				93,171
Construction and Farmland:
Residential	4,627				50				—				—				—				—				4,677
Commercial	21,105				5,349				314				346				—				—				27,114
Residential:
Equity Lines	30,791				382				—				17				116				—				31,306
Single family	182,404				6,850				724				6,533				149				—				196,660
Multifamily	3,032				534				—				—				—				—				3,566
All other loans	2,259				—				—				—				—				—				2,259
Total	$	429,793			$	60,588			$	3,865			$	9,506			$	696			$	—			$	504,448

	Performing				Nonperforming
Consumer Credit Exposure by Payment Activity	$	12,641			$	36

Three consumer loans totaling $13 thousand were rated below Pass at December 31, 2017. One consumer loan totaling $5 thousand was rated below Pass at December 31, 2016.

NOTE 5. Troubled Debt Restructurings

All loans deemed a troubled debt restructuring, or “TDR”, are considered impaired, and are evaluated for collateral and cash-flow sufficiency. A loan is considered a TDR when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. All of the following factors are indicators that the Bank has granted a concession (one or multiple items may be present):

•

The borrower receives a reduction of the stated interest rate to a rate less than the institution is willing to accept at the time of the restructure for a new loan with comparable risk.

The borrower receives a reduction of the stated interest rate to a rate less than the institution is willing to accept at the time of the restructure for a new loan with comparable risk.

•

The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.

The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.

•

The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.

The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.

•

The borrower receives a deferral of required payments (principal and/or interest).

The borrower receives a deferral of required payments (principal and/or interest).

•

The borrower receives a reduction of the accrued interest.

The borrower receives a reduction of the accrued interest.

There were twenty-one (21)seventeen (17) troubled debt restructured loans totaling $4.4$3.3 million at December 31, 2017.2020.  At December 31, 2016,2019, there were twenty-six (26)eighteen (18) troubled debt restructured loans totaling $7.3 million. One loan, totaling $44 thousand, was in nonaccrual status at December 31, 2017. Six$3.0 million.  NaN loans, totaling $1.6 million,$796 thousand, were in nonaccrual status at December 31, 2016.2020.  NaN loans, totaling $401 thousand, were in nonaccrual status at December 31, 2019. There were no outstanding commitments to lend additional amounts to troubled debt restructured borrowers at December 31, 20172020 or December 31, 2016.

2019.

During the year ended December 31, 2020, the Company approved 255 deferrals of interest and/or principal payments with respect to loan balances totaling approximately $130.5 million at December 31, 2020 for its customers experiencing hardships related to COVID-19. These deferrals were no more than six months in duration and were for loans not more than 30 days past due as of December 31, 2019. As such, they were not considered troubled debt restructurings based on the relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act and recent interagency regulatory guidance. As of December 31, 2020, 241 of these loans with loan balances totaling approximately $128.7 million had begun making payments on their loans after the end of the deferral period. The majority of the remainder of these loans are still in their original deferral period, have been granted an additional deferral or have paid off. In December 2020, the Consolidated Appropriations Act extended the period established by Section 4013 of the CARES Act for providing temporary relief from TDR classification to the earlier of January 1, 2022 or 60 days after the date when the national emergency concerning COVID-19 terminates.

The following tables set forth information on the Company’s troubled debt restructurings by class of financing receivable occurring during the years ended  December 31, 2017, 20162020 and 2015:2019:

						Twelve Months Ended
						December 31, 2020
						(in thousands)
		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Commercial Real Estate
Non-owner occupied			1			$	685			$	685
Consumer:
Installment			1				13				13
Residential
Single family			3				931				935
Total			5			$	1,629			$	1,633

Twelve Months Ended

December 31, 2019

(in thousands)

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Total

—

$

—

$

—

				For the Year Ended
				December 31, 2017
				(in thousands)
	Number of Contracts			Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Consumer:
Installment	1			$	22			$	22
Total	1			$	22			$	22
				For the Year Ended
				December 31, 2016
				(in thousands)
	Number of Contracts			Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Commercial Real Estate
Non-owner occupied	1			$	736			$	736
Residential:
Single family	4			560				463
Total	5			$	1,296			$	4
				For the Year Ended
				December 31, 2015
				(in thousands)
	Number of Contracts			Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Residential:
Single family	3			$	794			$	794
Total	3			$	794			$	794

During the twelve months ended December 31, 2017 ,2020, the Company restructured one loan5 loans by granting a concession to borrowersthe borrower experiencing financial difficulties. Onedifficulty. The Company restructured 1 consumer installment loan was modifiedand 1 residential single-family loan by consolidating debt andgranting three 90-day payment deferment periods. The Company restructured 1 single-family residential loan by reducing the interest rate.

payments due for a period of time and restructured another single-family residential loan by allowing a loan policy exception for a high loan-to-value. The Company also restructured 1 commercial real estate loan by granting interest-only payments.

During the twelve months ended December 31, 2016,2019, the Company restructured fivedid not restructure any loans by granting concessionsa concession to borrowers experiencing financial difficulties. One residential loan and one commercial real estate loan was modified by extending the amortization period and reducing the interest rate. Two residential loans were modified by reducing the payments to be affordable for the borrower. One residential loan was modified by changing payments to interest-only in order to reduce the monthly payment for a period of time.

During the twelve months ended December 31, 2015, the Company restructured three loans by granting concessions to borrowers experiencing financial difficulties. Two single family residential loans were modified by changing the amortization period. One single family residential loan was modified by changing the amortization period and interest rate in order to reduce the monthly payments.

Loans by class of financing receivable modified as TDRs within the previous 12 months and for which there was a payment default during the stated periods were:

		Twelve Months Ended
		December 31, 2020
		(in thousands)
		Number of Contracts				Recorded Investment
Total			—				—

		Twelve Months Ended
		December 31, 2019
		(in thousands)
		Number of Contracts				Recorded Investment
Residential
Single family			1			$	72
Total			1			$	72

	For the Year Ended
	December 31, 2017
	(in thousands)
	Number of Contracts			Recorded Investment
Total	—			$	—
	For the Year Ended
	December 31, 2016
	(in thousands)
	Number of Contracts			Recorded Investment
Residential:
Single family	2			$	588
Total	2			$	588
	For the Year Ended
	December 31, 2015
	(in thousands)
	Number of Contracts			Recorded Investment
Commercial - Non Real Estate:
Commercial & Industrial	1			$	267
Residential:
Equity	1			60
Single family	2			627
Total	4			$	954

Management defines default as over 30 days contractually past due under the modified terms, or the foreclosure andand/or repossession of the collateral, andor the charge-off of the loan during the twelve month period subsequent to the modification.

loan.

NOTE 6. Bank Premises and Equipment, Net

The major classes of bank premises and equipment and the total accumulated depreciation at December 31, 20172020 and 20162019 were as follows:

		December 31,
		2020				2019
		(in thousands)
Land		$	6,644			$	6,644
Buildings and improvements			18,498				18,472
Furniture and equipment			8,358				7,972
		$	33,500			$	33,088
Less accumulated depreciation			14,775				13,791
Bank premises and equipment, net		$	18,725			$	19,297

		December 31,
		2017				2016
		(in thousands)
Land		$	6,729			$	6,729
Buildings and improvements		17,970				17,928
Furniture and equipment		7,100				6,876
		$	31,799			$	31,533
Less accumulated depreciation		12,220				11,364
Bank premises and equipment, net		$	19,579			$	20,169

Depreciation expense on buildings and improvements was $484 thousand, $484$500 thousand and $470$494 thousand for the years ended 2017, 2016,2020 and 2015,2019, respectively. Depreciation expense on furniture and equipment was $462 thousand, $448$527 thousand and $373$463 thousand for the years ended 2017, 2016,2020 and 2015,2019, respectively.

As of December 31, 2017, one facility was under an operating lease, which expires in 2030. This lease requires payment of certain operating expenses and contains renewal options. The total minimum rental commitment at December 31, 2017 under this lease was due as follows:

	December 31, 2017
	(in thousands)
2018	$	200
2019	200
2020	213
2021	220
2022	220
Thereafter	1,724
	$	2,777

The total building and equipment rental expense was $232 thousand, $236 thousand, and $271 thousand in 2017, 2016, and 2015, respectively.

On June 10, 2015, the Company purchased the land on which one of its retail branches resides. The land was purchased subject to an existing lease and subsequently recorded at fair value, resulting in a write down of the total purchase price. This write down appears in the Consolidated Statement of Income as a Cost to terminate operating lease.

NOTE 7. Deposits

The composition of deposits at December 31, 20172020 and December 31, 20162019 was as follows:

		December 31, 2020				December 31, 2019
		(in thousands)
Noninterest bearing demand deposits		$	407,576			$	269,171
Savings and interest bearing demand deposits:
NOW accounts		$	132,249			$	102,337
Money market accounts			207,837				154,133
Regular savings accounts			136,778				107,705
		$	476,864			$	364,175
Time deposits:
Balances of less than $250,000		$	59,621			$	59,094
Balances of $250,000 or greater			69,037				79,104
		$	128,658			$	138,198
		$	1,013,098			$	771,544

	December 31,
	2017				2016
	(in thousands)
Noninterest bearing demand deposits	$	234,990			$	208,948
Savings and interest bearing demand deposits:
NOW accounts	$	91,288			$	85,944
Money market accounts	129,497				126,632
Regular savings accounts	102,163				94,271
	$	322,948			$	306,847
Time deposits:
Balances of less than $250,000	$	62,681			$	67,159
Balances of $250,000 and more	42,795				20,923
	$	105,476			$	88,082
	$	663,414			$	603,877

Time deposits with balances of less than $250,000

Money market accounts include $210 thousand$34.6 million and $2.2$27.0 million in brokered certificates of depositreciprocal deposits at December 31, 20172020 and 2016,2019, respectively. There were no time deposits with balances of $250,000 or more in brokered certificates of deposit at December 31, 2017 and 2016, respectively.

