0001323648us-gaap:AssetBackedSecuritiesSecuritizedLoansAndReceivablesMember2020-12-31

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x

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

For the fiscal year ended December 31, 20172020

or

¨

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

For the transition period from                      to

Commission file number 001-32590

COMMUNITY BANKERS TRUST CORPORATIONCORPORATION

(Exact name of registrant as specified in its charter)

Virginia
20-2652949

Virginia

20-2652949

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

9954 Mayland Drive, Suite 2100

Richmond, Virginia

23233

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code (804) (804934-9999

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

Title of each classclass:

Trading Symbol

Name of each exchange on which registeredregistered:

Common Stock, $0.01 par value

ESXB

The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K¨

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

Large accelerated filer  ¨

Accelerated filer  x

Non-accelerated filer¨(Do not check if a smaller reporting company)

Smaller reporting company ¨

Emerging growth company¨

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

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.    $174,575,122

$119,296,293

On February 28, 2018,2021, there were 22,074,52322,225,929 shares of the registrant’s common stock, par value $0.01, outstanding, which is the only class of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be used in conjunction with the registrant’s

20182021 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K.


​​

Table of Contents

TABLE OF CONTENTS

FORM 10-K

December 31, 2017

2020

Page

PART IPage

Item 1.

BusinessPART I

3

Item 1A.1.

Risk FactorsBusiness

11

3

Item 1A.

Risk Factors

13

Item 1B.

Unresolved Staff Comments

19

24

Item 2.

Properties

20

24

Item 3.

Legal Proceedings

20

25

Item 4.

Mine Safety Disclosures

20

25

PART II

Item 5.

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

21

25

Item 6.

Selected Financial Data

23

28

Item 7.

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

24

28

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

45

50

Item 8.

Financial Statements and Supplementary Data

46

52

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

93

99

Item 9A.

Controls and Procedures

93

100

Item 9B.

Other Information

94

101

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

94

101

Item 11.

Executive Compensation

94

101

Item 12.

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

94

101

Item 13.

Certain Relationships and Related Transactions, and Director Independence

94

101

Item 14.

Principal Accounting Fees and Services

94

101

PART IV

Item 15.

Exhibits, Financial Statement Schedules

94

102

Item 16.

Form 10-K Summary

96

103

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PART I

ITEM 1.BUSINESS

ITEM 1.BUSINESS

GENERAL

GENERAL

The Company is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 2624 full-service offices in Virginia and Maryland. The Bank also operates onetwo loan production officeoffices in Virginia.

 

The Bank was established in 1926. The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, and small businesses and larger commercial companies, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities.cash management services.

 

Essex Services, Inc. is a wholly-owned subsidiary of the Bank. Essex Services and its financial consultants offer a broad range of investment products and alternatives through an affiliation with Infinex Investments, Inc., an independent broker-dealer.  It also offers insurance products through anthe Bank’s ownership interest in Bankers Insurance, LLC, an independent insurance agency.

The Company’s corporate headquarters are located at 9954 Mayland Drive, Suite 2100, Richmond, Virginia 23233. The telephone number of the corporate headquarters is (804) 934-9999. The Company’s website is www.cbtrustcorp.com, and the Banks’s website is www.essexbank.com.

 

The Company’s common stock trades on the NASDAQ Capital Market under the symbol “ESXB”.

 

STRATEGY

The Company operates in somemany of the strongest growth markets in Virginia and Maryland.  Its operating strategy has been to provide the products and services of the larger financial institutions, but delivered with the individual service focus of a small community oriented bank.  This strategy has allowed the Company to have significant organic growth in its core markets.

 

The Company’s markets are geographically diverse enough to spread economic risk throughout a number of different customer bases.  Operating under the individual community delivery philosophy, the Company seeks to enhance customer relationships through superior products delivered with extraordinary service, while maintaining a prudent approach to credit quality and risk controls.  The Company’s associates are the most important element in its strategy for success, and therefore there is significant focus on training and building a team-oriented environment.  In a constantly changing world, competition remains intense for community banks. One ofWhile the featuresCOVID-19 pandemic has created numerous changes in banking, the Company believes that an important aspect that sets the Company apart from other organizations is the ability and desire to give superior personal service to customers.customers no matter what the delivery platform. 

 

In 2017, theThe Company expanded on its internal “Growing to Win” campaignbelieves that, as change in delivery methods and engaged its associates to determine and reflect oncustomer contact points has accelerated, the core values that the Company wants to deliver to associates, customers and shareholders.shareholders is still extremely important to its ongoing success.  The Company’s mission statement is “To provide financial inspiration through intriguingly unique experiences that educate and empower action”.  What makes the Company intriguingly unique is the consistent delivery of core values to the customers and the communities of which it is a part.  The Company believes that this strategy not only gives a competitive advantage over larger banks, but also over web-based financial technology companies.

 

Building a strong and cohesive culture for the Company is a primary objective of management. The Company’s strategic focus onhas transformed as it has expanded the offering a broad array of products delivered withvarious delivery channels through enhanced technology. The Company still offers individual service through its branch offices and customer service center, as well as digital banking through our web based and mobile applications. The Company is constantly upgrading its digital platform to augment the personal service delivery channels. This strategy has resulted in expanded market presence, earnings growth and increased value for shareholders. Since this strategy has been historically successful, management believes that it will continue to provide solid results.   Additionally, the Company has been focused on controlling risks and allowing growth in a safe and sound manner.  The Company continues to build thebalance capital strength and growth capacities to execute itswith strategies to utilize excess capital that will create superiormore value for shareholders. Among these strategies are common share dividends and stock repurchase programs.

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OPERATIONS

OPERATIONS

The Company’s operating strategy is delineated by business lines and by the functional support areas that help accomplish the stated goals and financial budget of the organization. A major component of future income is growth in three core business lines – retail and small business banking, commercial and industrial banking and real estate lending. These core businesses, combined with the Company’s geographic locations,digital banking delivery, dictate the market position that the Company needs to take to be successful. The majority of new loanConsistent and responsible growth will occur in all threethese lines althoughand delivery channels is the retail segment primarily provides the funding through core deposit relationship growth.key to success.

 

Retail and Small Business Banking

 

The Company markets to consumers in geographic areas around its branch network not only through existing bricks and mortar, but also with alternative delivery mechanisms and new product development such as online banking, remote deposit capture, mobile banking and telephonic banking. In addition, the Company attracts new customers by making its service through these distribution points convenient. All of the Company’s existing markets are prime targets for expanding the consumer side of its business with full loan, deposit, investment and deposit relationships, and theinsurance relationships. The Company has restructured its retail groupconstantly looks for ways to accommodate growth. In addition, the Company is focused on potential growth in newefficiently gain profitable market areas in which it currently operates loan production offices.share.

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Commercial and Industrial Banking

 

In the commercial and industrial banking group, the Company focuses on small to mid-sized business customers (sales of $5 million to $15 million each year) who are not targeted by larger banks and for whom smaller community banks have limited expertise. The Company has an experienced team with a strong loan pipeline. The typical relationship consists of working capital lines and equipment loans with the primary deposit accounts of the customer. MostMany of these relationships will be new to the Company and create strong and positive growth potential.

 

Commercial Real Estate Lending

 

The Company has historically held a significant concentration in real estate loans. The current strategy is to manage the existing real estate portfolio and add income producing property loans and builders and other development loans to the portfolio. The Company originates both owner occupied and non-owner occupied borrowings where the cash flows provide significant debt coverage for the relationship.

Paycheck Protection Program (PPP) and Other Pandemic Relief

During the COVID-19 pandemic and in response to such government legislation and regulations as Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company has participated in the Paycheck Protection Program and in certain forms of approved payment relief to its borrowers. Any actions taken were well vetted within applicable regulations and responsibly managed to ensure the safety of the Bank while helping the businesses and communities that the Company serves.

The Company continues to adapt to the changing business environment and is committed to providing necessary support to its customers and employees to meet the challenges of these uncertain times.

COMPETITION

 

Within its market areas in Virginia and Maryland, the Company operates in a highly competitive environment, competing for deposits and loans with commercial corporations, savings banks and other financial institutions, including non-bank competitors such as financial technology companies, many of which possess substantially greater financial resources than those available to the Company. Many of these institutions have significantly higher lending limits than the Company. In addition, there can be no assurance that other financial institutions, with substantially greater resources than the Company, will not establish operations in its service area. The financial services industry remains highly competitive and is constantly evolving.

 

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The activities in which the Company engages are highly competitive. Financial institutions such as credit unions, consumer finance companies, financial technology companies, insurance companies, brokerage companies and other financial institutions with varying degrees of regulatory restrictions compete vigorously for a share of the financial services market. Brokerage and insurance companies continue to become more competitive in the financial services arena and pose an ever increasing challenge to banks. Legislative changes also greatly affect the level of competition that the Company faces. Federal legislation allows credit unions to use their expanded membership capabilities, combined with tax-free status, to compete more fiercely for traditional bank business. The tax-free status granted to credit unions provides them a significant competitive advantage. Many of the largest banks operating in Virginia and Maryland, including some of the largest banks in the country, have offices in the Company’s market areas. Many of these institutions have capital resources, broader geographic markets, and legal lending limits substantially in excess of those available to the Company.  The Company faces competition from institutions that offer products and services that it does not or cannot currently offer. Some institutions with which the Company competes offer interest rate levels on loan and deposit products that the Company is unwilling to offer due to interest rate risk and overall profitability concerns. The Company expects the level of competition to increase.

 

Factors such as rates offered on loan and deposit products, types of products offered, and the number and location of branch offices, as well as the reputation of institutions in the market, affect competition for loans and deposits. The Company emphasizes customer service, establishing long-term relationships with its customers, thereby creating customer loyalty, and providing adequate product lines for individuals and small to medium-sized business customers.

 

The Company would not be materially or adversely impacted byNo material part of the loss of a single customer. The CompanyCompany’s business is not dependent upon a single or a few customers.customers, and the loss of any single customer would not have a materially adverse effect upon the Company’s business.

 

CORPORATE HISTORY

The Company was formed in 2005 as a special purpose acquisition company to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the banking industry.

In May 2008, the Company acquired each of TransCommunity Financial Corporation (TFC), which was the holding company for TransCommunity Bank, N.A., and BOE Financial Services of Virginia, Inc. (BOE), which was the holding company for the Bank. TFC had been the holding company for four separately-chartered banking subsidiaries — Bank of Powhatan, Bank of Goochland, Bank of Louisa and Bank of Rockbridge – until 2007, when they were consolidated into the newly created TransCommunity Bank. Later in 2008, TransCommunity Bank was consolidated into the Bank under the Bank’s state charter and, until 2010, the former branch offices of TFC operated as separate divisions under the Bank’s charter, using the names of TFC’s former banking subsidiaries.

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In November 2008, the Bank acquired certain fixed assets and assumed all deposit liabilities relating to four former branch offices of The Community Bank (TCB), a Georgia state-chartered bank, following its failure. The transaction was consummated pursuant to a Purchase and Assumption Agreement by and among the FDIC, both as Receiver for The Community Bank and in its corporate capacity, and the Bank. The Bank sold those offices and related deposits to Community & Southern Bank on November 8, 2013.

In January 2009, the Bank acquired substantially all assets and assumed all deposit and certain other liabilities relating to seven former branch offices of Suburban Federal Savings Bank, Crofton, Maryland (SFSB), following its failure. The transaction was consummated pursuant to a Purchase and Assumption Agreement by and among the FDIC, both as Receiver for SFSB and in its corporate capacity, and the Bank. The Bank entered into a shared loss arrangement with the FDIC with respect to loans and real estate assets acquired. The Bank terminated this arrangement on September 10, 2015.

In January 2014, the Company completed a reincorporation from Delaware, its original state of incorporation, to Virginia. As a result of the reincorporation, the Company’s corporate affairs are now governed by Virginia law. The purpose of the reincorporation to Virginia was annual cost savings of over $175,000 that the Company realizes from the difference between Delaware’s franchise tax and Virginia’s annual corporate fee. The form of the reincorporation was the merger of the then existing Delaware corporation into a newly created Virginia corporation. The Company retained the same name and conducts business in the same manner as before the reincorporation. In addition, all of the issued and outstanding shares of the Company’s common stock and preferred stock became shares of a Virginia corporation. The reincorporation had no effect on the Bank and its operations.

TARP INVESTMENT

In December 2008, the Company issued 17,680 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and a related common stock warrant to the Treasury for a total price of $17,680,000. The issuance and receipt of proceeds from the Treasury were made under its voluntary Capital Purchase Program. The Series A Preferred Stock qualified as Tier 1 capital. The Series A Preferred Stock had a liquidation amount per share equal to $1,000. The Series A Preferred Stock paid cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The Company could have deferred dividend payments, but the dividend was a cumulative dividend that accrued for payment in the future. The common stock warrant permitted the Treasury to purchase 780,000 shares of common stock at an exercise price of $3.40 per share.

During 2013 and 2014, the Company repurchased all of the outstanding shares of Series A Preferred Stock. In 2013, the Company repurchased 7,000 shares and funded it through the earnings of its banking subsidiary. The Company paid the Treasury $7.0 million, which represented 100% of the par value of the preferred stock repurchased plus accrued dividends with respect to such shares. On April 23, 2014, the Company repurchased the remaining 10,680 shares and funded it through an unsecured third-party term loan. The Company paid the Treasury $10.9 million, which represented 100% of the par value of the preferred stock repurchased plus accrued dividends with respect to such shares. The form of all repurchases were redemptions under the terms of the Series A Preferred Stock.

On June 4, 2014, the Company paid the Treasury $780,000 to repurchase the warrant that had been associated with the Series A Preferred Stock. The Company used its own funds to repurchase the warrant.

There are no other investments from the Company’s participation in the Capital Purchase Program that remain outstanding.

EMPLOYEES

 

As of December 31, 2017,2020, the Company had 264246 full-time equivalent employees, including executive officers, loan and other banking officers, branch personnel, operations personnel and other support personnel. None of the Company’s employees is represented by a union or covered under a collective bargaining agreement. Management of the Company considers its employee relations to be excellent.

 

AVAILABLE INFORMATION

The Company’s corporate headquarters are located at 9954 Mayland Drive, Suite 2100, Richmond, Virginia  23233.  The telephone number of the corporate headquarters is (804) 934-9999. The Company’s website is www.cbtrustcorp.com, and the Bank’s website is www.essexbank.com.

 

The Company files with or furnishes to the Securities and Exchange Commission annual, quarterly and current reports, proxy statements, and various other documents under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may read and copy any materials that the Company files with or furnishes to the SEC at the SEC’s Public Reference Room, which is located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. Also, the SEC maintains an internet website atwww.sec.govthat contains reports, proxy and information statements and other information regarding registrants, including the Company, that file or furnish documents electronically with the SEC.

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The Company also makes available free of charge on or through our internet website (www.cbtrustcorp.com) its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports as filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after the Company electronically files such materials with, or furnishes them to, the SEC.

 

SUPERVISION AND REGULATION

 

General

As a bankBank holding company, wecompanies, banks and their affiliates are subject to regulationextensively regulated under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Otherboth federal and state laws govern the activities of our bank subsidiary, including the activities in which it may engage, the investments that it makes, the aggregate amount of loans that it may grant to one borrower, and the dividends it may declare and pay to us. Our bank subsidiary is also subject to various consumer and compliance laws. As a state-chartered bank, the Bank is primarily subject to regulation, supervision and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (the “SCC”). Our bank subsidiary also is subject to regulation, supervision and examination by the FDIC.

law.  The following descriptionsummary discusses certain provisions of federal and state laws and certain regulations and the potential impact of such provisions on the Company and the Bank. These federal and state laws and regulations have been enacted generally for the protection of depositors in banks and not for the protection of shareholders of bank holding companies or banks.  This summary is not complete, and we refer you to the particular statutory or regulatory provisions or proposals for more information

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The Company

 

Bank Holding Companies

The Company is registered asAs a bank holding company, under the BHCA and, as a result, iswe are subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”), and regulation and supervision by the Federal Reserve. Accordingly, the Company is subject to periodic examination byBoard of Governors of the Federal Reserve and is required to file periodic reports regarding its operations and any additional information thatSystem (the “Federal Reserve”).  Under the BHCA, the Federal Reserve may require. has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuation of such activity or ownership constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.  The Federal Reserve and the Federal Deposit Insurance Corporation (the “FDIC”) have adopted guidelines and released interpretative materials that establish operational and managerial standards to promote the safe and sound operation of banks and bank holding companies.  These standards relate to the institution’s key operating functions, including but not limited to capital management, internal controls, internal audit systems, information systems, data and cybersecurity, loan documentation, credit underwriting, interest rate exposure and risk management, vendor management, executive management and its compensation, corporate governance, asset growth, asset quality, earnings, liquidity and risk management.

The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely related to banking or to managing or controlling banks as to be a proper incident to it. While federal law permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, or to establish interstate de novo branches, the Federal Reserve has jurisdiction under the BHCA to approve any bank or nonbanknon-bank acquisition, merger or consolidation, or the establishment of any interstate de novo branches, proposed by a bank holding company.

 

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositor of such depository institutions and to the FDIC’s Deposit Insurance Fund (the “DIF”) in the event the depository institution becomes in danger of default or in default. For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise.

 

The Federal Deposit Insurance Act (the “FDIA”) also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholders in the event that a receiver is appointed to distribute the assets of the Bank.

 

The Company was requiredis also subject to register inregulation and supervision by the Bureau of Financial Institutions of the Virginia with the SCCState Corporation Commission (the “Bureau”) under the financial institution holding company laws of Virginia. Accordingly, the Company

The Bank

The Bank is subject to supervision, regulation and supervisionexamination by the SCC.Bureau and its primary federal regulator, the Federal Reserve. The various laws and regulations issued and administered by the regulatory agencies affect corporate practices, such as the payment of dividends, the incurrence of debt and the acquisition of financial institutions and other companies, and affect business practices and operations, such as the payment of interest on deposits, the charging of interest on loans, the types of business conducted, the products and terms offered to customers and the location of offices. Prior approval of the applicable primary federal regulator and the Bureau is required for a Virginia chartered bank or bank holding company to merge with another bank or bank holding company, to purchase the assets or assume the deposits of another bank or bank holding company, or to acquire control of another bank or bank holding company.

 

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The Dodd-Frank Act and the EGRRCPA

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) has significantly restructuresrestructured the financial regulatory regime in the United States and has had a broad impact on the financial services industry. While some rulemaking under the Dodd-Frank Act has occurred, many of the act’s provisions require study or rulemaking by federal agencies, a process which will take years to implement fully.

Among other things, the Dodd-Frank Act provides for new capital standards that eliminate the treatment of trust preferred securities as Tier 1 capital. Existing trust preferred securities were grandfathered for banking entities with less than $15 billion of assets, such as the Company. The Dodd-Frank Act permanently raised deposit insurance levels to $250,000. Pursuant to modifications under the Dodd-Frank Act, deposit insurance assessments are calculated based on an insured depository institution’s assets rather than its insured deposits, and the minimum reserve ratio of the FDIC’s DIF is to be raised to 1.35%. The payment of interest on business demand deposit accounts is permitted by the Dodd-Frank Act. Further, the Dodd-Frank Act bars banking organizations, such as the Company, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances.

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The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”) as an independent bureau of the Federal Reserve System. The CFPB has the exclusive authority to prescribe rules governing the provision of consumer financial products and services, which in the case of the Bank will be enforced by the Federal Reserve. The Dodd-Frank Act also provides that debit card interchange fees must be reasonable and proportional to the cost incurred by the card issuer with respect to the transaction. This provision is known as the “Durbin Amendment.” In 2011, the Federal Reserve adopted regulations setting the maximum permissible interchange fee as the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, with an additional adjustment of up to one cent per transaction if the card issuer implements certain fraud-prevention standards. The interchange fee restriction only applies to financial institutions with assets of $10 billion or more and therefore has no effect on the Company.

 

The Dodd-Frank Act enhancesimplemented far-reaching changes across the requirements for certain transactions with affiliates under Sections 23A and 23Bfinancial regulatory landscape, including changes that have significantly affected the business of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained. The Dodd-Frank Act also provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of aall bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or compensation that gives rise to excessive risk or could lead to a material financial loss to such firm. Prior to the Dodd-Frank Act, the bank regulatory agencies promulgated theInteragency Guidance on Sound Incentive Compensation Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk to the financial institution of such behaviour.

Although a significant number of the rulescompanies and regulations mandated by the Dodd-Frank Act have been finalized, many of the new requirements have yet to be implemented and will likely be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact such requirements will have on the operations of the Company and the Bank is unclear. The changes resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business practices, impose more stringent capital requirements, liquidity and leverage ratio requirements, or otherwise adversely affect the business ofbanks, including the Company and the Bank.  These changes may also requireSome of the Company to invest significant management attentionrules that have been proposed and, resources to evaluate and make necessary changesin some cases, adopted to comply with new statutorythe Dodd-Frank Act's mandates are discussed further below. In 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”) was enacted to reduce the regulatory burden on certain banking organizations, including community banks, by modifying or eliminating certain federal regulatory requirements. While the EGRRCPA maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion as well as for larger banks with assets above $50 billion. In addition, the EGRRCPA included regulatory relief for community banks regarding regulatory examination cycles, call reports, application of the Volcker Rule (proprietary trading prohibitions), mortgage disclosures, qualified mortgages, and risk weights for certain high-risk commercial real estate loans. However, federal banking agencies retain broad discretion to impose additional regulatory requirements on banking organizations based on safety and soundness and U.S. financial system stability considerations.

Capital RequirementsThe Company continues to experience ongoing regulatory reform. These regulatory changes could have a significant effect on how the Company conducts its business. The specific implications of the Dodd-Frank Act, the EGRRCPA, and other potential regulatory reforms cannot yet be fully predicted and will depend to a large extent on the specific regulations that are to be adopted in the future.  Certain aspects of the Dodd-Frank Act and the EGRRCPA are discussed in more detail below.

 

Capital Requirements

Regulatory Capital Requirements. All financial institutions are required to maintain minimum levels of regulatory capital. The Federal Reserve has issuedestablishes risk-based and leverageleveraged capital guidelines applicable to banking organizations that it supervises. Understandards for the risk-basedfinancial institutions they regulate. The Federal Reserve also may impose capital requirements the Companyin excess of these standards on a case-by-case basis for various reasons, including financial condition or actual or anticipated growth.

Basel III Capital Framework.The Federal Reserve and the Bank are each generally requiredFDIC have adopted rules to maintain a minimum ratio of totalimplement the Basel III capital to risk-weighted assets (including certain off-balance sheet activities, suchframework as standby letters of credit) of 8%. At least half of the total capital must be composed of “Tier 1 Capital,” which is defined as common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles. The remainder may consist of “Tier 2 Capital,” which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance. In addition, each of the federal banking regulatory agencies has established minimum leverage capital requirements for banking organizations.

In 2013, the Federal Reserve adopted a final rule (the “Basel III Rule”) revising the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to be consistent with the agreements reachedoutlined by the Basel Committee on Banking Supervision inand standards for calculating risk-weighted assets and risk-based capital measurements (collectively, the “Basel III: A Global Regulatory Framework for More Resilient BanksIII Final Rules”) that apply to banking institutions they supervise. For the purposes of these capital rules, (i) common equity tier 1 capital (“CET1”) consists principally of common stock (including surplus) and Banking Systems” (Basel III)retained earnings; (ii) Tier 1 capital consists principally of CET1 plus non-cumulative preferred stock and related surplus, and certain provisionsgrandfathered cumulative preferred stocks and trust preferred securities; and (iii) Tier 2 capital consists of other capital instruments, principally qualifying subordinated debt and preferred stock, and limited amounts of an institution’s allowance for loan losses. Each regulatory capital classification is subject to certain adjustments and limitations, as implemented by the Dodd-Frank Act.Basel III Final Rules. The Basel III Rule appliesFinal Rules also establish risk weightings that are applied to all depository institutions, top-tier bank holding companies with total consolidatedmany classes of assets of $500 million or more,held by community banks, importantly including applying higher risk weightings to certain commercial real estate loans.

The Basel III Final Rules and top-tier savings and loan holding companies (referredminimum capital ratios required to as “banking organizations”). For community banking organizations, like the Company, these revisedbe maintained by banks were effective January 1, 2015. The Basel III Final Rules also include a requirement that banks maintain additional capital requirements began being(the “capital conservation buffer”), which was phased in beginning on January 1, 2015.

Under the requirements prior to effectiveness of the2016 and was fully phased in effective January 1, 2019. The Basel III Rule, banking organizations must have maintainedFinal Rules and fully phased in capital conservation buffer require banks to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5 percent, plus a 2.5 percent capital conservation buffer (which is added to the minimum CET1 ratio, effectively resulting in a required ratio of CET1 to risk-weighted assets of at least 7 percent), (ii) a minimum ratio of Tier 1 capital to adjustedrisk-weighted assets of at least 6.0 percent, plus the capital conservation buffer (effectively resulting in a required Tier 1 capital ratio of 8.5 percent), (iii) a minimum ratio of total

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(that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0 percent, plus the capital conservation buffer (effectively resulting in a required total capital ratio of 10.5 percent) and (iv) a minimum leverage ratio of 4 percent, calculated as the ratio of Tier 1 capital to average quarterlytotal assets, equal to 3% to 5%, subject to federal bank regulatory evaluation of an organization’s overall safetycertain adjustments and soundness. In summary, the capital measures used by the federal banking regulators are:limitations.

·Total risk-based capital ratio (Total Capital Ratio), which is the total of Tier 1 Capital and Tier 2 Capital as a percentage of total risk-weighted assets;
·Tier 1 risk-based capital ratio (Tier 1 Ratio), which is Tier 1 Capital as a percentage of total risk-weighted assets; and
·Leverage Ratio, which is Tier 1 Capital as a percentage of adjusted average total assets.

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Under pre-Basel III Rule regulations, a bank was considered:

·“Well capitalized” if it had a Total Capital Ratio of 10% or greater, Tier 1 Ratio of 6% or greater, a Leverage Ratio of 5% or greater, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure;
·“Adequately capitalized” if it had a Total Capital Ratio of 8% or greater, a Tier 1 Ratio of 4% or greater, and a Leverage Ratio of 4% or greater — or 3% in certain circumstances — and was not well capitalized;
·“Undercapitalized” if it had a Total Capital Ratio of less than 8% or greater, a Tier 1 Ratio of less than 4%, and a Leverage Ratio of less than 4% — or 3% in certain circumstances;
·“Significantly undercapitalized” if it had a Total Capital Ratio of less than 6%, a Tier 1 Ratio of less than 3%, or a Leverage Ratio of less than 3%; or
·“Critically undercapitalized” if its tangible equity was equal to or less than 2% of average quarterly tangible assets.

Among other things, the Basel III Rule establishes a new common equity tier 1 (CET1) minimum capital requirement, introduces a “capital conservation buffer” and raises minimum risk-based capital requirements. Under the new rule, CET1 is defined as comprising Tier 1 Capital, less non-cumulative perpetual preferred stock and grandfathered trust-preferred and other securities, plus certain regulatory deductions. The Basel III Rule establishes a new minimum required ratioFinal Rules provide deductions from and adjustments to regulatory capital measures, primarily to CET1, including deductions and adjustments that were not applied to reduce CET1 under historical regulatory capital rules. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income, and significant investments in non-consolidated financial entities must be deducted from CET1 to the extent that any one such category exceeds 10 percent of CET1 to risk-weighted assets (CET1 Ratio) of 4.5%, and raises the minimum Tier 1 Ratio to 6.0% (from the prior 4.0% minimum). Furthermore, the minimum required Leverage Ratio is increasedor all such categories in the final Basel III Rule to 4.0% for all banking organizations irrespectiveaggregate exceed 15 percent of differences in composite supervisory ratings.CET1.

In conjunction with the changes in the required minimum capital ratios, the Basel III Rule also changes the definitions of the five regulatory capitalization categories set forth above, effective January 1, 2015. A table illustrating these changes is set forth below.

Capitalization CategoryTotal Capital
Ratio (%)
Tier 1 Ratio
(%)
CET1 Ratio
(%)
Leverage Ratio
(%)
Well capitalized (prior)≥ 10≥ 6N/A≥ 5
Well capitalized (Basel III)≥ 10≥ 8≥ 6.5≥ 5
Adequately capitalized (prior)≥ 8≥ 4N/A≥ 4
Adequately capitalized (Basel III)≥ 8≥ 6≥ 4.5≥ 4
Undercapitalized (prior)< 8< 4N/A< 4
Undercapitalized (Basel III)< 8< 6< 4.5< 4
Significantly undercapitalized (prior)< 6< 3N/A< 3
Significantly undercapitalized (Basel III)< 6< 4< 3< 3

Critically undercapitalized (prior)GAAP tangible equity ≤ 2% of average quarterly assets
Critically undercapitalized (Basel III)Basel III tangible equity (Tier 1 Capital plus non-tier 1 perpetual preferred stock) ≤ 2% of total assets

The new required capital conservation buffer is comprised of an additional 2.5% above the minimum risk-based capital ratios. Institutions that do not maintain the required capital buffer will be subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. This capital conservation buffer is in addition to, and not included with, the minimum ratios described above. A table illustrating these limitations on the ratio which can be paid out (defined in the Basel III Rule as “maximum payout ratio”) is set forth below.

Capital Conservation BufferMaximum payout ratio (as a
percentage of eligible retained
income)
Greater than 2.5%.No applicable limitation.
≤ 2.5% and > 1.875%.60%
≤ 1.875% and > 1.25%40%
≤ 1.25% and > 0.625%20%
≤ 0.625%0%

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The Basel III Rule also introduces new methodologies for determining risk-weighted assets, including higher risk weightings, upFinal Rules permanently include in Tier 1 capital trust preferred securities issued prior to a maximum of 150%, for exposures that are more than 90 days past due or are on nonaccrual status and for certain commercial real estate facilities that finance the acquisition, development or construction of real property. The Basel III Rule also requires unrealized gains and losses on certain securities holdings to be included, or excluded, as applicable, for purposes of calculating certain regulatory capital requirements. Additionally, the Basel III Rule establishes that, for banking organizationsMay 19, 2010 by bank holding companies with less than $15 billion in total assets, subject to a limit of 25 percent of Tier 1 capital. The Corporation expects that its trust preferred securities will be included in the Corporation’s regulatory capital as Tier 1 capital instruments until their maturity.