The outstanding balance of time deposits at December 31, 20172020 was due as follows:

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

	December 31, 2017
	(in thousands)
2018	$	89,860
2019	7,324
2020	2,032
2021	4,583
2022	1,656
Thereafter	21
	$	105,476

Deposit overdrafts reclassified as loans totaled $115$70 thousand and $272$135 thousand at December 31, 20172020 and 2016,2019, respectively.

NOTE 8. Borrowings

The Company, through its subsidiary bank, borrows funds in the form of federal funds purchased and Federal Home Loan Bank advances.

Federal fund lines of credit are extended to the Bank by nonaffiliated banks with which a correspondent banking relationship exists. The line of credit amount is determined by the creditworthiness of the Bank and, in particular, its regulatory capital ratios, which are discussed in Note 16.15. Federal funds purchased generally mature each business day. The following table summarizes information related to federal funds purchased for the years ended December 31, 20172020 and 2016:2019:

		December 31,
		2020				2019
		(dollars in thousands)
Balance at year-end			—				—
Average balance during the year			1				1,074
Average interest rate during the year			0.61	%			2.91	%
Maximum month-end balance during the year		$	—			$	10,780
Gross lines of credit at year-end			28,000				28,000
Unused lines of credit at year-end			28,000				28,000

		December 31,
		2017				2016
		(dollars in thousands)
Balance at year-end		$	—			$	—
Average balance during the year		$	823			$	73
Average interest rate during the year		1.64		%		0.81		%
Maximum month-end balance during the year		$	3,413			$	1,302
Gross lines of credit at year-end		$	28,000			$	36,000
Unused lines of credit at year-end		$	28,000			$	36,000

As of December 31, 2017, the Company also had a $5.0 million unused line of credit, in addition to the $28.0 million in federal funds lines of credit listed in the table above.

As of December 31, 2017,2020, Company had remaining credit availability in the amount of $162.6$225.2 million with the Federal Home Loan Bank of Atlanta. This line may be utilized for short and/or long-term borrowing. Advances on the line are secured by all of the Company’s eligible first lien residential real estate loans on one-to-four-unit, single-family dwellings; multi-family dwellings; home equity lines of credit; and commercial real estate loans. The amount of the available credit is limited to a percentage of the estimated market value of the loans as determined periodically by the FHLB of Atlanta. The amount of the available credit is also limited to 20% of total Bank assets.

The Company had no long-term0 borrowings with the FHLB at December 31, 2017. The Company also had no short-term borrowings with the FHLB at2020 or December 31, 2017.2019. The Company had a $20.0$50.0 million irrevocable letter of credit at December 31, 20172020 with the FHLB to secure public deposits. The Company had no borrowings with the FHLB at December 31, 2016.

NOTE 9. Income Taxes

The Company files income tax returns with the United States of America,the Commonwealth of Virginia and West Virginia. With few exceptions, the Company is no longer subject to federal, state, or local income tax examinations for years prior to 2014.

2017.

The net deferred tax asset at December 31, 20172020 and 20162019 consisted of the following components:

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

		December 31,
		2017				2016
		(in thousands)
Deferred tax assets:
Allowance for loan losses		$	922			$	1,525
Deferred compensation		72				117
Accrued postretirement benefits		23				40
Home equity origination costs		46				73
Nonaccrual interest		101				151
Securities available for sale		—				32
Other		53				193
		$	1,217			$	2,131
Deferred tax liabilities:
Property and equipment		$	506			$	814
Securities available for sale		71				—
		$	577			$	814
Net deferred tax asset		$	640			$	1,317

The Company has not recorded a valuation allowance for deferred tax assets because management believes that it is more likely than not that they will be ultimately realized.

Income tax expense for the years ended December 31, 2017, 20162020 and 20152019 consisted of the following components:

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

		December 31,
		2017				2016				2015
		(in thousands)
Current tax expense		$	3,094			$	2,346			$	2,001
Deferred tax expense		135				207				432
Deferred tax adjustment for enacted rate change		397				—				—
		$	3,626			$	2,553			$	2,433

The following table reconciles income tax expense to the statutory federal corporate income tax amount, which was calculated by applying the federal corporate income tax rate to pre-tax income for the years ended December 31, 2017, 20162020 and 2015.2019.

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

		December 31,
		2017				2016				2015
		(in thousands)
Statutory federal corporate tax amount		$	3,880			$	3,034			$	3,172
Tax-exempt interest (income)		(417		)		(387		)		(404		)
Officer insurance (income) loss		(92		)		15				11
Net tax credits		(165		)		(126		)		(105		)
Corporate tax rate change		397				—				—
Other, net		23				17				(241		)
		$	3,626			$	2,553			$	2,433

The effective tax rates were 31.77%, 28.62%,16.05% and 26.08%,15.65% for years ended December 31, 2017, 2016,2020 and 2015,2019, respectively. This increase in theThe effective tax rate resulted mostly from the Tax Cuts and Jobs Act that was signed into lawis impacted by tax credits on December 22, 2017. The Company's deferred tax assets and liabilities were adjusted at December 31, 2017, for the reduction of our applicable corporate income tax rate from 34% to 21%, effective January 1, 2018. This adjustment resultedqualified affordable housing project investments as discussed in a write-down of our net deferred tax assets and an increase in our federal income tax expense of $397 thousand.

NOTE 10. Postretirement Benefit Plans

The Company provides certain health care and life insurance benefits for nine retired employees who have met certain eligibility requirements. All other employees retiring after reaching age 65 and having at least 15 years of service with the Company will be allowed to stay on the Company’s group life and health insurance policies, but will be required to pay premiums. The Company’s share of the estimated costs that will be paid after retirement is generally being accrued by charges to expense over the employees’ active service periodsNote 25 to the dates they are fully eligible for benefits.

Generally Accepted Accounting Principles (“GAAP”) requires the Company to recognize the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its postretirement benefit plans in the consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of taxes.

The following amounts that have not been recognized in the net periodic benefit cost of the postretirement benefit plan for the year ended December 31, 2017 but are included in other comprehensive income: unrecognized net actuarial gain of $44 thousand. The actuarial gain included in other comprehensive income and expected to be recognized in the net periodic benefit cost of the postretirement benefit plan during 2018 is $7 thousand.

The following tables provide a reconciliation of the changes in the benefit obligations and fair value of assets for 2017, 2016, and 2015 and a statement of the funded status at December 31, 2017, 2016 and 2015 for the postretirement benefit plans of the Company. The Company uses a December 31st measurement date for its plans.

		Postretirement Benefits Plan
		2017				2016				2015
		(in thousands)
Change in Benefit Obligation:
Benefit obligation, beginning		$	118			$	128			$	137
Service cost		—				—				—
Interest cost		3				4				4
Actuarial (gain) loss		(4		)		(7		)		(6		)
Benefits paid		(8		)		(7		)		(7		)
Settlement loss		—				—				—
Benefit obligation, ending		$	109			$	118			$	128
Change in Plan Assets:
Fair value of plan assets, beginning		$	—			$	—			$	—
Actual return on plan assets		—				—				—
Employer contributions		8				7				7
Benefits paid		(8		)		(7		)		(7		)
Fair value of plan assets, ending		$	—			$	—			$	—
		Postretirement Benefits Plan
		2017				2016				2015
		(in thousands)
Funded Status:
Funded status		$	(109	)		$	(118	)		$	(128	)
Unrecognized net actuarial loss		—				—				—
Unrecognized net transition obligation		—				—				—
Unrecognized prior service cost		—				—				—
Accrued benefits		$	(109	)		$	(118	)		$	(128	)
Amounts Recognized in Consolidated Balance Sheets:
Prepaid benefit cost		$	—			$	—			$	—
Accrued liability		(109		)		(118		)		(128		)
		$	(109	)		$	(118	)		$	(128	)
Amounts Recognized in Accumulated Other Comprehensive Income:
Net actuarial (gain)		$	(54	)		$	(58	)		$	(58	)
Net transition obligation		—				—				—
Deferred tax liability		10				19				19
		$	(44	)		$	(39	)		$	(39	)

The following tables provide the components of net periodic benefit cost of the postretirement benefit plan for the years ended December 31, 2017, 2016, and 2015:

		Postretirement Benefits Plan
		2017				2016				2015
		(in thousands)
Components of Net Periodic Benefit Cost:
Service cost		$	—			$	—			$	—
Interest cost		3				4				4
Expected return on plan assets		—				—				—
Amortization of prior service costs		—				—				—
Amortization of transition obligation		—				—				—
Recognized net loss due to settlement		—				—				—
Amortization of net actuarial gain		(7		)		(6		)		(6		)
Net periodic benefit cost		$	(4	)		$	(2	)		$	(2	)

The benefit obligation for the postretirement benefit plan was calculated using a weighted average discount rate of 2.75% for 2017, 3.00% for 2016, and 3.25% for 2015. For measurement purposes, a 8.00% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2018 and 2019, 7.00% for 2020 and 2021, and 5.00% for 2022 and thereafter. If these rates were increased by 1.00% in each year, the benefit obligation at December 31, 2017 would have increased by $3 thousand and the net periodic benefit cost for 2017 would have increased by less than $1 thousand. If these rates were decreased by 1.00% in each year, the benefit obligation at December 31, 2017 would have decreased by $3 thousand and the net periodic benefit cost for 2017 would have decreased by less than $1 thousand.