As of December 31, 2009,2020, the abilityBank met all capital adequacy requirements under the Basel III Final Rules, including the capital conservation buffer on a fully phased-in basis.

Community Bank Leverage Ratio.As a result of the EGRRCPA, the federal banking agencies were required to treat trust preferred securitiesdevelop a Community Bank Leverage Ratio (the ratio of a bank’s tangible equity capital to average total consolidated assets) for banking organizations with assets of less than $10 billion, such as tier 1the Bank. In 2019, the federal banking agencies issued a final rule that implements the Community Bank Leverage Ratio Framework (the “CBLRF”).  To qualify for the CBLRF, a bank must have less than $10 billion in total consolidated assets, limited amounts of off-balance sheet exposures and trading assets and liabilities, and a leverage ratio greater than 9 percent. A bank that elects the CBLRF and has a leverage ratio greater than 9 percent will be considered to be in compliance with Basel III capital wouldrequirements and exempt from the complex Basel III calculations and will also be permanently grandfathered in.deemed “well capitalized” under Prompt Corrective Action regulations, discussed below.  A bank that falls out of compliance with the CBLRF will have a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8 percent (a bank will be deemed “well capitalized” during the grace period).  The CBLRF was available for banking organizations to use as of March 31, 2020 (with the flexibility for banking organizations to subsequently opt into or out of the CBLRF, as applicable).

The CARES Act directed federal banking agencies to adopt interim final rules to lower the threshold under the CBLRF from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive. See “—Legislation and Regulation Related to the Coronavirus Pandemic” below.

   

Small Bank Holding Company.The risk-based capital standardsEGRRCPA also expanded the category of bank holding companies that may rely on the Federal Reserve’s Small Bank Holding Company Policy Statement by raising the maximum amount of assets a qualifying bank holding company may have from $1 billion to $3 billion. In addition to meeting the asset threshold, a bank holding company must not engage in significant nonbanking activities, not conduct significant off-balance sheet activities, and not have a material amount of debt or equity securities outstanding and registered with the SEC (subject to certain exceptions). The Federal Reserve explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agencymay, in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy.

The FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the FDIC. These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions bydiscretion, exclude any bank holding company from the application of the Small Bank Holding Company Policy Statement if such action is warranted for supervisory purposes.

In 2018, the Federal Reserve issued an interim final rule to apply the Small Bank Holding Company Policy Statement to bank holding companies with consolidated total assets of less than $3 billion. The policy statement, which, among other things, exempts certain bank holding companies from minimum consolidated regulatory capital ratios that controlsapply to other bank holding companies. As a result of the institution, requiring divestiture byinterim final rule, the institution of its subsidiaries or by theCompany expects that it will be treated as a small bank holding company ofand will not be subject to regulatory capital requirements. The comment period on the institution itself, requiring new election of directors,interim final rule closed in 2018 and, requiringto date, the dismissal of directors and officers.Federal Reserve has not issued a final rule to replace the interim final rule. The Bank presently maintains sufficientremains subject to the regulatory capital to remain in compliance with these capital requirements.requirements described above.

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Dividends

 

The Company is a legal entity that is separate and distinct from the Bank.  A significant portionThe Company’s ability to distribute cash dividends will depend primarily on the ability of the revenues of the Company result fromits banking subsidiary to pay dividends paid to it by the Bank. There are various legal limitations applicable to the payment of dividends by the Bank to the Company and to the payment of dividends by the Company to its shareholders.it. The Bank is subject to various statutory restrictionslegal limitations on its abilitythe amount of dividends that it is permitted to pay dividends tounder Section 5199(b) of the Company. Under current regulations, priorRevised Statues (12 U.S.C. 60), and the approval fromof the Federal Reserve iswould be required if cashthe total of all dividends declared by a state member bank in any givencalendar year shall exceed the total of its net income forprofits of that year pluscombined with its retained net profits of the preceding two preceding years.  TheAdditionally, the Bank is further restricted by Regulation H, Section 208.5, Dividends and Other Distributions, which requires pre-approval of dividends that exceed undivided profits. Furthermore, neither the Company nor the Bank may declare or pay a cash dividend on any of its capital stock if it is insolvent or if the payment of dividends by the Bankdividend would render the entity insolvent or unable to pay its obligations as they become due in the Company may be limited by other factors, such as requirements to maintain capital above regulatory guidelines. ordinary course of business.

Bank regulatory agencies have the authority to prohibit the Bank or the Company from engaging in an unsafe or unsound practice in conducting its respective business. The payment of dividends, depending on the financial condition of the Bank, or the Company, could be deemed to constitute such an unsafe or unsound practice.

 

Under the FDIA, insured depository institutions such as the Bank, are prohibited from making capital distributions, including the payment of dividends, if, after making such distributions, the institution would become “undercapitalized” (as such term is used in the statute). Based on the Bank’s current financial condition, the Company does not expect that this provision will have any impact on its ability to receive dividends from the Bank.

 

Deposit Insurance

 

The Bank’s deposits are insured by the DIF of the FDIC up to the standard maximum insurance amount for each deposit insurance ownership category. As of January 1, 2015, theThe basic limit on FDIC deposit insurance coverage is $250,000 per depositor. Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations as an insured institution, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC, subject to administrative and potential judicial hearing and review processes. The FDIC may also suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the Bank’s deposit insurance.

   

The DIF is funded by assessments on banks and other depository institutions. As required by the Dodd-Frank Act, in 2011, the FDIC approved a final rule that changed the assessment base for DIF assessments from domestic deposits toinstitutions calculated based on average consolidated total assets minus average tangible equity (defined as Tier 1 Capital. In addition, as alsocapital). As required by the Dodd-Frank Act, the FDIC has adopted a new large-bank pricing assessment scheme, set a target “designated reserve ratio” (described in more detail below) of 2 percent for the DIF and established a lower assessment rate schedule when the reserve ratio reaches 1.15 percent and, in lieu of dividends, provides for a lower assessment rate schedule when the reserve ratio reaches 2 percent and 2.5 percent. An institution’sinstitution's assessment rate depends upon the institution’s assigned risk category, which is based on supervisory evaluations, regulatory capitala statistical analysis of financial ratios that estimates the likelihood of failure over a three-year period, which considers the institution’s weighted average CAMELS component rating, and is subject to further adjustments including those related to levels of unsecured debt and certain other factors. Initialbrokered deposits (not applicable to banks with less than $10 billion in assets).  At December 31, 2020, total base assessment rates for institutions that have been insured for at least five years range from 2.51.5 to 4530 basis points. The FDIC may make the following further adjustmentspoints applying to an institution’s initial base assessment rates: decreases for long-term unsecured debt including most senior unsecured debt and subordinated debt; increases for holding long-term unsecured debt or subordinated debt issued by other insured depository institutions; and increases for broker depositsbanks with less than $10 billion in excess of 10 percent of domestic deposits for institutions not well rated and well capitalized.assets.

   

The Dodd-Frank Act transferred to the FDIC increased discretion with regard to managing the required amount of reserves for the DIF, or the “designated reserve ratio.” Among other changes, the Dodd-Frank Act (i) raised the minimum designated reserve ratio to 1.35 percent and removed the upper limit on the designated reserve ratio, (ii) requires that the designated reserve ratio reach 1.35 percent by September 2020, and (iii) requires the FDIC to offset the effect on institutions with total consolidated assets of less than $10 billion by raising the designated reserve ratio from 1.15 percent to 1.35 percent. The FDIA requires that the FDIC consider the appropriate level for the designated reserve ratio on at least an annual basis. As of December 31, 2020, the designated reserve ratio was 2.00 percent and the minimum designated reserve ratio was 1.35 percent.

Banks with less than $10 billion in total consolidated assets are eligible for credits to offset the portion of their assessments that helped to raise the reserve ratio to 1.35 percent. The FDIC automatically applies these credits to reduce

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an eligible bank’s regular DIF assessment up to the entire amount of the assessment. The Bank was awarded credits of $365,000, of which $207,000 was used to offset its DIF assessment in the third and fourth quarters of 2019. The Company used the remainder of the credits to offset the Bank’s DIF assessment during 2020.

In 2010,June 2020, the FDIC adopted a new DIF restoration planfinal rule that generally removes the effect of PPP lending when calculating a bank’s deposit insurance assessment by providing an offset to the bank’s total assessment amount for the increase in the assessment base attributable to the bank’s participation in the PPP. This final rule began applying to FDIC deposit insurance assessments during the second quarter of 2020.

Consumer Laws and Regulations

The Bank is subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth-in-Lending Act, the Truth-in-Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Housing Act, and regulations issued under such acts, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans to or engaging in other types of transactions with such customers.

The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the Consumer Financial Protection Bureau (the “CFPB”), and giving it responsibility for implementing, examining, and enforcing compliance with federal consumer protection laws. The CFPB focuses on (i) risks to consumers and compliance with the federal consumer financial laws, (ii) the markets in which firms operate and risks to consumers posed by activities in those markets, (iii) depository institutions that offer a wide variety of consumer financial products and services, and (iv) non-depository companies that offer one or more consumer financial products or services.

The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction.

Community Reinvestment Act

The Bank is subject to the provisions of the Community Reinvestment Act (the “CRA”), which imposes a continuing and affirmative obligation, consistent with their safe and sound operation, to help meet the credit needs of entire communities where the bank accepts deposits, including low- and moderate-income neighborhoods. The Federal Reserve’s assessment of the Bank’s CRA record is made available to the public. Further, a less than satisfactory CRA rating will slow, if not preclude, expansion of banking activities and prevent a company from becoming or remaining a financial holding company. Federal CRA regulations require, among other things, that evidence of discrimination against applicants on a prohibited basis, and illegal or abusive lending practices be considered in the CRA evaluation. The Bank has a rating of “Satisfactory” in its most recent CRA evaluation.

Cybersecurity

The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal banking agencies expect financial institutions to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure thatrapid recovery, resumption and maintenance of the fund reserve ratio reaches 1.35 percent by September 30, 2020,institution’s operations after a cyber-attack. If the Company or the Bank fails to meet the expectations set forth in this regulatory guidance, the Company or the Bank could be subject to various regulatory actions and any remediation efforts

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may require significant resources of the Company or the Bank.  In addition, all federal and state bank regulatory agencies continue to increase focus on cybersecurity programs and risks as required by the Dodd-Frank Act.

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Incentive Compensationpart of regular supervisory exams.

 

In 2010,2016, the federal banking regulatorsagencies issued proposed rules on enhanced cybersecurity risk-management and resilience standards that would apply to very large financial institutions and to services provided by third parties to these institutions. The comment period for these proposed rules has closed and a final rule has not been published. Although the proposed rules would apply only to bank holding companies and banks with $50 billion or more in total consolidated assets, these rules could influence the federal banking agencies’ expectations and supervisory requirements for information security standards and cybersecurity programs of smaller financial institutions, such as the Company and the Bank.

Anti-Money Laundering Legislation

The Company is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. Among other things, these laws and regulations require the Company to take steps to prevent the use of the Company for facilitating the flow of illegal or illicit money, to report large currency transactions, and to file suspicious activity reports. The Company is also required to carry out a comprehensive finalanti-money laundering compliance program. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act require the federal bank regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

Incentive Compensation

The federal banking agencies have issued regulatory guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s Board of Directors.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficienciesexamination, and deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.ratings. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.  At

In 2016, the SEC and the federal banking agencies proposed rules that prohibit covered financial institutions (including bank holding companies and banks) from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk taking by providing covered persons (consisting of senior executive officers and significant risk takers, as defined in the rules) with excessive compensation, fees or benefits that could lead to material financial loss to the financial institution.  The proposed rules outline factors to be considered when analyzing whether compensation is excessive and whether an incentive-based compensation arrangement encourages inappropriate risks that could lead to material loss to the covered financial institution, and establishes minimum requirements that incentive-based compensation arrangements must meet to be considered to not encourage inappropriate risks and to appropriately balance risk and reward.  The proposed rules also impose additional corporate governance requirements on the boards of directors of covered financial institutions and impose additional record-keeping requirements.  The comment period for these proposed rules has closed and a final rule has not yet been published.

Legislation and Regulation Related to the Coronavirus Pandemic

In response to the COVID-19 pandemic, federal government enacted the CARES Act on March 27, 2020. Among other things, the CARES Act included the following provisions impacting financial institutions:

Community Bank Leverage Ratio. The CARES Act directs federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national

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emergency or December 31, 2017,2020. In April 2020, the Companyfederal bank regulatory agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.

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

Small Business Administration Paycheck Protection Program. The CARES Act created the PPP as administered by the Small Business Administration (the “SBA”).. Under the PPP, $349 billion was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions, such as the Bank, that process loan applications and service the loans.

The federal government also enacted the Consolidated Appropriations Act, 2021, on December 27, 2020, which included (i) the Economic Aid to Hard-Hit Small Businesses, Non-profits, and Venues Act, (ii) the COVID-Related Tax Relief Act of 2020, and (iii) the Taxpayer Certainty and Disability Relief Act of 2020. These laws include significant clarifications and modifications to PPP, which had not been made aware of any instances of non-complianceterminated on August 8, 2020. In particular, the federal government revived the PPP and allocated an additional $284.45 billion in PPP funds for 2021. As a result, the SBA has modified prior guidance and promulgated new regulations and guidance to conform with and implement the new guidance.provisions during the first quarter of 2021. As a participating PPP lender, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto.

The Gramm-Leach-Bliley Act of 1999Prompt Corrective Action

 

The Gramm-Leach-Bliley Act of 1999 (Gramm-Leach-Bliley) drew lines between the types of activities that are permitted for banking organizations that are financial in nature and those that are not permitted because they are commercial in nature.

Gramm-Leach-Bliley created a new form of financial organization called a financial holding company that may own and control banks, insurance companies and securities firms, thereby repealing the prohibition in the Glass-Steagall Act on bank affiliations with companies that are engaged primarily in securities underwriting activities. A financial holding company is authorized to engage in any activity that is financial in nature or incidental to an activity that is financial in nature or is a complementary activity, including, for example, insurance, securities transactions (including underwriting, broker/dealer activities and investment advisory services) and traditional banking-related activities. The Company is currently not a financial holding company under Gramm-Leach-Bliley.

Gramm-Leach-Bliley directed federal banking regulatorsagencies have broad powers under current federal law to adopt rules limitingtake prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties.institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Pursuant to these rules, financial institutions must provide: initial notices to customers about their privacy policies, including a descriptionterms are defined under uniform regulations issued by each of the conditions underfederal banking agencies regulating these institutions. An insured depository institution which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; annual notices of their privacy policies to current customers; and a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties. These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Company, as a bank holding company,less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to these rules.

Community Reinvestment Actincreased regulatory oversight and is increasingly restricted in the scope of its permissible activities. As of December 31, 2020, the Bank was considered “well capitalized.”