Estimated future benefit payments at December 31, 2017, which reflect expected future service,Consolidated Financial Statements as appropriate, werewell as follows:

	Postretirement Benefits
	(in thousands)
2018	$	15
2019	14
2020	14
2021	13
2022	12
2023 - 2027	39

qualified rehabilitation credits.

NOTE 11.10. Stock-Based Compensation

Restricted Stock provides grantees with rights to shares of common stock upon completion of a service period or achievement of Company performance measures. During the restriction period, all shares are considered outstanding and dividends are paid to the grantee. Outside directors are periodically granted restricted shares which vest over a period of less than nine months. During 2017,2020, executive officers were granted restricted shares which vest over a three year service period and restricted shares which vest based on meeting performance measures over a one year period. Beginning in 2018, certain non-executive officers also were granted restricted shares which vest over a three year service period. Vesting schedules were unchanged from the two prior years.

The following table presents the activity for Restricted Stock for the years ended December 31, 2017, 20162020 and 2015:2019:

		Twelve Months Ended
		December 31,
		2020								2019
		Shares				Weighted Average Grant Date Fair Value				Shares				Weighted Average Grant Date Fair Value
Nonvested, beginning of period			18,488			$	30.39				16,701			$	29.72
Granted			22,128				28.82				22,488				30.69
Vested			(19,238	)			29.01				(18,150	)			30.16
Forfeited			(450	)			31.03				(2,551	)			30.28
Nonvested, end of period			20,928			$	29.98				18,488			$	30.39

	Twelve Months Ended
	December 31,
	2017							2016							2015
	Shares			Weighted Average Grant Date Fair Value				Shares			Weighted Average Grant Date Fair Value				Shares			Weighted Average Grant Date Fair Value
Nonvested, beginning of period	14,901			$	23.05			14,401			$	22.98			15,151			$	22.27
Granted	14,650			27.46				14,650			23.07				14,650			23.85
Vested	(14,493	)		25.90				(13,196	)		23.00				(14,363	)		23.09
Forfeited	(657	)		23.00				(954	)		23.00				(1,037	)		23.50
Nonvested, end of period	14,401			$	24.68			14,901			$	23.05			14,401			$	22.98

The Company recognizes compensation expense over the vesting period based on the fair value of the Company's stock on the grant date. Compensation expense was $382 thousand, $314$604 thousand and $328$562 thousand during December 31, 2017, 2016,2020 and 2015,2019, respectively. The total grant date fair value of Restricted Stock which vested was $375$558 thousand and $303$547 thousand for the years ended December 31, 20172020 and 2016,2019, respectively. The total vest date fair value of Restricted Stock which vested was $561 thousand and $556 thousand for the years ended December 31, 2020 and 2019, respectively. Unrecognized compensation cost related to unvested Restricted Stock was $69$184 thousand at December 31, 2017.2020. This amount is expected to be recognized over a weighted average period of one year. The Company's policy is to recognize forfeitures as they occur.

NOTE 12.11. Employee Benefits

The Company has established an Employee Stock Ownership Plan (ESOP) to provide additional retirement benefits to substantially all employees. Contributions can be made to the Bank of Clarke County Employee Retirement Trust to be used to purchase the Company’s common stock. There were no contributions in 2017, 2016,2020 and 2015.

2019.

The Company sponsors a 401(k) savings plan under which eligible employees may defer a portion of salary on a pretax basis, subject to certain IRS limits. Prior to January 1, 2007, theThe Company matchedmatches 50 percent of employee contributions, on a maximum of six6 percent of salary deferred, with Company common stock or cash, as elected by each employee. The shares for this purpose are provided principally by the Company’s employee stock ownership plan (ESOP), supplemented, as needed, by newly issued shares. In conjunction with amending the pension plan, theThe 401(k) plan was amended, effective January 1, 2007, to includeincludes a non-elective safe-harbor employer contribution and an age-weighted employer contribution. Each December 31^st,year, qualifying employees will receive a non-elective safe-harbor contribution equal to three3 percent of their salary for that year. Also, each December 31^st, qualifyingQualifying employees will receive an additional contribution based on their age and years of service. The percentage of salary for the age-weighted contribution increases on both factors, age and years of service, with a minimum of one1 percent of salary and a maximum of ten10 percent of salary. Contributions under the plan amounted to $1.0$1.5 million in 2017, $990 thousand2020 and $1.1 million in 2016, and $956 thousand in 2015.

2019.

The Company has established an Executive Supplemental Income Plan for certain key employees. Benefits are to be paid in monthly installments following retirement or death. The agreement provides that if employment is terminated for reasons other than death or disability prior to age 65, the amount of benefits could be reduced or forfeited. The executive supplemental income benefit liability was $56$23 thousand and $64$30 thousand at December 31, 20172020 and 2016,2019, respectively. The executive supplemental income benefit expense, based on the present value of the retirement benefits, was $29 thousand in 2017, $292020 and $21 thousand in 2016, and $29 thousand in 2015.2019. The plan is unfunded; however, life insurance has been acquired on the lives of these employees in amounts sufficient to discharge the plan’s obligations.

NOTE 13.12. Commitments and Contingencies

In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. These commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit. The Company does not anticipate any material losses as a result of these commitments.

During the normal course of business, various legal claims arise from time to time which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.

As a member of the Federal Reserve System, the Bank is required to maintain certain average reserve balances. These reserve balances include usable vault cash and amounts on deposit with the Federal Reserve Bank. In March 2020, the Federal Reserve announced they were reducing the reserve requirement to zero percent across all deposit tiers in response to the COVID-19 pandemic.  This adjustment to the reserve requirements remained in effect through December 31, 2020. For the final weekly reporting period in the yearsyear ended December 31, 2017 and 2016,2019, the amount of daily average required balances werewas approximately  $1.5 million and $1.3 million, respectively. For both periods, these$1.7 million. This required amounts wereamount was met by vault cash and no additional amount was required to be on deposit with the Federal Reserve Bank.  In addition, the Bank was required to maintain a total compensating balance on deposit with two correspondent banks in the amount of $250 thousand at December 31, 20172020 and 2016.

2019.

See Note 1918 with respect to financial instruments with off-balance-sheet risk.

NOTE 14. Derivative Instruments13. Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and Hedging Activities

Interest Rate Swaps

all subsequent ASUs that modified Topic 842. The Company has used interest rate swaps to reduce interest rate riskelected the prospective application approach provided by ASU 2018-11 and to manage interest expense. By entering into these agreements,did not adjust prior periods for ASC 842.  The Company also elected certain practical expedients within the Company converts floating rate debt into fixed rate debt,standard and consistent with such elections did not reassess whether any expired or alternatively, converts fixed rate debt into floating rate debt. Interest differentials paidexisting contracts are or received undercontain leases, did not reassess the swap agreements are reflected as adjustments to interest expense. These interest rate swap agreements are derivative instruments that qualifylease classification for hedge accounting as discussed in Note 1.any expired or existing leases, and did not reassess any initial direct costs for existing leases. The notional amountsimplementation of the interest rate swapsnew standard resulted in recognition of a right-of-use asset and lease liability of $3.8 million at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are not exchangedincluded in other assets and do not represent exposure to credit loss. Inother liabilities, respectively, in the eventConsolidated Balance Sheets. During the first quarter of default by a counterparty, the risk in these transactions is the cost of replacing the agreements at current market rates.

On December 4, 2008,2020, the Company entered into an interesta long-term lease agreement for a loan production office in Tysons Corner, Virginia. This resulted in the initial recognition of a right-of-use asset and lease liability of $549 thousand, also reflected in other assets and other liabilities.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.  Cash flows are discounted at the Company’s incremental borrowing rate swap agreement relatedin effect at the commencement date of the lease.  Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

The Company’s two long-term lease agreements are classified as operating leases.  These leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liability to the outstanding trust preferred capital notes. The swap agreement became effective on December 1, 2008. The notional amountextent the options are reasonably certain of the interest rate swap was $7.0 millionbeing exercised.  These lease agreements do not provide for residual value guarantees and had an expiration date of December 1, 2016. Under the terms of the agreement, the Company paid interest quarterly at a fixed rate of 2.85% and received interest quarterly at a variable rate of three month LIBOR. The variable rate reset on each interest payment date. This agreement was designated as a cash-flow hedge at inception of the contract until the redemption of the trust preferred capital notes on July 29, 2015. As a result of the redemption, the derivative contract washave no longer classified as a cash flow hedge and was recorded in the balance sheet at its fair value with changes in fair value recorded in Other operating income in the Consolidated Statements of Income.

restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about the effectCompany’s leases:

(dollars in thousands)		December 31, 2020				December 31, 2019
Lease liability		$	4,113			$	3,680
Right-of-use asset		$	4,014			$	3,618
Weighted average remaining lease term		17 years				20 years
Weighted average discount term			3.34	%			3.62	%