 

Under the Community Reinvestment Act (CRA) 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. CRA requires the adoption of a statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with CRA and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s CRA 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.

Gramm-Leach-Bliley and federal bank regulators have made various changes to CRA. Among other changes, CRA agreements with private parties must be disclosed and annual reports must be made to a bank’s primary federal regulator. A financial holding company or any of its subsidiaries will not be permitted to engage in new activities authorized under Gramm-Leach-Bliley if any bank subsidiary received less than a “satisfactory” rating in its latest CRA examination. The Company believes that it is currently in compliance with CRA.

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Fair Lending; Consumer Laws

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

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

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

Governmental Policies

 

The Federal Reserve regulates money, credit and interest rates in order to influence general economic conditions. These policies influence overall growth and distribution of bank loans, investments and deposits. These policies also affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

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Future Regulations

 

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company or the Bank.

ITEM 1A.RISK FACTORS

ITEM 1A.
RISK FACTORS

Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the market value of our common stock. The risk factors applicable to us are the following:

Risks Related to the COVID-19 Pandemic

Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

The coronavirus (COVID-19) pandemic, including measures that governmental authorities have taken to manage the public health effects of the pandemic, has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. These measures, together with voluntary changes in consumer behavior, have led to a substantial decrease in economic activity and a dramatic increase in unemployment. We cannot predict at this time the extent to which COVID-19 will continue to negatively affect us. The extent of any continued or future adverse effects of COVID-19 will depend on future developments, which are highly uncertain and outside our control, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on our employees, customers and service providers, as well as other market participants, and additional actions taken by governmental authorities and other third parties in response to the pandemic.

We are prioritizing the safety of our customers and employees and have limited our branch activity to drive-through services or in-branch appointments. In addition, most of our employees are working remotely.  If these measures are not effective in serving our customers or affect the productivity of our employees, they may lead to significant disruptions in our business operations.

Many of our third-party service providers have also been, and may further be, affected by the same factors that affect us and that, in turn, increase their own risks of business disruption or may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. As a result, our operational and other risks are generally expected to increase until the pandemic subsides.

We are offering varying levels of credit relief to borrowers who are experiencing financial hardships related to COVID-19, including interest only payment concessions and payment deferrals. In addition, we are a certified and qualified SBA lender and assisted our customers with their applications under the PPP. These assistance efforts may adversely affect our revenue and results of operations. These government programs are complex, and our participation may lead to governmental and regulatory scrutiny, negative publicity and damage to our reputation. In addition, if these assistance efforts are not effective in mitigating the effects of COVID-19 on borrowers, we may experience higher rates of default and increased credit losses in future periods.

Certain concentrations where we have credit exposure, including commercial and residential lessors, hotels, medical service providers and restaurants, have experienced significant operational challenges as a result of COVID-19.

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These negative effects may cause our commercial customers to be unable to pay their loans as they come due or decrease the value of collateral, which we expect would cause significant increases in our credit losses.

Our earnings and cash flows are dependent to a large degree on net interest income. Net interest income is significantly affected by market rates of interest. Significant reductions to the federal funds rate have led to a decrease in the rates and yields on U.S. Treasury securities. If interest rates are reduced further in response to COVID-19, we expect that our net interest income will decline, perhaps significantly. The overall effect of lower interest rates cannot be predicted at this time and depends on future actions that the Federal Reserve may take to increase or reduce the targeted federal funds rate in response to COVID-19, and resulting economic conditions.

The effects of COVID-19 on economic and market conditions have increased demands on our liquidity as we meet our customers’ and clients’ needs. We suspended repurchases for a period of time under our stock repurchase program to preserve capital and liquidity in order to support our customers and employees and, although we have no current plans to reduce or suspend our common stock dividend, we will continue to exercise prudent capital management and monitor the business environment.

Governmental authorities have taken unprecedented measures to stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to address the negative effects of COVID-19 or avert severe and prolonged reductions in economic activity.

Other negative effects of the COVID-19 pandemic that may impact our business, financial condition, liquidity, capital and results of operations cannot be predicted at this time, but it is likely that we will continue to be adversely affected until the pandemic subsides and the economy begins to recover. Further, COVID-19 may also have the effect of heightening many of the other risks described in this report. Even after the pandemic subsides, it is possible that our markets continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations.

Risks Related to Our Business, Industry and Markets

Our future success is dependent on our ability to compete effectively in the highly competitive banking and financial services industry.

 

We face vigorous competition from other commercial banks, savings banks, credit unions, mortgage banking firms, consumer finance companies, financial technology companies, securities brokerage firms, insurance companies, money market funds and other types of financial institutions for deposits, loans and other financial services in our market area. A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. Many of our non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services.

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While we believe we compete effectively with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, smaller asset base, lack of geographic diversification and inability to spread our marketing costs across a broader market. If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, our net interest margin and income could be negatively affected. Failure to compete effectively to attract new, or to retain existing, clients may reduce or limit our margins and our market share and may adversely affect our results of operations, financial condition, and growth.

 

We may be adversely affected by economic conditions in our market area.

 

We operate in a mixed market environment with influences from both rural and urban areas. Because our lending operation is concentrated in localized areas in Virginia and Maryland, we will be affected by the general economic conditions in these markets. Changes in the local economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio, and loan and deposit pricing. A significant decline in general economic conditions caused by inflation, recession, unemployment, pandemic conditions, public health emergencies, or other

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factors beyond our control would impact these local economic conditions and the demand for banking products and services generally, which could negatively affect our financial condition and performance. Although we might not have significant credit exposure to all the businesses in our areas, the downturn in any of these businesses could have a negative impact on local economic conditions and real estate collateral values generally, which could negatively affect our profitability.

 

Deterioration in the soundness of other financial institutions could adversely affect us.

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

We may not be ableadversely impacted by changes in the condition of financial markets.

We are directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. Market risk is inherent in the financial instruments associated with our operations and activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives. Just a few of the market conditions that may shift from time to successfully managetime, thereby exposing us to market risk, include fluctuations in interest and currency exchange rates, equity and futures prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of issuers. Accordingly, depending on the instruments or activities impacted, market risks can have adverse effects on our long-term growth,results of operations and our overall financial condition.

Risks Related to Our Lending Activities and Our Management of Other Assets

If our allowance for loan losses becomes inadequate, our results of operations may be adversely affected.

An essential element of our business is to make loans. We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses in our loan portfolio. Through a periodic review and analysis of the loan portfolio, management determines the adequacy of the allowance for loan losses by considering such factors as general and industry-specific market conditions, credit quality of the loan portfolio, the collateral supporting the loans and financial performance of our loan customers relative to their financial obligations to us. The amount of future losses is impacted by changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control. Actual losses may exceed our current estimates. Rapidly growing loan portfolios are, by their nature, unseasoned. Estimating loan loss allowances for an unseasoned portfolio is more difficult than with seasoned portfolios, and may be more susceptible to changes in estimates and to losses exceeding estimates. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in our loan portfolio, we cannot fully predict such losses or assert that our loan loss allowance will be adequate in the future. Future loan losses that are greater than current estimates could have a material impact on our future financial performance.

Banking regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize additional loan charge-offs, based on credit judgments different than those of our management. Any increase in the amount of our allowance or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.

In addition, the measure of our allowance for loan losses is dependent on the adoption and interpretation of accounting standards. In 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, “Financial

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Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” Under this ASU, the current incurred loss credit impairment methodology will be replaced with the CECL model, a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. While this ASU is not effective for us until the fiscal year beginning after December 15, 2022, we expect that the implementation of the CECL model will change our current method of setting an allowance and may result in material changes in our accounting for credit losses on financial instruments. The CECL model may create more volatility in our level of allowance for loan losses. If we are required to materially increase this level for any reason, such increase could adversely affect our business, financial condition, and results of operations.

Our concentration in loans secured by real estate may increase our future credit losses, which would negatively affect our financial results.

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Credit risk and credit losses can increase if our loans are concentrated to borrowers who, as a group, may be uniquely or disproportionately affected by economic or market conditions. Approximately 80.37% of our loans are secured by real estate, both residential and commercial, substantially all of which are located in our market area. A major change in the region’s real estate market, resulting in a deterioration in real estate values, or in the local or national economy, including changes caused by raising interest rates, could adversely affect our customers’ ability to pay these loans, which in turn could adversely impact us. Risk of loan defaults and foreclosures are inherent in the banking industry, and we try to limit our exposure to this risk by carefully underwriting and monitoring our extensions of credit. We cannot fully eliminate credit risk, and as a result credit losses may occur in the future.

If our concentration in commercial real estate increases significantly, we may have to take certain actions that could impact our balance sheet.

Regulators have been paying close attention to banks with higher commercial real estate concentrations, due to concerns about credit risk building in the industry.   Concentration levels of concern include commercial real estate loans making up at least 300% of a bank’s total risk-based capital, construction, land development and other land loans comprising 100% or more of total risk-based capital and construction and total commercial real estate growth of 50% or more over the prior 36 months.  While we currently are below all of these levels, if we exceed one or more of them, we may have to take certain actions to minimize the risk associated with higher concentration levels and otherwise bolster our balance sheet. These actions include ensuring robust risk management practices, including conducting regular appraisals, analyzing borrowers’ ability to repay credits, evaluating local economic conditions and operating with enhanced reporting and systems.  At an extreme, these actions can also include curtailing our lending in these areas and raising capital.

A substantial decline in the value of our securities portfolio may result in an “other-than-temporary” impairment charge.

The total amount of our available-for-sale securities portfolio was $271.3 million at December 31, 2020. The measurement of the fair value of these securities involves significant judgment due to the complexity of the factors contributing to the measurement. Market volatility makes measurement of the fair value of our securities portfolio even more difficult and subjective. More generally, as market conditions continue to be volatile, we cannot provide assurance with respect to the amount of future unrealized losses in the portfolio. To the extent that any portion of the unrealized losses in these portfolios is determined to be other than temporary, and the loss is related to credit factors, we would recognize a charge to our earnings in the quarter during which such determination is made, and our capital ratios could be adversely affected.

Nonperforming assets adversely affect our results of operations and financial condition.

Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans, thereby adversely affecting our income and increasing loan administration costs. When we receive collateral through foreclosures and similar proceedings, we are required to mark the related loan to the then fair market

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value of the collateral less estimated selling costs, which may result in a loss. An increase in the level of nonperforming assets also increases our risk profile and may impact the capital levels our regulators believe is appropriate in light of such risks. We utilize various techniques such as loan sales, workouts and restructurings to manage our problem assets. Decreases in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our business, results of operations and financial condition.

In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to performance of their other responsibilities. Such resolution may also require the assistance of third parties, and thus the expense associated with it. There can be no assurance that we will avoid further increases in nonperforming loans in the future.

We rely upon independent appraisals to determine the value of the real estate, which secures a significant portion of our loans, and the values indicated by such appraisals may not be realizable if we are forced to foreclose upon such loans.

 

A key aspectsignificant portion of our long-term business strategyloan portfolio consists of loans secured by real estate (80.37% at December 31, 2020). We rely upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of our loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is our continued growth and expansion. Our ability to continue to grow depends, in part, upon our ability to:

·open new branch offices or acquire existing branches or other financial institutions;
·attract deposits to those locations; and
·identify attractive loan and investment opportunities.

Weless valuable than originally estimated, we may not be able to successfully implement our growth strategy if we are unable to identify attractive markets, locations or opportunities to expand inrecover the future, or if we are subject to regulatory restrictions on growth or expansionoutstanding balance of our operations. In addition, we compete with our companies for acquisitionthe loan and expansion opportunities, and many of those competitors have greater financial resources than us and thus may be able to pay more for such an opportunity than we can.will suffer a loss.

 

Our abilityRisks Related to manage our growth successfully also will depend on whether we can maintain capital levels adequate to support our growth, maintain cost controlsInterest Rates and asset quality and successfully integrate any businesses we acquire into our organization. As we identify opportunities to implement our growth strategy by opening new branches or acquiring branches or other banks, we may incur increased personnel, occupancy and other operating expenses. In the case of new branches, we must absorb those higher expenses while we begin to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, any plans for branch expansion could decrease our earnings in the short run, even if we efficiently execute our branching strategy.Liquidity

We may incur losses if we are unable to successfully manage interest rate risk.

 

Our profitability depends in substantial part upon the spread between the interest rates earned on investments and loans and interest rates paid on deposits and other interest-bearing liabilities. These rates are normally in line with general market rates and rise and fall based on our view of our financing and liquidity needs.  We may selectively pay above-market rates to attract deposits as we have done in some of our marketing promotions in the past. Changes in interest rates will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits, which, in turn, may affect the growth in loan and retail deposit volume. We attempt to minimize our exposure to interest rate risk, but cannot eliminate it. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments. Our net interest spread will depend on many factors that are partly or entirely outside our control, including competition, federal economic, monetary and fiscal policies and economic conditions generally. Fluctuations in market rates are neither predictable nor controllable and may have a material and negative effect on our business, financial condition and results of operations.

 

Changes in interest rates also affect the value of our loans. An increase in interest rates could adversely affect our borrowers’ ability to pay the principal or interest on existing loans or reduce their desire to borrow more money. This situation may lead to an increase in non-performing assets or a decrease in loan originations, either of which could have a material and negative effect on our results of operations.

Our liquidity needs could adversely affect results of operations and financial condition.

Our primary sources of funds are deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including, but not limited to, changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, availability of, and/or access to, sources of refinancing, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to

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customers on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances, sales of securities and loans, federal funds lines of credit from correspondent banks and borrowings from the Federal Reserve Discount Window, as well as additional out-of-market time deposits and brokered deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand.  We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

We will be required to transition from the use of the LIBOR index in the future.

We have certain variable-rate loans indexed to LIBOR to calculate the loan interest rate. The United Kingdom Financial Conduct Authority, which regulates LIBOR, has announced that the continued availability of LIBOR on the current basis is not guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR, and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based variable-rate loans, as well as LIBOR-based securities, subordinated notes, trust preferred securities, or other securities or financial arrangements. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with borrowers or other financial arrangements may cause us to incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers or other counter-parties over the appropriateness or comparability to LIBOR of the substitute index or indices, any of which could have a material adverse effect on our results of operations.

Risks Related to Our Operations

We may not be able to successfully manage our long-term growth, which may adversely affect our results of operations and financial condition.

A key aspect of our long-term business strategy is our continued growth and expansion. Our ability to continue to grow depends, in part, upon our ability to:

12open new branch offices or acquire existing branches or other financial institutions;
attract deposits to those locations; and

identify attractive loan and investment opportunities.

We may not be able to successfully implement our growth strategy if we are unable to identify attractive markets, locations or opportunities to expand in the future, or if we are subject to regulatory restrictions on growth or expansion of our operations.  In addition, we compete with our companies for acquisition and expansion opportunities, and many of those competitors have greater financial resources than us and thus may be able to pay more for such an opportunity than we can.