		Twelve Months Ended
Lease Cost		December 31, 2020				December 31, 2020
Operating lease cost		$	287			$	261
Variable lease cost			—				—
Short-term lease cost			16				16
Total lease cost		$	303			$	277
Cash paid for amounts included in the measurement of lease liabilities		$	239			$	200

A maturity analysis of operating lease liabilities and reconciliation of the derivative instrument on the Consolidated Statements of Income for December 31, 2017, 2016, and 2015:

Derivatives not designated as hedging instruments under GAAP	Location of Gain  (Loss) Recognized in Income		Amount of Gain  (Loss) Recognized in Income
			2017				2016				2015
			(dollars in thousands)
Interest rate swap contracts, net of tax	Other operating income		$	—			$	149			88

The balance of the interest rate swap liability was $237 thousand at the time of the redemption of the Company's trust preferred debt on July 29, 2015. The total amount recorded in accumulated other comprehensive income at that date was reclassified to earnings dueundiscounted cash flows to the derecognition of the cash flow hedge. Subsequent to the redemption of the debt and reclassification, the interest rate swap derivative was adjusted to its fair value resulting in a $149 thousand and $88 thousand gain recorded in Othertotal operating income in the Consolidated Statements of Income for the twelve months ended December 31, 2016 and 2015, respectively.lease liabilities is as follows:

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

NOTE 15.14. Transactions with Directors and Officers

The Bank grants loans to and accepts deposits from its directors, principal officers and related parties of such persons during the ordinary course of business. The aggregate balance of loans to directors, principal officers and their related parties was $4.1$5.4 million and $4.7$6.2 million at December 31, 20172020 and 2016,2019, respectively. These balances reflect total principal additions of $9.4$1.9 million and total principal payments of $10.0$2.7 million, during 2017.2020. The aggregate balance of deposits from directors, principal officers and their related parties was $19.4$16.6 million and $15.6$24.3 million at December 31, 20172020 and 2016,2019, respectively. Adjustments were made to prior year amounts for directors and officers that are no longer considered to be related parties.

NOTE 16.15. Capital Requirements

The Company (on a consolidated basis) and the Bank areis subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

In July 2013,

Effective January 1, 2015, the Federal Reserve Bank issued a final rule that makesmade technical changes to its market risk capital rules to align them with the BASEL III regulatory capital framework and meet certain requirements of the Dodd-Frank Act.  The phase-in period for the final rules began January 1, 2015 with full compliance with the final rules to be phased in by January 1, 2019.  As a part of this final rule, the Bank was required to begin calculating and disclosing Common Equity Tier 1 Capital to risk weighted assets in 2015. Although not required by the final rule, the Company also began calculating and disclosing Common Equity Tier 1 Capital to risk weighted assets in 2015. In addition to the minimum regulatory capital required for capital adequacy purposes, , the CompanyBank is required to maintain a minimum Capital Conservation Buffer, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses. The required amount of the Capital Conservation Buffer was 0.625% on January 1, 2016 and will increasehas increased by 0.625% each year until it reachesreached 2.5% on January 1, 2019. The Capital Conservation Buffer is applicable to all ratios except the leverage ratio, which is noted below as Tier 1 Capital to Average Assets. The Bank's institution specific capital conservation buffer at December 31, 20172020 was 6.86%5.29%.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital, and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes that the Company and the Bank met all capital adequacy requirements to which they areit was subject at December 31, 20172020 and 2016.

2019.

At December 31, 2017,2020, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and common equity Tier 1 ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category.

The following table presents the Company’s and the Bank’s actual capital amounts and ratios at December 31, 20172020 and 2016:2019:

		Actual								Minimum Capital Requirement								Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(dollars in thousands)
December 31, 2020
Common Equity Tier 1 Capital to Risk Weighted Assets		$	97,825				12.39	%		$	35,540				4.50	%		$	51,335				6.50	%
Total Capital to Risk Weighted Assets			104,957				13.29	%			63,182				8.00	%			78,977				10.00	%
Tier 1 Capital to Risk Weighted Assets			97,825				12.39	%			47,386				6.00	%			63,182				8.00	%
Tier 1 Capital to Average Assets			97,825				9.06	%			43,213				4.00	%			54,016				5.00	%
December 31, 2019
Common Equity Tier 1 Capital to Risk Weighted Assets		$	90,775				13.65	%		$	29,931				4.50	%		$	43,234				6.50	%
Total Capital to Risk Weighted Assets			95,772				14.40	%			53,211				8.00	%			66,514				10.00	%
Tier 1 Capital to Risk Weighted Assets			90,775				13.65	%			39,908				6.00	%			53,211				8.00	%
Tier 1 Capital to Average Assets			90,775				10.61	%			34,216				4.00	%			42,770				5.00	%

																Minimum To Be Well
									Minimum Capital							Capitalized Under Prompt Corrective
		Actual							Requirement							Action Provisions
		Amount				Ratio			Amount				Ratio			Amount				Ratio
		(dollars in thousands)
December 31, 2017:
Common Equity Tier 1 Capital to Risk
Weighted Assets
Consolidated		$	83,507			14.45	%		$	26,003			4.50	%		N/A
Bank of Clarke County		$	80,150			14.08	%		$	25,622			4.50	%		$	37,009			6.50	%
Total Capital to Risk Weighted Assets
Consolidated		$	87,959			15.22	%		$	46,228			8.00	%		N/A
Bank of Clarke County		$	84,583			14.86	%		$	45,550			8.00	%		$	56,938			10.00	%
Tier 1 Capital to Risk Weighted Assets
Consolidated		$	83,507			14.45	%		$	34,671			6.00	%		N/A
Bank of Clarke County		$	80,150			14.08	%		$	34,163			6.00	%		$	45,550			8.00	%
Tier 1 Capital to Average Assets
Consolidated		$	83,507			11.21	%		$	29,810			4.00	%		N/A
Bank of Clarke County		$	80,150			10.86	%		$	29,511			4.00	%		$	36,889			5.00	%
December 31, 2016:
Common Equity Tier 1 Capital to Risk
Weighted Assets
Consolidated		$	79,440			15.68	%		$	22,798			4.50	%		N/A
Bank of Clarke County		$	76,124			15.11	%		$	22,666			4.50	%		$	32,740			6.50	%
Total Capital to Risk Weighted Assets
Consolidated		$	83,977			16.58	%		$	40,531			8.00	%		N/A
Bank of Clarke County		$	80,640			16.01	%		$	40,295			8.00	%		$	50,369			10.00	%
Tier 1 Capital to Risk Weighted Assets
Consolidated		$	79,440			15.68	%		$	30,398			6.00	%		N/A
Bank of Clarke County		$	76,124			15.11	%		$	30,221			6.00	%		$	40,295			8.00	%
Tier 1 Capital to Average Assets
Consolidated		$	79,440			11.84	%		$	26,848			4.00	%		N/A
Bank of Clarke County		$	76,124			11.40	%		$	26,711			4.00	%		$	33,389			5.00	%

NOTE 17.16. Restrictions On Dividends, Loans and Advances

Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be paid at any date is generally limited to the lesser of the Bank’s retained earnings or the three preceding years’ undistributed net income of the Bank. Loans or advances are limited to 10% of the Bank’s capital stock and surplus on a secured basis. Capital stock and surplus is defined as tier 1 and tier 2 capital under the risk-based capital guidelines. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

At December 31, 2017,2020, the Bank’s retained earnings available for the payment of dividends to the Company was $5.3$17.7 million. Accordingly, $75.2$83.4 million of the Company’s equity in the net assets of the Bank was restricted at December 31, 2017.2020. Funds available for loans or advances by the Bank to the Company amounted to $1.1$10.5 million at December 31, 2017.

2020.

NOTE 18.17. Dividend Investment Plan

The Company has a Dividend Investment Plan, which allows participants’ dividends to purchase additional shares of common stock at its fair market value on each dividend record date. DuringIn 2016, the Company amended the Plan to provide that shares of common stock purchased through the Plan would be purchased at a price equal to the market price of the shares.  Prior to this date, the Plan allowed participants' dividends to purchase additional shares of common stock at 95% of its fair market value. Our board of directors determined to eliminate the discount for purchases of shares in order to reflect current best practices and market standards for dividend reinvestment plans generally and among our peers.  No other changes have been made to the operation of the dividend reinvestment features of the Plan, and current participants will remain enrolled in the Plan under their current methods of participation unless they choose to alter their enrollment following the procedures described in this prospectus.

enrollment.

NOTE 19.18. Financial Instruments with Off-Balance-Sheet Risk

The Company, through its subsidiary bank, is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unfunded commitments under lines of credit, and commercial and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

At December 31, 20172020 and 2016,2019, the following financial instruments were outstanding whose contract amounts represent credit risk:

		December 31, 2020				December 31, 2019
		(dollars in thousands)
Commitments to extend credit		$	27,558			$	19,939
Unfunded commitments under lines of credit			146,202				121,609
Commercial and standby letters of credit			8,139				6,132

		2017				2016
		(dollar in thousands)
Commitments to extend credit		$	3,959			$	27,144
Unfunded commitments under lines of credit		108,483				100,530
Commercial and standby letters of credit		8,437				5,897

Commitments to extend credit are agreements to lend to a customer as long as the terms offered are acceptable and certain other conditions are met. Commitments generally have fixed expiration dates or other termination clauses. Since these commitments may expire or terminate, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, with regards to these commitments, is based on management’s credit evaluation of the customer.