Our ability to manage our growth successfully also will depend on whether we can maintain capital levels adequate to support our growth, maintain cost controls and asset quality and successfully integrate any businesses we acquire into our organization. As we identify opportunities to implement our growth strategy by opening new branches or acquiring branches or other banks, we may incur increased personnel, occupancy and other operating expenses. In the case of new branches, we must absorb those higher expenses while we begin to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, any plans for branch expansion could decrease our earnings in the short run, even if we efficiently execute our branching strategy.

 

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Our operations may be adversely affected by cyber security risks.

 

In the ordinary course of business, we collect and store sensitive data, including proprietary business information and personally identifiable information of our customers and employees in systems and on networks. The secure processing, maintenance, and use of this information is critical to our operations and business strategy. In addition, we rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. We have invested in accepted technologies, and we continually review processes and practices that are designed to protect our networks, computers and data from damage or unauthorized access. Despite these security measures, our computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems, and the information stored there could be accessed, damaged or disclosed. A breach in security or other failure could result in legal claims, regulatory penalties, disruption in operations, increased expenses, loss of customers and business partners and damage to our reputation, which could adversely affect our business and financial condition. Furthermore, as cyber threats continue to evolve and increase, we may be required to expend significant additional financial and operational resources to modify or enhance our protective measures, or to investigate and remediate any identified information security vulnerabilities.

 

Our liquidity needs could adversely affect results of operations and financial condition.

Our primary sources of funds are deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including, but not limited to, changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, availability of, and/or access to, sources of refinancing, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to customers on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances, sales of securities and loans, federal funds lines of credit from correspondent banks and borrowings from the Federal Reserve Discount Window, as well as additional out-of-market time deposits and brokered deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

If our allowance for loan losses becomes inadequate, our results of operations may be adversely affected.

An essential element of our business is to make loans. We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses in our loan portfolio. Through a periodic review and analysis of the loan portfolio, management determines the adequacy of the allowance for loan losses by considering such factors as general and industry-specific market conditions, credit quality of the loan portfolio, the collateral supporting the loans and financial performance of our loan customers relative to their financial obligations to us. The amount of future losses is impacted by changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control. Actual losses may exceed our current estimates. Rapidly growing loan portfolios are, by their nature, unseasoned. Estimating loan loss allowances for an unseasoned portfolio is more difficult than with seasoned portfolios, and may be more susceptible to changes in estimates and to losses exceeding estimates. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in our loan portfolio, we cannot fully predict such losses or assert that our loan loss allowance will be adequate in the future. Future loan losses that are greater than current estimates could have a material impact on our future financial performance.

Banking regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize additional loan charge-offs, based on credit judgments different than those of our management. Any increase in the amount of our allowance or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.

Our concentration in loans secured by real estate may increase our future credit losses, which would negatively affect our financial results.

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Credit risk and credit losses can increase if our loans are concentrated to borrowers who, as a group, may be uniquely or disproportionately affected by economic or market conditions. Approximately 83.23% of our loans are secured by real estate, both residential and commercial, substantially all of which are located in our market area. A major change in the region’s real estate market, resulting in a deterioration in real estate values, or in the local or national economy, including changes caused by raising interest rates, could adversely affect our customers’ ability to pay these loans, which in turn could adversely impact us. Risk of loan defaults and foreclosures are inherent in the banking industry, and we try to limit our exposure to this risk by carefully underwriting and monitoring our extensions of credit. We cannot fully eliminate credit risk, and as a result credit losses may occur in the future.

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If our concentration in commercial real estate increases significantly, we may have to take certain actions that could impact our balance sheet.

Regulators have been paying close attention to banks with higher commercial real estate concentrations, due to concerns about credit risk building in the industry. Concentration levels of concern include commercial real estate loans making up at least 300% of a bank’s total risk-based capital, construction, land development and other land loans comprising 100% or more of total risk-based capital and construction and total commercial real estate growth of 50% or more over the prior 36 months. While we currently are below all of these levels, if we exceed one or more of them, we may have to take certain actions to minimize the risk associated with higher concentration levels and otherwise bolster our balance sheet. These actions include ensuring robust risk management practices, including conducting regular appraisals, analyzing borrowers’ ability to repay credits, evaluating local economic conditions and operating with enhanced reporting and systems. At an extreme, these actions can also include curtailing our lending in these areas and raising capital.

We rely heavily on our management team and the unexpected loss of any of those personnel could adversely affect our operations; we depend on our ability to attract and retain key personnel.

 

We are a customer-focused and relationship-driven organization. We expect our future growth to be driven in a large part by the relationships maintained with our customers by our president and chief executive officer and other senior officers.  The unexpected loss of any of our key employees could have an adverse effect on our business and possibly result in reduced revenues and earnings. We do maintain bank-owned life insurance on key officers that would help cover some of the economic impact of a loss caused by death.

 

The implementation of our business strategy will also require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or to solicit their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult. The market for these people is competitive, and we cannot assure you that we will be successful in attracting, hiring, motivating or retaining them.

 

We rely on other companies to provide key components of our business infrastructure.

Third parties provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While we have selected these third party vendors carefully, we do not control their actions. Any problem caused by these third parties, including poor performance of services, failure to provide services, disruptions in services provided by a vendor and failure to handle current or higher volumes, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business, and may harm our reputation. Financial or operational difficulties of a third party vendor could also hurt our operations if those difficulties affect the vendor’s ability to serve us. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations.

The operational functions of business counterparties over which we may have limited or no control may experience disruptions that could adversely impact the Company.

Major U.S. retailers continue to experience data system incursions resulting in the thefts of credit and debit card information, online account information, and other financial data impacting millions of the retailers’ customers. Retailer incursions affect cards issued and deposit accounts maintained by many banks, including us. Although our systems are not breached in retailer incursions, these events can cause us to reissue a significant number of cards and take other costly steps to avoid significant losses to us and our customers.  In some cases, we may be required to

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reimburse customers for the losses they incur. Other possible points of intrusion or disruption not within our control include internet service providers, electronic mail portal providers, social media portals, distant-server (cloud) service providers, electronic data security providers, telecommunications companies, and smart phone manufacturers.

We continually encounter technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

Consumers may increasingly decide not to use us to complete their financial transactions, which would have a material adverse impact on our financial condition and operations.

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

Our risk-management framework may not be effective in mitigating risk and loss.

We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that we face. These risks include interest-rate, credit, liquidity, operations, reputation, compliance and litigation. While we assess and improve this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in our business. If conditions or circumstances arise that expose flaws or gaps in our risk-management program, or if its controls break down, our results of operations and financial condition may be adversely affected.

Negative perception of us through social media may adversely affect our reputation and business.

Our reputation is critical to the success of our business.  We believe that our brand image has been well received by customers, reflecting the fact that the brand image, like our business, is based in part on trust and confidence. Our reputation and brand image could be negatively affected by rapid and widespread distribution of publicity through social media channels. Our reputation could also be affected by our association with customers affected negatively through social media distribution, or other third parties, or by circumstances outside of our control.  Negative publicity, whether true or untrue, could affect our ability to attract or retain customers, or cause us to incur additional liabilities or costs, or result in additional regulatory scrutiny.

Changes in accounting standards could impact reported earnings.

The authorities that promulgate accounting standards, including the Financial Accounting Standards Board and Securities and Exchange Commission, 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

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statements for prior periods. Such changes could also require the Company to incur additional personnel or technology costs.

Our disclosure controls and procedures and internal controls may not prevent or detect all errors or acts of fraud.

Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or omission. Additionally, controls can be circumvented by individual acts, by collusion by two or more people and/or by override of the established controls. Accordingly, because of the inherent limitations in our control systems and in human nature, misstatements due to error or fraud may occur and not be detected.

We can give no assurances that our deferred tax asset will not become impaired in the future because it is based on projections of future earnings, which are subject to uncertainty and estimates that may change based on economic conditions.

We can give no assurances that our deferred tax asset will not become impaired in the future. At December 31, 2020, we recorded net deferred income tax assets of $4.0 million. We assess the realization of deferred income tax assets and record a valuation allowance if it is “more likely than not” that we will not realize all or a portion of the deferred tax asset. We consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, we need a valuation allowance. Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to our core earnings capacity and our prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given an uncertain economic outlook and current banking industry conditions. The Company does not currently have a valuation allowance; however, due to the uncertainty of estimates and projections, it is possible that we will be required to establish a valuation allowance in future reporting periods. 

Risks Related to Our Regulatory Environment

The financial services industry, as well as the broader economy, may be subject to new legislation, regulation, and government policy.

 

At this time, it is difficult to predict the legislative and regulatory changes that will result from the current presidential and congressional administrations. The President and/or Congress may change existing financial services regulations or enact new policies affecting financial institutions, specifically community banks. Such changes may include amendments to the Dodd-Frank Act and structural changes to the CFPB. The newcurrent administration and Congress also may cause broader economic changes due to changes in governing ideology and governing style. New appointments to the Board of Governors of the Federal Reserve could affect monetary policy and interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. Future legislation, regulation, and government policy, particularly following changes in political leadership and policymakers in the federal government, could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.

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We are subject to more stringent capital and liquidity requirements as a result of the Basel III regulatory capital reforms and the Dodd-Frank Act, which could adversely affect our return on equity and otherwise affect our business. 

 

We are subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that we 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. These stricter capital requirements will bewere phased-in over a four-year period which began on January 1, 2015, until they arewere fully-implemented on January 1, 2019. See “Business − Supervision and Regulation – Capital Requirements” for further information about the requirements.

 

The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to use its capital for strategic opportunities. If we fail to meet these minimum capital guidelines and/or other regulatory requirements, our financial condition would be materially and adversely affected.

 

14

New regulations issued by the Consumer Financial Protection Bureau could adversely affect our earnings.

 

The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers.  The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.  For example, the CFPB issued a final rule in 2014 requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms, or to originate “qualified mortgages” that meet specific requirements with respect to terms, pricing and fees. The new rule also contains new disclosure requirements at mortgage loan origination and in monthly statements.

 

The requirements under the CFPB’s regulations and policies could limit our ability to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact our profitability.

 

We rely on other companies to provide key components of our business infrastructure.

Third parties provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While we have selected these third party vendors carefully, we do not control their actions. Any problem caused by these third parties, including poor performance of services, failure to provide services, disruptions in services provided by a vendor and failure to handle current or higher volumes, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business, and may harm our reputation. Financial or operational difficulties of a third party vendor could also hurt our operations if those difficulties affect the vendor’s ability to serve us. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations.

The operational functions of business counterparties over which we may have limited or no control may experience disruptions that could adversely impact the Company.

Multiple major U.S. retailers have recently experienced data systems incursions reportedly resulting in the thefts of credit and debit card information, online account information, and other financial data of tens of millions of the retailers’ customers. Retailer incursions affect cards issued and deposit accounts maintained by many banks, including us. Although our systems are not breached in retailer incursions, these events can cause us to reissue a significant number of cards and take other costly steps to avoid significant theft loss to us and our customers. In some cases, we may be required to reimburse customers for the losses they incur. Other possible points of intrusion or disruption not within our control include internet service providers, electronic mail portal providers, social media portals, distant-server (cloud) service providers, electronic data security providers, telecommunications companies, and smart phone manufacturers.

We may need to raise capital that may not ultimately be available to us.

Regulatory authorities require us to maintain certain levels of capital to support our operations. While we remained “well capitalized” at December 31, 2017, we may need to raise additional capital in the future if we unexpectedly incur losses or due to regulatory mandates. The ability to raise capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may not be able to raise capital, if and when needed, on terms acceptable to us, or at all. If we cannot raise capital when needed, our ability to increase our capital ratios could be materially impaired, and we could face regulatory challenges.

We continually encounter technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

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A substantial decline in the value of our securities portfolio may result in an “other-than-temporary” impairment charge.

The total amount of our available-for-sale securities portfolio was $204.8 million at December 31, 2017. The measurement of the fair value of these securities involves significant judgment due to the complexity of the factors contributing to the measurement. Market volatility makes measurement of the fair value of our securities portfolio even more difficult and subjective. More generally, as market conditions continue to be volatile, we cannot provide assurance with respect to the amount of future unrealized losses in the portfolio. To the extent that any portion of the unrealized losses in these portfolios is determined to be other than temporary, and the loss is related to credit factors, we would recognize a charge to our earnings in the quarter during which such determination is made, and our capital ratios could be adversely affected.

Consumers may increasingly decide not to use us to complete their financial transactions, which would have a material adverse impact on our financial condition and operations.

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

Nonperforming assets adversely affect our results of operations and financial condition.

Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans, thereby adversely affecting our income and increasing loan administration costs. When we receive collateral through foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral less estimated selling costs, which may result in a loss. An increase in the level of nonperforming assets also increases our risk profile and may impact the capital levels our regulators believe is appropriate in light of such risks. We utilize various techniques such as loan sales, workouts and restructurings to manage our problem assets. Decreases in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our business, results of operations and financial condition.

In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to performance of their other responsibilities. Such resolution may also require the assistance of third parties, and thus the expense associated with it. There can be no assurance that we will avoid further increases in nonperforming loans in the future.

We rely upon independent appraisals to determine the value of the real estate, which secures a significant portion of our loans, and the values indicated by such appraisals may not be realizable if we are forced to foreclose upon such loans.

A significant portion of our loan portfolio consists of loans secured by real estate (83.23% at December 31, 2017). We rely upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of our loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, we may not be able to recover the outstanding balance of the loan and will suffer a loss.

Our risk-management framework may not be effective in mitigating risk and loss.

We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that we face. These risks include interest-rate, credit, liquidity, operations, reputation, compliance and litigation. While we assess and improve this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in our business. If conditions or circumstances arise that expose flaws or gaps in our risk-management program, or if its controls break down, our results of operations and financial condition may be adversely affected.

16

Negative perception of us through social media may adversely affect our reputation and business.

Our reputation is critical to the success of our business. We believe that our brand image has been well received by customers, reflecting the fact that the brand image, like our business, is based in part on trust and confidence. Our reputation and brand image could be negatively affected by rapid and widespread distribution of publicity through social media channels. Our reputation could also be affected by our association with customers affected negatively through social media distribution, or other third parties, or by circumstances outside of our control. Negative publicity, whether true or untrue, could affect our ability to attract or retain customers, or cause us to incur additional liabilities or costs, or result in additional regulatory scrutiny.

We are subject to extensive government regulation and supervision.

 

We are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, and not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes.

 

The banking industry continues to be faced with new and complex regulatory requirements and enhanced supervisory oversight. Banking regulators are increasingly concerned about, among other things, growth, commercial real estate concentrations, underwriting of commercial real estate and commercial and industrial loans, capital levels and cyber security. These factors are exerting downward pressure on revenues and upward pressure on required capital levels and the cost of doing business.

 

These provisions, or any other aspects of current proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities or change certain of

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our business practices, including our ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to our operations in order to comply, and could therefore also materially adversely affect our business, financial condition, and results of operations. Furthermore, failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.

 

Changes in accounting standards could impact reported earnings.

The authorities that promulgate accounting standards, including the Financial Accounting Standards Board and Securities and Exchange Commission, 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 require the Company to incur additional personnel or technology costs.

Our disclosure controls and procedures and internal controls may not prevent or detect all errors or acts of fraud.

Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or omission. Additionally, controls can be circumvented by individual acts, by collusion by two or more people and/or by override of the established controls. Accordingly, because of the inherent limitations in our control systems and in human nature, misstatements due to error or fraud may occur and not be detected.

We can give no assurances that our deferred tax asset will not become impaired in the future because it is based on projections of future earnings, which are subject to uncertainty and estimates that may change based on economic conditions.

We can give no assurances that our deferred tax asset will not become impaired in the future. At December 31, 2017, we recorded net deferred income tax assets of $6.1 million. We assess the realization of deferred income tax assets and record a valuation allowance if it is “more likely than not” that we will not realize all or a portion of the deferred tax asset. We consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, we need a valuation allowance. Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to our core earnings capacity and our prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given an uncertain economic outlook and current banking industry conditions. Due to the uncertainty of estimates and projections, it is possible that we will be required to record adjustments to the valuation allowance in future reporting periods.

17

Deterioration in the soundness of other financial institutions could adversely affect us.

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

We may be adversely impacted by changes in the condition of financial markets.

We are directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. Market risk is inherent in the financial instruments associated with our operations and activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives. Just a few of the market conditions that may shift from time to time, thereby exposing us to market risk, include fluctuations in interest and currency exchange rates, equity and futures prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of issuers. Accordingly, depending on the instruments or activities impacted, market risks can have adverse effects on our results of operations and our overall financial condition.

Banking regulators have broad enforcement power, but regulations are meant to protect depositors, and not investors.

 

We are subject to supervision by several governmental regulatory agencies, including the Federal Reserve Bank of Richmond and Virginia’s Bureau of Financial Institutions. Bank regulations, and the interpretation and application of them by regulators, are beyond our control, may change rapidly and unpredictably and can be expected to influence earnings and growth. In addition, these regulations may limit our growth and the return to investors by restricting activities such as the payment of dividends, mergers with, or acquisitions by, other institutions, investments, loans and interest rates, interest rates paid on deposits and the opening of new branch offices. Although these regulations impose costs on us, they are intended to protect depositors, and should not be assumed to protect the interest of shareholders. The regulations to which we are subject may not always be in the best interest of investors.

 

The FDIC deposit insurance assessments that we are required to pay may increase in the future, which would have an adverse effect on earnings.

As an insured depository institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC to maintain the level of the FDIC deposit insurance reserve ratio. The past failures of financial institutions have significantly increased the loss provisions of the DIF, resulting in a decline in the reserve ratio. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC revised its assessment rates, which raised deposit premiums for certain insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, the FDIC may increase the deposit insurance assessment rates. Any future assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect earnings and could negatively affect our stock price.

18

Our businesses and earnings are impacted by governmental, fiscal and monetary policy.

 

We are affected by domestic monetary policy. For example, the Federal Reserve Board regulates the supply of money and credit in the United States and its policies determine in large part our cost of funds for lending, investing and capital raising activities and the return we earn on those loans and investments, both of which affect our net interest margin. The actions of the Federal Reserve Board also can materially affect the value of financial instruments we hold, such as loans and debt securities, and its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States. Changes in fiscal or monetary policy are beyond our control and hard to predict.

 

Risks Related to an Investment in Our Stock

Our profitability and the value of any equity investment in us may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.

 

We are subject to extensive supervision by several governmental regulatory agencies at the federal and state levels. Recently enacted, proposed and future banking and other legislation and regulations have had, and will continue to have, or may have a significant impact on the financial services industry. These regulations, which are generally intended to protect depositors and not our shareholders, and the interpretation and application of them by federal and state regulators, are beyond our control, may change rapidly and unpredictably, and can be expected to influence our earnings and growth. Our success depends on our continued ability to maintain compliance with these regulations. Many of these regulations increase our costs and thus place other financial institutions that may not be subject to similar regulation in stronger, more favorable competitive positions.

 

The trading volume in our common stock is less than that of other larger financial services companies.

 

The trading volume in our common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock 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. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.

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Our dividends may not be sustained

Although we recommenced paying cash dividends in 2019 to holders of our common stock, holders of common stock are not entitled to receive dividends. Financial, regulatory or economic factors may cause our Board of Directors to consider, among other actions, the suspension or reduction of dividends paid on our common stock. Furthermore, we are a bank holding company that conducts substantially all of its operations through its subsidiaries, including the Bank. As a result, we rely on dividends from the Bank for substantially all of our revenues. There are various regulatory restrictions on the ability of the Bank to pay dividends or make other payments to us, and our right to participate in a distribution of assets upon the Bank’s liquidation or reorganization is subject to the prior claims of the Bank’s creditors. If the Bank is unable to pay dividends to us, we may not be able to service our outstanding borrowings and other debt, pay our other obligations or pay a cash dividend to the holders of our common stock, and our business, financial condition and results of operations may be materially adversely affected. 

Virginia law and the provisions of our articles of incorporation and bylaws could deter or prevent takeover attempts by a potential purchaser of our common stock that would be willing to pay you a premium for your shares of our common stock.

   

Our Articles of Incorporation and Bylaws contain provisions that may be deemed to have the effect of discouraging or delaying uninvited attempts by third parties to gain control of us. These provisions include the ability of our board to set the price, term, and rights of, and to issue, one or more series of our preferred stock. Our Articles of Incorporation and Bylaws do not provide for the ability of shareholders to call special meetings.

   

Similarly, the Virginia Stock Corporation Act contains provisions designed to protect Virginia corporations and employees from the adverse effects of hostile corporate takeovers. These provisions reduce the possibility that a third party could affect a change in control without the support of our incumbent directors. These provisions may also strengthen the position of current management by restricting the ability of shareholders to change the composition of the board, to affect its policies generally, and to benefit from actions that are opposed by the current board.

ITEM 1B.UNRESOLVED STAFF COMMENTS

ITEM 1B.       UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

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ITEM 2.PROPERTIES

The Company operates the following offices:

Corporate Headquarters:

Deep Run at Mayland — 9954 Mayland Drive, Suite 2100, Richmond, VA 23233

Virginia Branch Offices:

Bon Air — 2730 Buford Road, Richmond, VA 23235

Burgess — 14598 Northumberland Highway, Burgess, VA 22432

Callao — 654 Northumberland Highway, Callao, VA 22435

Centerville — 100 Broad Street Road, Manakin-Sabot, VA 23103

Cumberland — 1496 Anderson Highway, Cumberland, VA 23040

Deep Run at Mayland — 9954 Mayland Drive, Richmond, VA 23233

Fairfax — 10509 Judicial Drive, Fairfax, VA 22030

Flat Rock — 2320 Anderson Highway, Powhatan, VA 23139

Goochland Courthouse — 1949 Sandy Hook Road, Goochland, VA 23063

King William — 4935 Richmond-Tappahannock Highway, Aylett, VA 23009

Louisa — 217 East Main Street, Louisa, VA 23093

Lynchburg–Old Forest Road — 3638 Old Forest Road, Lynchburg, VA 24501

Lynchburg–Timberlake — 21437 Timberlake Road, Lynchburg, VA 24502

Mechanicsville — 6315 Mechanicsville Turnpike, Mechanicsville, VA 23111

Midlothian–Stonehenge — 12640 Stone Village Way, Midlothian, VA 23113

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Tappahannock–Dillard — 1325 Tappahannock Boulevard, Tappahannock, VA 22560

Tappahannock–Prince Street — 323 Prince Street, Tappahannock, VA 22560

Virginia Center — 9951 Brook Road, Glen Allen, VA 23060

West Broad Marketplace — 12254 West Broad Marketplace, Henrico, VA 23233

West Point — 16th and Main Street, West Point, VA 23181

Winterfield — 3740 Winterfield Road, Midlothian, VA 23113

Maryland Branch Offices:

Annapolis — 1835 West Street, Annapolis, MD 21401

Arnold — 1460 Ritchie Highway, Arnold, MD 21012

Bowie — 6143 High Bridge Road, Bowie, MD 20720

Crofton — 2120 Baldwin Avenue, Crofton, MD 21114

Edgewater — 3062 Solomons Island Road, MD 21037

Rockville — 1101 Nelson Street, Rockville, MD 20850

Rosedale — 1230 Race Road, Rosedale, MD 21237

 

The Company owns all of the offices listed above, except that it leases its corporate headquarters and the Fairfax,Midlothian–Stonehenge and West Broad Marketplace and Winterfield offices in the Virginia market and the Arnold, Crofton, Edgewater and Rockville offices in the Maryland market. The Company also has a loan production office in each of Lynchburg, Virginia, and Timonium, Maryland, each of which it leases.

The Company opened its West Board Marketplace branch office on May 16, 2017, its Lynchburg–Timberlake branch office on June 19, 2017 and its Lynchburg–Old Forest Road on December 4, 2017. The Company expects to open a branch office in the Stonehenge Village development in Midlothian, Virginia (12646 Stone Village Way) in July 2018.

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

ITEM 3.LEGAL PROCEEDINGS

ITEM 3.       LEGAL PROCEEDINGS

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

ITEM 4.MINE SAFETY DISCLOSURES

ITEM 4.       MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET PRICES FOR SECURITIESINFORMATION

The Company’s common stock trades on the NASDAQ Capital Market under the symbol “ESXB”.

The following table sets summarizes the high and low sales prices for the Company’s common stock for the quarterly periods during the years ended December 31, 2017 and 2016:

  2017  2016 
  High  Low  High  Low 
Quarter ended March 31 $8.50  $7.00  $5.45  $4.45 
Quarter ended June 30  8.30   6.95   5.30   4.72 
Quarter ended September 30  9.25   8.05   5.50   5.10 
Quarter ended December 31  9.35   7.90   7.25   5.35 

HOLDERS OF RECORD

As of December 31, 2017,2020, there were 1,9311,723 holders of record of the Company’s common stock, not including beneficial holders of securities held in street name.

DIVIDENDS

The Company’s dividend policyCompany recommenced the payment of quarterly cash dividends in 2019. The payment of dividends is subject to the discretion of the board of directors, and future cash dividend payments to shareholders will depend upon a number of factors, including future earnings, alternative investment opportunities, financial condition, cash requirements and general business conditions.

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EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about common stock that may be issued upon the exercise of options, warrants and rights under the Company’s ability to distribute cash dividends will depend primarily on the abilitytwo stock incentive plans as of its banking subsidiary to pay dividends to it. The Bank is subject to legal limitations on the amount of dividendsDecember 31, 2020. There are no outstanding warrants or rights under that it is permitted to pay under Section 5199(b) of the Revised Statues (12 U.S.C. 60),plan, and the approval of the Federal Reserve would be required if the total of all dividends declared by a state member bank in any calendar year shall exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. Additionally, the Bank is further restricted by Regulation H, Section 208.5,Dividends and Other Distributions, which requires pre-approval of dividends that exceed undivided profits. Furthermore, neither the Company nor the Bank may declare or pay a cash dividend on any of its capital stock if it is insolvent or if the payment of the dividend would render the entity insolvent or unable to pay its obligations as they become due in the ordinary course of business. For additional information on these limitations, see “Supervision and Regulation — Dividends” in Item 1 above.

In addition, until January 2017, the ability of each of the Company and the Bank to distribute cash dividends was subject to restrictions in a third-party term loan that the Company obtained in April 2014 to repurchase its then outstanding Series A Preferred Stock.   Specifically, neither the Company nor the Bank could have declared or made a dividend if there existed a default, or such action would have created a default, under the term loan, which required the Company to be in compliance with certain covenants, such as maintenance of minimum regulatory capital ratios, minimum return on assets, minimum cash on hand and minimum dividend capacity.  For additional information on the term loan, see Note 10 to the Notes to the Consolidated Financial Statements.

Following the payment of a cash dividend in February 2010, the Company determined to suspend the payment of its quarterly dividend to holders of common stock. While the Company believes that its capital and liquidity levels remain above the averages of its peers, the Company utilized dividends from the Bank for the payment of capital funding (Series A Preferred Stock) received from the Department of the Treasury until April 2014, when the Company completed the redemption of such funding. Until January 2017, the Company primarily utilized dividends from the Bank for principal and interest payments with respect to an unsecured third party loan that the Company obtained at the same time in connection with such redemption. Additional dividends from the Bank would be utilized for the payment of intercompany expenses and interest payments on trust preferred securities.

The Company does not plan to recommence the payment of its quarterly dividend to holders of common stock at the current time. The Company believeshave any other plans that the current use of earnings to support growth, maintain current capital levels and support payments under the third party loan are appropriateprovide for the long-term growthissuance of shareholder value in the Company.any options, warrants or rights.

Plan Category

Number of Securities to be Issued

Upon Exercise of Outstanding Options, Warrants and Rights

Weighted-Average

Exercise Price of Outstanding Options, Warrants and Rights

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in

First Column)

Equity Compensation Plans Approved by Security Holders

2009 Stock Incentive Plan

2019 Stock Incentive Plan

1,539,750

314,000

$6.08

9.45

--

2,138,323

Equity Compensation Plans Not Approved by Security Holders

--

--

--

Total

1,853,750

$6.65

2,138,323

PURCHASES OF EQUITY SECURITIES BY THE ISSUER

The Company does not currently have in place a repurchase program with respect to any of its securities. In addition, the Company did not repurchase any of its securities during the year ended December 31, 2017.

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STOCK PERFORMANCE GRAPH

The stock performance graph set forth below shows the cumulative stockholder return on the Company’s common stock during the period from December 31, 2012,2015, to December 31, 2017,2020, as compared with (i) an overall stock market index, the NASDAQ Composite Index, and (ii) a published industry index, the SNL Bank and Thrift Index. The graph assumes that $100 was invested on December 31, 20122015 in the Company’s common stock and in each of the comparable indices and that dividends were reinvested.

 Graphic

    Period Ended 

 

Period Ending

Index 12/31/12  12/31/13  12/31/14  12/31/15  12/31/16  12/31/17 

12/31/15

12/31/16

12/31/17

12/31/18

12/31/19

12/31/20

Community Bankers Trust Corporation  100.00   141.89   166.79   202.64   273.58   307.55 

100.00

135.01

151.77

134.45

167.95

132.00

NASDAQ Composite Index  100.00   140.12   160.78   171.97   187.22   242.71 

100.00

108.87

141.13

137.12

187.44

271.64

SNL Bank and Thrift Index  100.00   136.92   152.85   155.94   196.86   231.49 

100.00

126.25

148.45

123.32

166.67

144.61

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Table of Contents

ITEM 6.

PURCHASES OF EQUITY SECURITES BY THE ISSUER

SELECTED FINANCIAL DATA

Effective January 22, 2020, the Company’s Board of Directors authorized a share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act. The Company purchased 130,800 shares under the program during the first two quarters of 2020 before suspending activity under it effective April 2, 2020.  On October 26, 2020, the Company authorized the recommencement of the programfor the repurchase of up to 200,000 shares of its common stock through January 2021.

The following table sets forth selected financial data forprovides information with respect to purchases under the Company over eachshare repurchase program during the fourth quarter of the past five years ended December 31. The historical results included below and elsewhere in this report are not indicative of the future performance of the Company and its subsidiaries.  2020.