Unfunded commitments under lines of credit are contracts for possible future extensions of credit to existing customers. Unfunded commitments under lines of credit include, but are not limited to, home equity lines of credit, overdraft protection lines of credit, credit cards, and unsecured and secured commercial lines of credit. The terms and conditions of these commitments vary depending on the line of credit’s purpose, collateral, and maturity. The amount disclosed above represents total unused lines of credit for which a contract with the Bank has been established.

Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in granting loans to customers. The Bank holds collateral supporting these commitments if it is deemed necessary. At December 31, 2017, $7.52020, $7.8 million of the outstanding letters of credit were collateralized.

The Bank has cash accounts in other commercial banks. The amount on deposit in these banks at December 31, 20172020 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $1.7$3.7 million.

NOTE 20. Trust Preferred Capital Notes

In September 2007, Eagle Financial Statutory Trust II (the “Trust II”), a wholly-owned subsidiary19. Revenue Recognition

Substantially all of the Company's revenue from contracts with customers that is within the scope of ASC 606, "Revenue from Contracts with Customers" is reported within noninterest income.  A limited amount of other in-scope items such as gains and losses on other real estate owned are recorded in noninterest expense.  The recognition of interest income and certain sources of noninterest income (e.g. gains on securities transactions, bank owned life insurance income, etc.) are governed by other areas of U.S. GAAP.  Significant revenue streams that are within the scope of ASC 606 and included in noninterest income are discussed in the following paragraphs.

Income from Fiduciary Activities

Trust asset management fee income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company was formeddoes not earn performance-based incentives.  Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Service Charges on Deposit Accounts

Service charges on deposit accounts are principally comprised of overdrawn account fees and account maintenance charges. The Company’s performance obligations on revenue generated from deposit accounts are generally satisfied immediately, when the transaction occurs, or by month-end. Typically, the duration of a contract does not extend beyond the services performed. Due to the short duration of most customer contracts which generate these sources of noninterest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized.

Other Service Charges and Fees

The majority of the Company’s noninterest income is derived from short term contracts associated with services provided for other ancillary services such as ATM fees, brokerage commissions, secondary market fees and wire transfer fees. The Company’s performance obligations on revenue generated from these ancillary services are generally satisfied immediately, when the transaction occurs, or by month-end. Typically, the duration of a contract does not extend beyond the services performed. Due to the short duration of most customer contracts which generate these sources of noninterest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized.

The Company earns interchange fees from credit cardholder transactions conducted through the Visa payment network.  Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized no less than monthly.

Noninterest income disaggregated by major source, for the purposeyears ended December 31, 2020 and 2019 consisted of issuing redeemable capital securities. On September 20, 2007, Trust II issued $7.0 million of trust preferred securities and $217the following:

		December 31, 2020				December 31, 2019
		(dollar in thousands)
Noninterest income:
Income from fiduciary activities(1):
Trust asset management fees		$	1,398			$	1,380
Service charges on deposit accounts(1):
Overdrawn account fees			695				961
Monthly and other service charges			225				226
Other service charges and fees:
Interchange fees (1)			372				380
ATM fees (1)			2,578				2,431
Brokerage commissions (1)			916				1,150
Secondary market fees			431				486
Other charges and fees (2)			460				446
Gain (loss) on the sale and disposal of bank premises and equipment (1)			5				137
Gain (loss) on sale of securities			687				(7	)
Bank owned life insurance income			310				(48	)
Other operating income (3)			502				217
Total noninterest income		$	8,579			$	7,759

(1)	Income within the scope of Topic 606.

(2)	Includes income within the scope of Topic 606 of $390 thousand and $412 thousand for the years ended December 31, 2020 and 2019, respectively. The remaining balance is outside the scope of Topic 606.

(3)	Includes income within the scope of Topic 606 of $505 thousand and $212 thousand for the years ended December 31, 2020 and 2019, respectively. The remaining balance is outside the scope of Topic 606.

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in common equity. On July 29, 2015, the poola contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the Company's $7.0 million in outstanding trust preferred capital notes belonged was liquidated by means of auction.entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company was successful in purchasingdoes not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2020 and December 31, 2019, the outstanding notes at a price of 65.375% of par or $4.6 million in cash, resulting in a gain on the redemption of $2.4 million. On August 7, 2015, the Trust II was dissolved.

Company did not have any significant contract balances.

NOTE 21.20. Quarterly Condensed Statements of Income - Unaudited

The Company’s quarterly net income, net income per common share and dividends per common share during 2017, 20162020 and 20152019 are summarized as follows:

		2020
		March 31				June 30				September 30				December 31
		(in thousands, except per share amounts)
Total interest and dividend income		$	9,107			$	9,661			$	10,150			$	9,990
Net interest income after provision for loan losses			8,102				8,005				9,367				8,696
Noninterest income			1,690				2,422				2,216				2,251
Noninterest expenses			6,875				7,014				7,465				8,087
Income before income taxes			2,917				3,413				4,118				2,860
Net income			2,441				2,819				3,406				2,506
Net income per common share, basic			0.71				0.83				0.99				0.74
Net income per common share, diluted			0.71				0.83				0.99				0.74
Dividends per common share			0.26				0.26				0.26				0.26

		2019
		March 31				June 30				September 30				December 31
		(in thousands, except per share amounts)
Total interest and dividend income		$	8,593			$	8,750			$	9,084			$	9,027
Net interest income after provision for loan losses			7,430				7,433				7,835				7,888
Noninterest income			1,844				1,878				2,219				1,818
Noninterest expenses			6,231				6,824				7,411				6,310
Income before income taxes			3,043				2,487				2,643				3,396
Net income			2,571				2,126				2,231				2,831
Net income per common share, basic			0.74				0.62				0.65				0.83
Net income per common share, diluted			0.74				0.62				0.65				0.83
Dividends per common share			0.24				0.25				0.25				0.26

		2017 Quarter Ended
		March 31				June 30				September 30				December 31
		(in thousands, except per share amounts)
Total interest and dividend income		$	6,566			$	7,004			$	7,458			$	7,323
Net interest income after (recovery of) loan losses		6,890				6,985				7,109				6,838
Noninterest income		1,673				1,598				1,617				1,892
Noninterest expenses		5,711				5,747				5,909				5,823
Income before income taxes		2,852				2,836				2,817				2,907
Net income		2,042				2,027				2,007				1,710
Net income per common share, basic		0.59				0.58				0.58				0.49
Net income per common share, diluted		0.59				0.58				0.58				0.49
Dividends per common share		0.22				0.22				0.22				0.22
		2016 Quarter Ended
		March 31				June 30				September 30				December 31
		(in thousands, except per share amounts)
Total interest and dividend income		$	6,421			$	6,642			$	6,279			$	6,443
Net interest income after (recovery of) loan losses		6,035				6,345				6,162				6,364
Noninterest income		1,635				1,738				1,687				1,609
Noninterest expenses		5,554				5,832				5,871				5,395
Income before income taxes		2,116				2,251				1,978				2,578
Net income		1,525				1,610				1,430				1,805
Net income per common share, basic		0.43				0.46				0.40				0.52
Net income per common share, diluted		0.43				0.46				0.40				0.52
Dividends per common share		0.20				0.20				0.20				0.22
		2015 Quarter Ended
		March 31				June 30				September 30				December 31
		(in thousands, except per share amounts)
Total interest and dividend income		$	5,938			$	6,121			$	6,265			$	6,169
Net interest income after (recovery of) loan losses		5,408				5,494				6,354				6,117
Noninterest income		1,629				1,644				3,830				1,335
Noninterest expenses		5,058				6,131				5,518				5,774
Income before income taxes		1,979				1,007				4,666				1,678
Net income		1,455				798				3,289				1,355
Net income per common share, basic		0.42				0.23				0.94				0.38
Net income per common share, diluted		0.42				0.23				0.94				0.38
Dividends per common share		0.20				0.20				0.20				0.20

NOTE 22.21. Fair Value Measurements

GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants.

participants as of the measurement date.

“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

	•
•	Level 1		Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

	•
•	Level 2		Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

	•
•	Level 3		Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at December 31, 20172020 and December 31, 2016:2019:

						Fair Value Measurements at
						December 31, 2020
						Using
		Balance as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		December 31, 2020				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies		$	17,483			$	—			$	17,483			$	—
Mortgage-backed securities			119,009				—				119,009				—
Obligations of states and political subdivisions			27,213				—				27,213				—
Subordinated debt			1,250				—				1,250				—
Total assets at fair value		$	164,955			$	—			$	164,955			$	—

						Fair Value Measurements at
						December 31, 2019
						Using
		Balance as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		December 31, 2019				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies		$	22,186			$	—			$	22,186			$	—
Mortgage-backed securities			108,161				—				108,161				—
Obligations of states and political subdivisions			34,656				—				34,656				—
Total assets at fair value		$	165,003			$	—			$	165,003			$	—

					Fair Value Measurements at
					December 31, 2017
					Using
	Balance as of				Quoted Prices in  Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
	December 31, 2017				(Level 1)				(Level 2)				(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	21,520			$	—			$	21,520			$	—
Mortgage-backed securities	61,244				—				61,244				—
Obligations of states and political subdivisions	49,802				—				49,259				543
Total assets at fair value	$	132,566			$	—			$	132,023			$	543
Liabilities:
Total liabilities at fair value	$	—			$	—			$	—			$	—
					Fair Value Measurements at
					December 31, 2016
					Using
	Balance as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
	December 31, 2016				(Level 1)				(Level 2)				(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	30,441			$	—			$	30,441			$	—
Mortgage-backed securities	42,372				—				42,372				—
Obligations of states and political subdivisions	46,449				—				45,835				614
Total assets at fair value	$	119,262			$	—			$	118,648			$	614
Liabilities:
Total liabilities at fair value	$	—			$	—			$	—			$	—

The table below presents a reconciliation for all assets measured and recognized at fair value on a recurring basis using significant unobservable inputs (Level 3) for the twelve months ended December 31, 2017 and 2016.

	Level 3 Recurring Fair Value Measurements
	As of and for the Year Ended
	December 31, 2017			December 31, 2016
	(in thousands)
Beginning balance	$	614		$	684
Purchases	—			—
Sales	—			—
Issuances	—			—
Settlements	(71		)	(70		)
Total assets at fair value	$	543		$	614

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on the present value of its expected future cash flows discounted at the loan's coupon rate, or at the loans' observable market price or the fair value of the collateral securing the loans, if they are collateral dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data within the last twelve months (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise,

values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. The fair value measurement of real estate held in other real estate owned is assessed in the same manner as impaired loans described above. We believe that the fair value component in its valuation follows the provisions of GAAP.

The following table displays quantitative information about Level 3 Fair Value Measurements for certain financial assets measured at fair value on a nonrecurring basis for December 31, 20172020 and December 31, 2016:2019:

Quantitative information about Level 3 Fair Value Measurements

December 31, 2020

Valuation Technique(s)

Unobservable Input

Range

Weighted Average (1)

Assets:

Impaired loans

Present value of cash flows

Discount rate

4% - 6%

4%

Other real estate owned

Discounted appraised value

Discount for current market conditions and selling costs

6%

6%

December 31, 2019

Valuation Technique(s)

Unobservable Input

Range

Weighted Average

Assets:

Impaired loans

Discounted appraised value

Selling cost

12%

12%

Impaired loans

Present value of cash flows

Discount rate

4% - 6%

5%

Other real estate owned

Discounted appraised value

Discount for current market conditions and selling costs

6%

6%

	Quantitative information about Level 3 Fair Value Measurements for
	December 31, 2017
	Valuation Technique(s)		Unobservable Input		Range		Weighted Average
Assets:
Impaired loans	Discounted appraised value		Selling cost		6% - 12%		7%
Impaired loans	Present value of cash flows		Discount rate		4% - 10%		5%
Other real estate owned	Discounted appraised value		Selling cost		6%		6%
	Quantitative information about Level 3 Fair Value Measurements for
	December 31, 2016
	Valuation Technique(s)		Unobservable Input		Range		Weighted Average
Assets:
Impaired loans	Discounted appraised value		Selling cost		12%		12%
Impaired loans	Present value of cash flows		Discount rate		4% - 7%		5%
Other real estate owned	Discounted appraised value		Selling cost		6%		6%

(1) - Weighted based on the relative fair values of the specific items measured at fair value.

The following table summarizes the Company’s financial and nonfinancial assets that were measured at fair value on a nonrecurring basis at December 31, 20172020 and December 31, 2016:2019:

						Carrying value at
						December 31, 2020
		Balance as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		December 31, 2020				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Financial Assets:
Impaired loans		$	1,355			$	—			$	—			$	1,355
Nonfinancial Assets:
Other real estate owned			607				—				165				442

					Carrying value at
					December 31, 2017
	Balance as of				Identical Assets				Observable Inputs				Unobservable Inputs
	December 31, 2017				(Level 1)				(Level 2)				(Level 3)
	(in thousands)
Financial Assets:
Impaired loans	$	2,248			$	—			$	—			$	2,248
Nonfinancial Assets:
Other real estate owned	106				—				—				106
					Carrying value at
					December 31, 2016
	Balance as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
	December 31, 2016				(Level 1)				(Level 2)				(Level 3)
	(in thousands)
Financial Assets:
Impaired loans	$	2,671			$	—			$	—			$	2,671
Nonfinancial Assets:
Other real estate owned	370				—				—				370

						Carrying value at
						December 31, 2019
		Balance as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		December 31, 2019				(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Financial Assets:
Impaired loans		$	3,075			$	—			$	—			$	3,075
Nonfinancial Assets:
Other real estate owned			183				—				—				183

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments:

Cash and short-term investments/restricted investments/accrued interest: The fair value was equal to the carrying amount.

Securities: The fair value, excluding restricted securities, was based on quoted market prices. The fair value of restricted securities approximated the carrying amount based on the redemption provisions of the issuers.

Loans: The fair value of variable rate loans, which reprice frequently and with no significant change in credit risk, was equal to the carrying amount. The fair value of all other loans was determined using discounted cash flow analysis. The discount rate was equal to the current interest rate on similar products.

Bank owned life insurance: The carrying amount of bank owned life insurance was a reasonable estimate of fair value.

Deposits and borrowings: The fair value of demand deposits, savings accounts, and certain money market deposits was equal to the carrying amount. The fair value of all other deposits and borrowings was determined using discounted cash flow analysis. The discount rate was equal to the current interest rate on similar products.

Off-balance-sheet financial instruments: The fair value of commitments to extend credit was estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the credit worthiness of the counterparties. The fair value of fixed rate loan commitments also considered the difference between current interest rates and the committed interest rates. The fair value of standby letters of credit was estimated using the fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties.

The carrying amount and fair value of the Company’s financial instruments at December 31, 20172020 and 20162019 were as follows:

	Fair Value Measurements at																				Fair Value Measurements at
	December 31, 2017																				December 31, 2020
	Using																				Using
	Carrying Value as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Fair Value as of				Carrying Value as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Fair Value as of
	December 31, 2017				(Level 1)				(Level 2)				(Level 3)				December 31, 2017				December 31, 2020				(Level 1)				(Level 2)				(Level 3)				December 31, 2020
	(in thousands)																				(in thousands)
Financial Assets:
Cash and short-term investments	$	35,848			$	35,848			$	—			$	—			$	35,848			$	79,920			$	79,920			$	—			$	—			$	79,920
Securities	132,566				—				132,023				543				132,566					164,955				—				164,955				—				164,955
Restricted Investments	1,107				—				1,107				—				1,107					1,267				—				1,267				—				1,267
Loans, net	564,406				—				—				559,665				559,665					829,238				—				—				819,691				819,691
Bank owned life insurance	486				—				486				—				486					12,709				—				12,709				—				12,709
Accrued interest receivable	1,955				—				1,955				—				1,955					3,441				—				3,441				—				3,441
Financial Liabilities:
Deposits	$	663,414			$	—			$	662,696			$	—			$	662,696			$	1,013,098			$	—			$	1,013,600			$	—			$	1,013,600
Accrued interest payable	44				—				44				—				44					72				—				72				—				72

		Fair Value Measurements at
		December 31, 2019
		Using
		Carrying Value as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Fair Value as of
		December 31, 2019				(Level 1)				(Level 2)				(Level 3)				December 31, 2019
		(in thousands)
Financial assets:
Cash and short-term investments		$	33,659			$	33,659			$	—			$	—			$	33,659
Securities			165,003				—				165,003				—				165,003
Restricted Investments			1,197				—				1,197				—				1,197
Loans, net			639,787				—				—				633,476				633,476
Bank owned life insurance			398				—				398				—				398
Accrued interest receivable			2,237				—				2,237				—				2,237
Financial liabilities:
Deposits		$	771,544			$	—			$	772,111			$	—			$	772,111
Accrued interest payable			142				—				142				—				142

	Fair Value Measurements at
	December 31, 2016
	Using
	Carrying Value as of				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Fair Value as of
	December 31, 2016				(Level 1)				(Level 2)				(Level 3)				December 31, 2016
	(in thousands)
Financial assets:
Cash and short-term investments	$	35,281			$	35,281			$	—			$	—			$	35,281
Securities	119,262				—				118,648				614				119,262
Restricted Investments	1,068				—				1,068				—				1,068
Loans, net	512,437				—				—				512,181				512,181
Bank owned life insurance	1,769				—				1,769				—				1,769
Accrued interest receivable	588				—				588				—				588
Financial liabilities:
Deposits	$	603,877			$	—			$	603,516			$	—			$	603,516
Accrued interest payable	34				—				34				—				34

The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations. As a result, the fair value of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities in order to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay their principal balance in a rising rate environment and more likely to do so in a falling rate environment. Conversely, depositors who are receiving fixed rate interest payments are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting the terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

NOTE 23.22. Change in Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) includes unrealized gains and losses on available for sale securities change in fair value of interest rate swaps and changes in benefit obligations and plan assets for the post retirement benefit plan.  Changes to accumulated other comprehensive income (loss) are presented net of tax effect as a component of equity.  Reclassifications out of accumulated other comprehensive income (loss) are recorded in the Consolidated Statements of Income either as a gain or loss.