  Year Ended December 31 
(dollars in thousands, except for per share amounts) 2017  2016  2015  2014  2013 
Results of Operations                    
Interest and dividend income $53,315  $49,295  $47,552  $48,725  $50,045 
Interest expense  9,199   7,820   7,497   6,933   7,078 
Net interest income  44,116   41,475   40,055   41,792   42,967 
Provision for loan losses  550   166          
Net interest income after provision for loan losses  43,566   41,309   40,055   41,792   42,967 
Noninterest income  4,697   5,179   5,081   5,269   4,724 
Noninterest expenses  34,157   32,750   50,260   36,817   39,288 
Income (loss) before income taxes  14,106   13,738   (5,124)  10,244   8,403 
Income tax expense (benefit)  6,903   3,816   (2,627)  2,728   2,497 
Net income (loss) $7,203  $9,922  $(2,497) $7,516  $5,906 
                     
Financial Condition                    
Assets $1,336,190  $1,249,816  $1,180,557  $1,155,734  $1,089,532 
FDIC indemnification asset           18,609   25,409 
PCI loans  44,333   51,964   58,955   67,460   73,275 
Loans  942,018   836,299   748,724   660,020   596,173 
Deposits  1,095,764   1,037,294   945,519   918,945   892,341 
Shareholders’ equity  124,003   114,536   104,487   107,650   106,659 
Ratios                    
Return on average assets  0.56%  0.83%  (0.22)%  0.67%  0.53%
Return on average equity  5.91%  8.92%  (2.31)%  7.09%  5.22%
Non-GAAP return on average tangible assets (1)  0.61%  0.94%  (0.11)%  0.79%  0.66%
Non-GAAP return on average tangible common equity (1)  6.40%  10.23%  (1.19)%  9.09%  8.38%
Efficiency ratio (2)  69.98%  70.20%  111.35%  78.23%  82.38%
Equity to assets  9.28%  9.15%  8.86%  9.31%  9.79%
Loan to deposits  90.01%  85.63%  85.42%  79.16%  75.02%
Average tangible common equity / average tangible assets (1)  9.50%  9.16%  9.10%  8.70%  7.90%
Asset Quality                    
Allowance for loan losses (3) $8,969  $9,493  $9,559  $9,267  $10,444 
Allowance for loan losses / loans (3)  0.95%  1.14%  1.28%  1.40%  1.75%
Allowance for loan losses / nonaccrual loans (3)  99.37%  92.68%  89.59%  55.92%  86.28%
Non-covered nonperforming assets / loans and other real estate (3)  1.25%  1.74%  2.14%  3.64%  3.05%
Per Share Data                    
Earnings per share, basic $0.33  $0.45  $(0.11) $0.33  $0.22 
Earnings per share, diluted  0.32   0.45   (0.11)  0.33   0.22 
Non-GAAP earnings per share, diluted (1)  0.35   0.50   (0.06)  0.40   0.33 
Market value per share  8.15   7.25   5.37   4.42   3.76 
Book value per tangible common share (1)  5.62   5.17   4.65   4.72   4.07 
Price to earnings ratio, diluted  25.47   16.11   (48.82)  13.39   17.09 
Price to book value ratio  145.0%  139.2%  112.4%  89.5%  86.0%
Weighted average shares outstanding, basic  22,013,810   21,914,270   21,826,845   21,755,448   21,699,964 
Weighted average shares outstanding, diluted  22,512,206   22,161,221   21,826,845   21,980,979   21,922,132 

Period

Total Number of Shares Purchased (1)

    

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares That May Yet Be Purchased Under the Program

October 1 - October 31, 2020

November 1 - November 30, 2020

December 1 - December 31, 2020

178,900

 

6.91

178,900

690,300

Total

178,900

$

6.91

178,900

690,300

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ITEM 6.       SELECTED FINANCIAL DATA

Not applicable

  Year Ended December 31 
  2017  2016  2015  2014  2013 
Capital Ratios                    
Leverage Ratio  9.74%  9.60%  9.38%  9.36%  9.52%
Common equity tier 1 capital ratio  11.50%  11.78%  11.62%  n/a   n/a 
Tier 1 risk-based capital ratio  11.88%  12.20%  12.08%  13.52%  15.62%
Total risk-based capital ratio  12.70%  13.16%  13.16%  14.72%  16.82%

(1) Refer to “ItemITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, section “Non GAAP Measures” for a reconciliation.

(2) The efficiency ratio is calculated by dividing noninterest expense over the sum of net interest income plus noninterest income.

(3) Excludes PCI loans.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition at December 31, 20172020 and results of operations for the year ended December 31, 20172020 of Community Bankers Trust Corporation (the “Company”) should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in this report.

GENERAL

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 2624 full-service offices, 18 of which are in Virginia and six of which are in Maryland. The Bank also operates onetwo loan production office in Virginia.

offices.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, and small businesses and larger commercial companies, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities.

cash management services.

The Company generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest earning assets outstanding during the period and the interest rates earned thereon. The Company’s cost of funds is a function of the average amount of interest bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The mix and product type for both loans and deposits can have a significant effect on the net interest income of the Bank. For the past several years, the Bank’s focus has been on maximizing that mix through customer growth and targeted product types, with lenders and other employees directly involved with customer relationships. Additionally, the quality of the interest earning assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses. Additionally, the

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The Bank also earns noninterest income from service charges on deposit accounts and other fee or commission-based services and products, such as insurance, mortgage loans, annuities, and other wealth management products. Other sources of noninterest income can include gains or losses on securities transactions mortgage loan income, gains from loan sales, and income from bank owned life insurance (BOLI) policies. The Company’s income is offset by noninterest expense, which consists of salaries and employee benefits, occupancy and equipment costs, data processing expenses, professional fees, transactions involving bank-owned property, the amortization of intangible assets and other operational expenses. The provision for loan losses and income taxes may also materially affect net income.

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CAUTION ABOUT FORWARD-LOOKING STATEMENTS

The Company makes certain 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, growthfuture strategy, and financial and other goals. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.

These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by factors, including, without limitation, the effects of and changes in the following:

·the quality or composition of the Company’s loan or investment portfolios, including collateral values and the repayment abilities of borrowers and issuers;

·assumptions that underlie the Company’s allowance for loan losses;

·general economic and market conditions, either nationally or in the Company’s market areas;

·unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the current COVID-19 pandemic), and of governmental and societal responses to them
the interest rate environment;

·competitive pressures among banks and financial institutions or from companies outside the banking industry;

·real estate values;

·the demand for deposit, loan, and investment products and other financial services;

·the demand, development and acceptance of new products and services;

·the performance of vendors or other parties with which the Company does business;

·time and costs associated with de novo branching, acquisitions, dispositions and similar transactions;

·the realization of gains and expense savings from acquisitions, dispositions and similar transactions;

·assumptions and estimates that underlie the accounting for purchased credit impaired loans;

·consumer profiles and spending and savings habits;

·levels of fraud in the banking industry;

·the level of attempted cyber attacks in the banking industry;

·the securities and credit markets;

·costs associated with the integration of banking and other internal operations;

·the soundness of other financial institutions with which the Company does business;

·inflation;

·technology; and

·legislative and regulatory requirements.

These factors and additional risks and uncertainties are described in the “Risk Factors” discussion in Part I, Item 1A, of this report.

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Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

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CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within the statements is, to a significant extent, financial information that is based on measures 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 either earning income, recognizing an expense, recovering an asset or relieving a liability. For example, the Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that the Company uses. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact its transactions could change.

The Company’s critical accounting policies are discussed in detail in Note 1 - “Nature of Banking Activities and Significant Accounting Policies” in Item 8 of this Form 10-K. The following is a summary of the Company’s critical accounting policies that are highly dependent on estimates, assumptions and judgments.

Allowance for Loan Losses on Loans

The allowance for loan losses is established as losses are estimated to have occurred through a provision for 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 is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. The evaluation also considers the following risk characteristics of each loan portfolio:

·Residential 1-4 family mortgage loans include HELOCs and single family investment properties secured by first liens. The carry risks associated with owner-occupied and investment properties are the continued credit-worthiness of the borrower, changes in the value of the collateral, successful property maintenance and collection of rents due from tenants. The Company manages these risks by using specific underwriting policies and procedures and by avoiding concentrations in geographic regions.

·Commercial real estate loans, including owner occupied and non-owner occupied mortgages, carry risks associated with the successful operations of the principal business operated on the property securing the loan or the successful operation of the real estate project securing the loan. General market conditions and economic activity may impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by avoiding concentrations to any one business or industry, and by diversifying the lending to various lines of businesses, such as retail, office, office warehouse, industrial and hotel.

·Construction and land development loans are generally made to commercial and residential builders/developers for specific construction projects, as well as to consumer borrowers. These carry more risk than real estate term loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market and state and local government regulations. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding concentrations to any one business or industry and by diversifying lending to various lines of businesses, in various geographic regions and in various sales or rental price points.

·Second mortgages on residential 1-4 family loans carry risk associated with the continued credit-worthiness of the borrower, changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the inferior lien position. The Company manages risk by using specific underwriting policies and procedures.

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·Multifamily loans carry risks associated with the successful operation of the property, general real estate market conditions and economic activity. In addition to using specific underwriting policies and procedures, the Company manages risk by avoiding concentrations toin geographic regions and by diversifying the lending to various unit mixes, tenant profiles and rental rates.

·Agriculture loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time and inventory that may be affected by weather, biological, price, labor, regulatory and economic factors. The Company manages risks by using specific underwriting policies and procedures, as well as avoiding concentrations to individual borrowers and by diversifying lending to various agricultural lines of business (i.e., crops, cattle, dairy, etc.).

·Commercial loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time, accounts receivable whose collectability may change and inventory values that may be subject to various risks including obsolescence. General market conditions and economic activity may also impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by diversifying the lending to various industries and avoids geographic concentrations.

·Consumer installment loans carry risks associated with the continued credit-worthiness of the borrower and the value of rapidly depreciating assets or lack thereof. These types of loans are more likely than real estate loans to be quickly and adversely affected by job loss, divorce, illness or personal bankruptcy. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

·All other loans generally support the obligations of state and political subdivisions in the U.S. and are not a material source of business for the Company. The loans carry risks associated with the continued credit-worthiness of the obligations and economic activity. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific, general and unallocated components. For loans that are also classified as impaired, an allowance is established when the collateral value (or 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-classified loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors relate to loan growth and concentrations, internal environment, loan quality deterioration and delinquencies.  The unallocated component covers uncertainties thethat could affect management’s estimate of probable losses.

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 the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.impairment as a pool. Accordingly, the Company does not separately identifyanalyze these individual consumer and residential loans for impairment disclosures.

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Accounting for Certain Loans Acquired in a Transfer

Financial Accounting Standards Board (FASB)FASB Accounting Standards Codification (ASC) 310,Receivables requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit arrangements are excluded from the scope of FASB ASC 310 which limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments through the allowance for loan losses.

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The Company’s acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the “PCI loans”), subject to FASB ASC Topic 805,Business Combinations, were recorded at fair value and no separate valuation allowance was recorded at the date of acquisition. FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. The Company is applying the provisions of FASB ASC 310-30 to all loans acquired in the SFSB transaction. The Company has grouped loans together based on common risk characteristics including product type, delinquency status and loan documentation requirements among others.

The PCI loans are subject to the credit review standards described above for loans. If and when credit deterioration occurs subsequent to the date that the loans were acquired, a provision for loan loss for PCI loans will be charged to earnings for the full amount.

The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each pool’s contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to collect from the pool is referred to as nonaccretable difference, which is not accreted into income.recorded. Judgmental prepayment assumptions are applied to both contractually required payments and cash flows expected to be collected at acquisition. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through the allowance for loan loss.losses. Subsequent increases in expected or actual cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the pool.

OVERVIEW

Other Real Estate Owned

Real estate acquired through, orComing off a strong end to the 2019 year, the Company began the year with good momentum but was disrupted by the coronavirus (COVID-19) pandemic that set off an economic crisis.  Specific events that impacted the Company’s financial results during 2020, and will impact future financial results, include government mandated business closures and stay-at-home orders, which have transformed into some of the highest unemployment rates seen in lieu of, loan foreclosure is held for sale and is initially recorded at the fair value at the date of foreclosure net of estimated disposal costs, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by managementCompany’s markets.  In addition, unprecedented government stimulus programs and the assets are carried atuncertainties regarding how long the lowermandates will last have contributed to the unpredictability of the carrying amount orfinancial impacts that the fair value less costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses. Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred.

Other Intangibles

Company may experience.  The Company is accountingfocused on assessing the risks in its loan portfolio and working with its customers to minimize future losses.  See below for other intangible assets in accordance with FASB ASC 350,Intangibles - Goodwilladditional discussion regarding trends and Others. Under FASB ASC 350, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. The costs of purchased deposit relationships and other intangible assets, based on independent valuation by a qualified third party, are being amortized over their estimated lives. The core deposit intangible is evaluated for impairment in accordance with FASB ASC 350.

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 taxpotential effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.COVID-19.  

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income. The Company had no interest or penalties during the years ended December 31, 2017, 2016 or 2015. Under FASB ASC 740,Income Taxes,a valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies that would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that the deferred tax assets are realizable; therefore, no allowance is required.

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The Company and its subsidiaries are subject to U. S. federal income tax as well as Virginia and Maryland state income tax. All years from 2014 through 2017 are open to examination by the respective tax authorities.

OVERVIEW

Total assets increased $86.4$213.9 million, or 6.9%15.0%, to $1.336$1.645 billion at December 31, 2017 as2020 when compared with $1.250December 31, 2019.  Total loans, excluding PCI loans, were $1.182 billion at December 31, 2016.2020, increasing $124.0 million, or 11.7%, from year end 2019. Total PCI loans were $942.0$24.0 million at December 31, 2017, increasing $105.7 million, or 12.6%, from year end 2016.  Total PCI loans were $44.32020 versus $32.5 million at December 31, 2017 versus $52.0 million at year end 2016.2019.

32

The Company’s securities portfolio, excluding restricted equity securities, declined $11.7 million, or 4.5%, from $262.7was $292.5 million at December 31, 2016 to $251.02020 and increased $69.8 million since December 31, 2019. U.S. Treasury issues increased $23.5 million during 2020 as excess liquidity was invested short term in very liquid and low risk instruments. Corporate securities with balances, at fair value, of $26.6 million at December 31, 2017. Net realized gains of $210,000 were recognized2020, increased by $20.5 million during 2017 through sales2020. State, county and call activity, as compared with $634,000 recognized during 2016. The decline inmunicipal securities, the volume of securities was a strategic decision by management to fund strong loan growth with securities sales, normal securities amortization, call activity, sales and maturities.

The Company is required to account for the effect of market changes in the value of securities available-for-sale (AFS) under FASB ASC 320,Investments - Debt and Equity Securities. The market value of the AFS portfolio was $204.8 million and $216.1largest investment category totaling $146.9 million at December 31, 20172020, increased by $22.6 million during 2020. Asset backed securities, consisting of student loan pools 97% guaranteed by the U.S. Government, increased by $25.9 million during 2020 and 2016, respectively. The Company had a net unrealized gain of $1.2 million and a net unrealized loss of $621,000 in the AFS portfolio at December 31, 2017 and 2016, respectively.