Changes to accumulated other comprehensive income (loss) by components are shown in the following tables for the years ended December 31, 2017, 2016,2020 and 2015:2019:

		Twelve Months Ended
		December 31,
		2020													2019
		Unrealized Gains and Losses on Available for Sale Securities					Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan				Total				Unrealized Gains and Losses on Available for Sale Securities					Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan				Total
		(dollars in thousands)													(dollars in thousands)
January 1		$	1,438				$	44			$	1,482			$	(1,597	)			$	44			$	(1,553	)
Other comprehensive income (loss) before reclassifications			2,993					(33	)			2,960				3,835					—				3,835
Reclassifications from other comprehensive income (loss)			(687	)				3				(684	)			7					—				7
Tax effect of current period changes			(484	)				5				(479	)			(807	)				—				(807	)
Current period changes net of taxes			1,822					(25	)			1,797				3,035					—				3,035
December 31		$	3,260				$	19			$	3,279			$	1,438				$	44			$	1,482

	Twelve Months Ended
	December 31,
	2017									2016									2015
	Unrealized Gains and Losses on Available for Sale Securities			Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan			Total			Unrealized Gains and Losses on Available for Sale Securities			Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan			Total			Unrealized Gains and Losses on Available for Sale Securities			Change in Fair Value of Interest Rate Swap			Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan			Total
	(dollars in thousands)
January 1	$	(63	)	$	39		$	(24	)	$	1,012		$	39		$	1,051		$	1,466		$	(190	)	$	39		$	1,315
Other comprehensive income (loss) before reclassifications	422			4			426			(1,531		)	—			(1,531		)	(564		)	52			—			(512		)
Reclassifications from other comprehensive income (loss)	10			(7		)	3			(98		)	—			(98		)	(124		)	237			—			113
Reclassification of stranded tax effects from change in tax rate	44			7			51			—			—			—			—			—			—			—
Tax effect of current period changes	(147		)	1			(146		)	554			—			554			234			(99		)	—			135
Current period changes net of taxes	329			5			334			(1,075		)	—			(1,075		)	(454		)	190			—			(264		)
December 31	$	266		$	44		$	310		$	(63	)	$	39		$	(24	)	$	1,012		$	—		$	39		$	1,051

For the years ended December 31, 2017, 2016,2020 and 2015, $(10) thousand, $982019, $687 thousand and $124$(7) thousand, respectively, was reclassified out of accumulated other comprehensive income and appeared as (Loss) Gain (loss) on Salesale of Securitiessecurities in the Consolidated Statement of Income.  The tax expense (benefit) expense related to these reclassifications was $(4) thousand, $33$144 thousand and $42$(1) thousand for the years ended December 31, 2017, 2016,2020 and 2015,2019, respectively. The tax is included in Income Tax Expense in the Consolidated Statements of Income.

For the twelve monthsyear ended December 31, 2017, $72020, $(3) thousand was reclassified out of accumulated other comprehensive income related to the Company's postretirement benefit plan.  This reclassification is a component of net periodic benefit cost and was reflected in Salaries and Employee BenefitsOther noninterest expense in the Consolidated Statements of Income.  Tax related to this reclassification was $2less than $1 thousand and was included in Income Tax Expense in the Consolidated Statements of Income.

For the twelve months ended December 31, 2015, $237 thousand was reclassified out of accumulated other comprehensive income related to the Company's derecognition of it's cash flow hedge. This loss was recorded in Other operating income in the Consolidated Statements of Income. Tax related to this reclassification was $81 thousand and was included in Income Tax Expense in the Consolidated Statements of Income. There were no reclassifications related to cash flow hedges during the twelve months ended December 31, 2017 and 2016.

NOTE 24.23. Condensed Financial Information – Parent Company Only

EAGLE FINANCIAL SERVICES, , INC.

(Parent Company Only)

Balance Sheets

December 31, 20172020 and 2016

2019

(dollars in thousands)

		2020				2019
Assets
Cash held in subsidiary bank		$	902			$	989
Loans, net of allowance			2,932				2,939
Investment in subsidiary			101,104				92,257
Other assets			136				141
Total assets		$	105,074			$	96,326
Liabilities and Shareholders’ Equity
Total liabilities		$	—			$	—
Shareholders’ Equity
Preferred stock		$	—			$	—
Common stock			8,460				8,529
Surplus			10,811				11,406
Retained earnings			82,524				74,909
Accumulated other comprehensive income			3,279				1,482
Total shareholders’ equity		$	105,074			$	96,326
Total liabilities and shareholders’ equity		$	105,074			$	96,326

		2017				2016
Assets
Cash held in subsidiary bank		$	426			$	391
Loans, net of allowance		2,825				2,881
Investment in subsidiaries, at cost, plus undistributed net income		80,459				76,099
Other assets		107				45
Total assets		$	83,817			$	79,416
Liabilities and Shareholders’ Equity
Total liabilities		$	—			$	—
Shareholders’ Equity
Preferred stock		$	—			$	—
Common stock		8,587				8,633
Surplus		12,075				12,642
Retained earnings		62,845				58,165
Accumulated other comprehensive income (loss)		310				(24		)
Total shareholders’ equity		$	83,817			$	79,416
Total liabilities and shareholders’ equity		$	83,817			$	79,416

EAGLE FINANCIAL SERVICES, , INC.

(Parent Company Only)

Statements of Income

Years Ended December 31, 2017, 2016,2020 and 2015

2019

(dollars in thousands)

		2020				2019
Income
Dividends from subsidiary bank		$	4,250			$	5,000
Interest and fees on loans			133				134
Total income		$	4,383			$	5,134
Expenses
Other operating expenses		$	295			$	457
Total expenses		$	295			$	457
Income before income tax (benefit) and equity in undistributed earnings of subsidiary bank		$	4,088			$	4,677
Income Tax (Benefit)			(34	)			(70	)
Income before equity in undistributed earnings of subsidiary bank		$	4,122			$	4,747
Equity in Undistributed Net Income of Subsidiary Bank			7,050				5,012
Net income		$	11,172			$	9,759
Comprehensive income		$	12,969			$	12,794

		2017				2016				2015
Income
Dividends from subsidiary bank		$	3,800			$	4,350			$	6,576
Interest and fees on loans		106				97				52
Other interest and dividends		—				2				11
Gain on redemption of trust preferred debt		—				—				2,424
Other income (loss)		—				149				(121		)
Total income		$	3,906			$	4,598			$	8,942
Expenses
Interest expense on borrowings		$	—			$	143			$	260
Other operating expenses		255				211				260
Total expenses		$	255			$	354			$	520
Income before income tax (benefit) expense and equity (deficit) in undistributed earnings of subsidiary bank		$	3,651			$	4,244			$	8,422
Income Tax (Benefit) Expense		(58		)		(36		)		629
Income before equity (deficit) in undistributed earnings of subsidiary bank		$	3,709			$	4,280			$	7,793
Equity (Deficit) in Undistributed Net Income of Subsidiary Bank		4,077				2,090				(896		)
Net income		$	7,786			$	6,370			$	6,897
Comprehensive income		$	8,069			$	5,295			$	6,633

EAGLE FINANCIAL SERVICES, , INC.

(Parent Company Only)

Statements of Cash Flows

Years Ended December 31, 2017, 2016,2020 and 2015

2019

(dollars in thousands)

		2020				2019
Cash Flows from Operating Activities
Net Income		$	11,172			$	9,759
Adjustments to reconcile net income to net cash provided by operating activities
Stock-based compensation expense			604				562
Undistributed earnings of subsidiary bank			(7,050	)			(5,012	)
Changes in assets and liabilities:
Decrease (increase) in other assets			5				(50	)
Net cash provided by operating activities		$	4,731			$	5,259
Cash Flows from Investing Activities
Net decrease (increase) in loans		$	7			$	(43	)
Net cash provided by (used in) investing activities		$	7			$	(43	)
Cash Flows from Financing Activities
Cash dividends paid			(3,198	)			(2,996	)
Issuance of common stock, employee benefit plan			227				138
Retirement of common stock			(1,854	)			(1,771	)
Net cash (used in) financing activities		$	(4,825	)		$	(4,629	)
(Decrease) increase in cash		$	(87	)		$	587
Cash
Beginning		$	989			$	402
Ending		$	902			$	989

		2017				2016				2015
Cash Flows from Operating Activities
Net Income		$	7,786			$	6,370			$	6,897
Adjustments to reconcile net income to net cash provided by operating activities
(Recovery of) Provision for loan losses		(2		)		(2		)		23
(Gain) on the sale of securities		—				—				(27		)
(Gain) on the redemption of trust preferred capital notes		—				—				(2,424		)
Loss on derecognition of cash flow hedge		—				—				237
Fair value adjustment on derivative contract		—				(149		)		(88		)
Stock-based compensation expense		382				314				328
Undistributed earnings of subsidiary bank		(4,077		)		(2,090		)		896
Changes in assets and liabilities:
(Increase) decrease in other assets		(62		)		(39		)		294
(Decrease) increase in other liabilities		—				(568		)		814
Net cash provided by operating activities		$	4,027			$	3,836			$	6,950
Cash Flows from Investing Activities
Proceeds from the sale of securities available for sale		$	—			$	—			$	1,009
Proceeds from maturities of securities available for sale		—				—				385
Net decrease (increase) in loans		58				62				(2,963		)
Net cash provided by (used in) investing activities		$	58			$	62			$	(1,569	)
Cash Flows from Financing Activities
Redemption of trust preferred capital notes		$	—			$	—			$	(4,793	)
Cash dividends paid		(2,652		)		(2,354		)		(2,064		)
Issuance of common stock, employee benefit plan		166				81				187
Retirement of common stock		(1,564		)		(2,143		)		—
Net cash (used in) financing activities		$	(4,050	)		$	(4,416	)		$	(6,670	)
Increase (decrease) in cash		$	35			$	(518	)		$	(1,289	)
Cash
Beginning		$	391			$	909			$	2,198
Ending		$	426			$	391			$	909

NOTE 25.24. Other Real Estate Owned

The following table is a summary of other real estate owned (OREO) activity for the twelve months ended December 31, 2017 2016:2020 and 2019:

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

	Year Ended				Year Ended
	December 31,				December 31,
	2017				2016
Balance, beginning	$	370			$	571
Net loans transferred to OREO	53				666
Sales	(317		)		(890		)
Valuation adjustments	—				23
Balance, ending	$	106			$	370

The major classifications of other real estate owned in the consolidated balance sheets at December 31, 20172020 and 20162019 were as follows:

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

	As of
	December 31, 2017				December 31, 2016
	(in thousands)
Construction and Farmland	$	106			$	155
Residential Real Estate	—				215
Commercial Real Estate	—				—
Subtotal	$	106			$	370
Less valuation allowance	—				—
Total	$	106			$	370

There was one1 consumer mortgage loan totaling $4.1 million$68 thousand collateralized by residential real estate in the process of foreclosure at December 31, 2017.2020.  There were no2 consumer mortgage loans totaling $334 thousand collateralized by residential real estate in the process of foreclosure at December 31, 2016.

2019.

NOTE 26.25. Qualified Affordable Housing Project Investments

The Company invests in qualified affordable housing projects. The general purpose of these investments is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, provide tax credits and other tax benefits to investors, and to preserve and protect project assets.

At December 31, 20172020 and 2016,2019, the balance of the investment for qualified affordable housing projects was $2.5$2.8 million and $2.6$3.0 million, respectively. These balances are reflected in Other assets on the Consolidated Balance Sheets.  Total unfunded commitments related to the investments in qualified affordable housing projects totaled $1.9 million$446 thousand and $2.0 million$798 thousand at December 31, 20172020 and 2016, respectively.2019. These balances are reflected in Other liabilities on the Consolidated Balance Sheets.  The Company expects to fulfill these commitments by December 31, 2020,2023, in accordance with the terms of the individual agreements.

During the twelve months ended December 31, 20172020 and 2016,2019, the Company recognized amortization expense of $172 thousand and $138 thousand, respectively.$229 thousand. The amortization expense was included in Other operating expenses on the Consolidated Statements of Income.

Total estimated credits to be received during 20172020 are $165$337 thousand based on the most recent quarterly estimates received from the funds. Total tax credits and other tax benefits recognized during 20172020 and 20162019 were $219$324 thousand and $172$415 thousand, respectively.

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

None.

Item 9A.    Controls and Procedures

Disclosure Controls and Procedures

The Company, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 20172020 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

Management is also responsible for establishing and maintaining adequate internal control over the Company’s financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended). Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, management has conducted an assessment of the design and effectiveness of its internal controls over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

in 2013.

Management maintains a comprehensive system of internal control to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. Those policies and procedures: 1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of the assets of the Company, 2) provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors, 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Management recognizes that there are inherent limitations in the effectiveness of any internal control system, including the possibility of human error and the circumvention or overriding of internal controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Changes in conditions will also impact the internal control effectiveness over time. Eagle Financial Services, Inc. and subsidiaries maintains an internal auditing program, under the supervision of the Audit Committee of the Board of Directors, which independently assesses the effectiveness of the system of internal control and recommends possible improvements.

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2017,2020, using the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded as of December 31, 2017,2020, the Company’s internal control over financial reporting is adequate and effective and meets the criteria of the Internal Control – Integrated Framework.

Management’s assessment did not determine any material weaknesses within the Company’s internal control structure. There were no changes in the Company’s internal control over financial reporting during the Company’s quarter ended December 31, 20172020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The effectiveness

This annual report does not include an attestation report of the Company'scompany’s registered public accounting firm, regarding internal control over financial reporting as of December 31, 2017 has been auditedreporting. Management’s report was not subject to attestation by Yount, Hyde& Barbour, P.C., the independentCompany’s registered public accounting firm which also auditedpursuant to rules of the Company's consolidated financial statements includedSecurities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K. Yount, Hyde & Barbour's attestation report on the Company's internal control over financial reporting is included in Item 8 "Financial Statements and Supplementary Data" of this Form 10-K.

annual report.

Item 9B.    Other Information

None.

PART III

Item 10.    Directors, Executives Officers and Corporate Governance

The information required by Part III, Item 10. is incorporated herein by reference to the Proxy Statement for the 20182021 Annual Meeting of Shareholders to be held May 15, 2018.

18, 2021.

Item 11.    Executive Compensation

The information required by Part III, Item 11. is incorporated herein by reference to the Proxy Statement for the 20182021 Annual Meeting of Shareholders to be held May 15, 2018.

18, 2021.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Part III, Item 12. is incorporated herein by reference to the Proxy Statement for the 20182021 Annual Meeting of Shareholders to be held May 15, 2018.

18, 2021.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by Part III, Item 13. is incorporated herein by reference to the Proxy Statement for the 20182021 Annual Meeting of Shareholders to be held May 15, 2018.

18, 2021.

Item 14.    Principal Accounting Fees and Services

The information required by Part III, Item 14. is incorporated herein by reference to the Proxy Statement for the 20182021 Annual Meeting of Shareholders to be held May 15, 2018.

18, 2021.

PART IV

Item 15.

Item 15.

Exhibits, Financial Statement Schedules

(a)(1) Financial Statements

The financial statements are filed as part of this Annual Report on Form 10-K within Item 8.

(a)(2) Financial Statement Schedules

All financial statement schedules are omitted since they are not required, or are not applicable, or the required information is given in the financial statements or notes thereto.

(a)(3) Exhibits

The following exhibits, as applicable, are filed with this Form 10-K or incorporated by reference to previous filings.

Exhibit No.		Description
3.1
Exhibit No.			Description
3.1			Articles of Incorporation of the Company, restated in electronic format only as of March 1, 2006 (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated March 1, 2006).
3.2			Bylaws of the Company (incorporated herein by reference to Exhibit 3.2312 of the Company’s Registration StatementCurrent Report on Form S-4, Registration No. 33-43681).8-K filed on April 17, 2020.
10.1 4.1		Description of Securities (incorporated herein by reference to Exhibit 4.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019).
10.1		Description of Executive Supplemental Income Plan (incorporated by reference to Exhibit 10.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1996).*
10.2			Amended and Restated Employment Agreement of John R. MillesonBrandon C. Lorey (incorporated herein by reference to Exhibit 10.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008)2019).*
10.3			Amended and Restated Employment Agreement of James W. McCarty, Jr. (incorporated herein by reference to Exhibit 10.3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).*
10.4			Eagle Financial Services, Inc. Stock Incentive Plan (incorporated herein by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8, Registration No. 333-118319).*
10.510.4			Eagle Financial Services, Inc. 2014 Stock Incentive Plan incorporated(incorporated by reference to Exhibit A of the Proxy Statement for the Annual Meeting of Shareholders held on May 21, 2014, filed inon April 21, 2014.2014).
10.610.5			Employment Agreement of John E. Hudson. *
10.7			Amended and Restated Employment Agreement of Kaley P. CrosenJohn E. Hudson (incorporated herein by reference to Exhibit 10.710.5 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008)2019).*
10.910.6			Amended and Restated Employment Agreement of Kathleen J. ChappellKaley P. Crosen (incorporated herein by reference to Exhibit 10.910.6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013)2019).*
10.1010.7		Amended and Restated Employment Agreement of Kathleen J. Chappell (incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 16, 2020).*
10.8		Eagle Financial Services, Inc. Dividend Investment Plan (incorporated herein by reference to to the Company’s Registration Statement on Form S-3, File No. 333-209460, filed on February 10, 2016).*
10.1110.9			Amended and Restated Employment Agreement of Carl A. Esterhay.Esterhay (incorporated by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019).*
10.1210.10			Amended and Restated Employment Agreement of Joseph T. Zmitrovich.Zmitrovich (incorporated by reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019).*
21.1			Subsidiary of the Company.
23.1			Consent of Yount, Hyde & Barbour, P.C.
31.1			Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2
31.2			Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1			Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101			The following materials from the Eagle Financial Service, Inc. Annual Report on Form 10-K for the year ended December 31, 20172020 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders” Equity, (v) Consolidated Statements of Cash Flows and (vi) notes to Consolidated Financial Statements.

*
*	Management contracts and compensatory plans and arrangements.

(b)
(b)	See Item 15(a)(3) above.

(c)
(c)	See Item 15(a)(2) above.

Item 16.Form 10-K Summary

Not applicable.

SIGNATURES

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

Eagle Financial Services, Inc.
By:		/s/ JOHN R. MILLESONBRANDON C. LOREY
		John R. Milleson Brandon C. Lorey
		President and Chief Executive Officer

Date: March 15, 2018

30, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2018.

30, 2021.

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

Item 16.    Form 10-K Summary

Not applicable.

105

99