Noninterest bearing deposits increased $24.1 million, or 18.7%, from $128.9totaled $37.5 million at December 31, 20162020. Offsetting these increases were a decrease of $16.6 million in mortgage backed securities and a decline of $6.1 million in balances held in U.S. Government agency bonds. The Company actively manages the portfolio to $153.0improve its liquidity and maximize the return within the desired risk profile.

The Company had cash and cash equivalents of $63.2 million at December 31, 2017. 2020 compared with $28.7 million at year end 2019, an increase of $34.5 million. The majority of this category growth, $33.4 million, occurred in interest bearing bank balances, which were $45.1 million at December 31, 2020, as large amounts of liquidity have been funneled into the banking system through the facilitation of PPP loans by the banking industry and stimulus checks issued by the U.S. Treasury during 2020 under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  

Interest bearing deposits at December 31, 20172020 were $942.7 million,$1.100 billion, an increase of $34.3$114.9 million, or 3.8%11.7%, from $908.4December 31, 2019. Interest bearing checking accounts (formerly NOW accounts) of $239.6 million grew by $69.1 million, or 40.5%, during 2020. Money market deposit accounts were $154.5 million at December 31, 2016. NOW, MMDA2020 and savings account balances increased $19.7 million, $32.0 million and $3.6 million, respectively, since December 31, 2016. Total time deposits declined $21.0grew $33.7 million, or 3.7%. While retail time deposits increased by $18.8 million, or 3.6%27.9%, the level of brokered deposits declined by $39.8 million, or 74.5%, and were $13.6during 2020. Savings accounts totaled $124.4 million at December 31, 2017. Excluding brokered deposits, retail interest bearing deposits increased in 2017 by $74.12020 and grew $27.8 million, or 8.7%.

FHLB advances28.8%, during 2020. Strong growth in these non-maturity categories for the year has allowed the Bank to react to lower interest rates through proactive repricing in certificates of deposit, the highest costing deposit category.  As a result, there has been less growth in time deposits over $250,000, which grew by $8.9 million, or 7.5%, in 2020 and were $101.4$128.4 million at December 31, 2017, compared with $81.92020. Time deposits less than or equal to $250,000 declined $24.6 million in 2020 and were $452.9 million at December 31, 2016.2020.  Time deposit balances combined were 52.9% of interest bearing deposits at December 31, 2020 and 41.6% of all deposit balances. This is a decline from 60.6% of interest bearing balances and 51.3% of all deposit balances at December 31, 2019. The increasegrowth in FHLB advancesinterest bearing checking accounts, money market accounts and savings accounts, as well as in noninterest bearing deposits, was offset by$250.9 million, or 44.3%, during 2020. A portion of this growth was associated with the decline$85.1 million in brokered deposits. FHLB advancesPPP loans originated during the second and third quarters of 2020  and stimulus checks issued under the CARES Act, as well as previously postponed business activity that resulted from the COVID-19 stay-at-home orders.

In other funding activity, noninterest bearing deposits were less costly than most brokered deposit alternatives in 2017.

Long term debt totaled $0 and $1.7$298.9 million at December 31, 20172020 and 2016, respectively. This borrowing, initially in the amount of $10.7increased by $120.3 million, was obtained in April 2014, and the proceedsor 67.4%, during 2020. FHLB borrowings were used to redeem the Company’s remaining outstanding TARP preferred stock. The Company had paid down this debt by $9.0$57.8 million at December 31, 2016, and the loan, which was scheduled to be fully paid on April 21, 2017, was fully paid on January 9, 2017.

Shareholders' equity was $124.02020, compared with $68.5 million at December 31, 2017 and $114.52019. The stable level of FHLB borrowings during 2020 has been due to the FHLB swiftly responding to the March 16, 2020 rate cut of 1.50% to the discount rate by repricing advances downward to ensure low cost liquidity for the banking system. As a result, the Bank has found this level of borrowing to be a stable source of low cost funding. The average rate paid on FHLB borrowings, net of cash flow hedge, was 1.15% during 2020. There were no Federal funds purchased at December 31, 2020 compared with $24.4 million at December 31, 2016.2019.

Shareholders’ equity was $169.7 million at December 31, 2020, or 10.3% of total assets, compared with $155.5 million, or 10.9% of total assets, at December 31, 2019.  During 2020, the Company repurchased 309,700 shares of common stock at a total cost of $2.1 million.

.  

RESULTS OF OPERATIONS

Net Income

For the year ended December 31, 2017, netNet income was $7.2$15.5 million or $0.33 per common share basic and $0.32 fully diluted, compared with net income of $9.9 million, or $0.45 per common share, basic and fully diluted, for the year ended December 31, 2016. Net2020 compared with $15.7 million for the same period in 2019. This is a decrease of $157,000, or 1.0% driven by the provision for loan losses recorded to reflect the business and market disruptions arising from the COVID-19 pandemic. The provision was $4.2 million for 2020 compared with $325,000 for 2019. The decrease in net income on a year-over-year basis was the result of an increase of $1.4 million,

33

or 2.7%, in 2017net interest income, an increase of $594,000, or 11.1%, in noninterest income and a decrease of $2.0 million in noninterest expenses. There was affected by a chargean increase of $3.5 million to$226,000 in income tax expense in 2020 compared with 2019. Details on the fourth quarterdrivers of 2017 related to the re-measurement of net deferred tax assets resulting from the new 21% federal corporate tax rate established by the Tax Cuts and Jobs Act of 2017.

For the year ended December 31, 2016, net income was $9.9 million, or $0.45these year-over-year changes are presented below. Earnings per common share were $0.70 basic and $0.69 fully diluted for 2020 compared with a net loss of $2.5 million, or ($0.11) per common share,$0.71 basic and $0.70 fully diluted for the year ended December 31, 2015.2019.

Net income in 2015 was affected by the third quarter termination of the Bank’s FDIC shared-loss agreements in order to improve profitability beginning in the fourth quarter of 2015. As part of the termination of the shared-loss agreements, the FDIC paid $3.1 million in cash to the Bank, and the remaining $13.1 million of the FDIC indemnification asset related to the agreements was charged off. This transaction eliminated future indemnification asset amortization expense, which had totaled $5.2 million for the 12-month period from July 1, 2014 through June 30, 2015.

In addition to the shared-loss termination charge, the Company had write-downs totaling $1.1 million with respect to two bank buildings held for sale and one parcel in other real estate owned in the third quarter of 2015. Also contributing to the increase in net income for the year ended 2016 was an increase in net interest income of $1.4 million, or 3.5%, as compared to the year ended 2015.

29

Net Interest Income

The Company’s operating results depend primarily on its net interest income, which is the difference between interest income on interest earning assets, including securities and loans, and interest expense incurred on interest bearing liabilities, including deposits and other borrowed funds. Net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest earning assets and rates paid on interest bearing deposits and other borrowed funds, referred to as a “rate change.”

ForNet interest income was $51.3 million for the 2017 year ended December 31, 2020.  This is an increase of $1.4 million, or 2.7%, from net interest income increased $2.6of $50.0 million for the year ended December 31, 2019. Interest and dividend income declined by $1.8 million over this time frame. Interest and dividend income was impacted by volume increases offset by a decline in yield. First, there was an increase of $929,000, or 6.4%1.8%, and was $44.1 million. The tax equivalent yield (non-GAAP) on earning assets was 4.54% for 2017 compared with 4.50% for 2016. Interestin interest and fees on loans, which increased as a result of $40.3growth of $119.0 million, or 11.6%, in the average balance of loans in 2020 over 2019. The yield on loans declined from 5.03% for 2019 to 4.61% for 2020. A portion of this decrease is attributable to the addition of $85.1 million in 2017 was an increasePPP loans net of $4.3 million, or 12.0%, compared with $36.0 million for 2016.unamortized fees/costs during the second and third quarters of 2020 at a rate of 1.00%. Interest and fees on PCI loans declined $497,000 overby $2.0 million, or 32.9%. Part of this same time frame. Securities income increased $139,000decline is related to payoffs within charged-off loan pools in the PCI portfolio during 2019. The yield on the PCI portfolio was 14.00% for 20172020 compared with 16.99% for 2019. Interest on deposits in other banks declined by $53,000. Interest and dividends on securities declined by $705,000 in 2020 compared with 2019. The yield on earning assets was 4.35% for 2020, a decline of 64 basis points from 4.99% in 2019. The yield on total loans, which includes PCI loans and PPP loans, declined from 5.44% for 2019 to 2016, and4.84% for 2020. The return on interest bearing bank balances declined from 2.45% to 0.59%, while the tax-equivalent yield on the securities portfolio was 3.12% in 2017 and 3.11% in 2016.declined from 3.23% for 2019 to 2.90% for 2020.

Interest expense of $9.2$12.3 million for 2017 represented an increase2020 was a decrease of $1.4$3.2 million, or 17.6%20.6%, compared with 2016. Total averagefrom interest expense of $15.5 million for 2019. The cost of interest bearing liabilities increased $53.0decreased from 1.44% for 2019 to 1.08% for 2020. Interest on deposits decreased $2.7 million due to a decline in the rate paid from 1.39% for 2019 to 1.06% for 2020. Short term borrowing expense decreased by $89,000, and the cost of FHLB and other borrowings decreased by $426,000, or 31.7%, as loan growth has been fueled by this increase and an average balance increase of $20.5 million, or 17.6%, in noninterest bearing deposits.the rate paid decreased from 2.04% for 2019 to 1.32% for 2020.

Interest spread is the product of yield on earning assets less cost of total interest bearing liabilities. The Company'sCompany’s net interest spread declined from 3.69%3.55% for the year ended December 31, 20162019 to 3.64%3.27% for the same period in 2017.2020. The tax equivalent yield (non-GAAP) on earning assets increaseddecreased from 4.50%4.99% for the year ended December 31, 20162019 to 4.54%4.35% for the year ended December 31, 2017. The yield on total loans was stable, finishing at 5.01% for each of 2017 and 2016. PCI loan yield rose from 11.29% to 11.95%, and the yield on loans, excluding PCI loans, increased 6 basis points, from 4.57% to 4.63%. The tax-equivalent yield on securities increased from 3.11% for 2016 to 3.12% for 2017, as the Company sold lower yielding securities during the course of 2017 to fund loan demand.

For the 2016 year, net interest income increased $1.4 million, or 3.6%, and was $41.5 million. The tax equivalent yield on earning assets was 4.50% for 2016 compared with 4.57% for 2015. Interest and fees on loans of $36.0 million in 2016 was an increase of $4.0 million, or 12.5%, compared with $32.0 million for 2015. Interest and fees on PCI loans declined $1.6 million over this same time frame. Of that decline, $475,000 related to cash payments on ADC loans related to pools previously written down to a zero carrying value received in 2015 versus no such payments in 2016. Securities income declined $681,000 for 2016 compared 2015, as securities balances have been liquidated to fund loan growth.

Interest expense of $7.8 million for 2016 represented an increase of $323,000, or 4.31%, compared with 2015. Total average interest bearing liabilities increased $21.4 million, as loan growth has been fueled by this increase and an average balance increase of 23.0%, or $21.7 million, in noninterest bearing deposits, coupled with a decline in the average balance of securities of $36.3 million during 2016.

2020.

The Company’s total loan to deposit ratio was 90.01%86.3% at December 31, 20172020 versus 85.63%93.8% at December 31, 2016 and 85.42% at December 31, 2015.2019.

30

34

The following table presents the total amount of average balances, interest income from average interest earning assets and the resulting yields, as well as the interest expense on average interest bearing liabilities, expressed both in dollars and rates. Except as indicated in the footnote, no tax equivalent adjustments were made. Any non-accruing loans have been included in the table as loans carrying a zero yield.

NET INTEREST MARGIN ANALYSIS

AVERAGE BALANCE SHEETS

(Dollars in thousands)

  Year ended December 31, 2017  Year ended December 31, 2016  Year ended December 31, 2015 
        Average        Average        Average 
  Average  Interest  Rates  Average  Interest  Rates  Average  Interest  Rates 
  Balance  Income/  Earned/  Balance  Income/  Earned/  Balance  Income/  Earned/ 
  Sheet  Expense  Paid  Sheet  Expense  Paid  Sheet  Expense  Paid 
ASSETS:                                    
Loans, including fees $870,258  $40,301   4.63% $787,245  $35,998   4.57% $687,463  $31,990   4.65%
PCI loans  47,983   5,733   11.95   55,178   6,230   11.29   63,552   7,875   12.39 
Total loans  918,241   46,034   5.01   842,423   42,228   5.01   751,015   39,865   5.31 
Interest bearing bank balances  15,618   196   1.26   17,922   122   0.68   14,551   59   0.41 
Federal funds sold  94   1   1.11   27      0.49   1,852   2   0.10 
Securities (taxable)  181,476   4,682   2.58   178,833   4,696   2.63   220,525   5,469   2.48 
Securities (tax exempt)(1)  85,305   3,639   4.27   82,045   3,407   4.15   76,644   3,268   4.26 
Total earning assets  1,200,734   54,552   4.54   1,121,250   50,453   4.50   1,064,587   48,663   4.57 
Allowance for loan losses  (9,431)          (9,967)          (9,981)        
Non-earning assets  89,904           85,779           95,190         
Total assets $1,281,207          $1,197,062          $1,149,796         
                                     
LIABILITIES AND SHAREHOLDERS' EQUITY                                    
                                     
Demand - interest bearing $264,082  $897   0.34% $235,571  $636   0.27% $229,220  $698   0.30%
Savings  91,687   243   0.26   86,499   236   0.27   83,614   260   0.31 
Time deposits  574,630   6,757   1.18   530,531   5,510   1.04   523,726   5,025   0.96 
Total deposits  930,399   7,897   0.85   852,601   6,382   0.75   836,560   5,983   0.72 
Short-term borrowings  1,556   25   1.58   1,776   16   0.88   1,516   12   0.76 
FHLB and other borrowings  85,127   1,277   1.50   105,455   1,210   1.15   96,937   1,179   1.22 
Long-term debt           4,257   212   4.97   7,707   323   4.20 
Total interest bearing liabilities  1,017,082   9,199   0.90   964,089   7,820   0.81   942,720   7,497   0.80 
Noninterest bearing deposits  136,674           116,215           94,476         
Other liabilities  5,550           5,543           4,490         
Total liabilities  1,159,306           1,085,847           1,041,686         
Shareholders' equity  121,901           111,215           108,110         
                                     
Total liabilities and shareholders' equity $1,281,207          $1,197,062          $1,149,796         
Net interest earnings     $45,353          $42,633          $41,166     
Interest spread          3.64%          3.69%          3.77%
Net interest margin          3.78%          3.80%          3.87%
                                     
Tax equivalent adjustment:                                    
Securities     $1,237          $1,158          $1,111     

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

    

Year ended December 31, 2020

    

Year ended December 31, 2019

    

Year ended December 31, 2018

 

Average

Average

Average

 

Average

Interest

Rates

Average

Interest

Rates

Average

Interest

Rates

 

Balance

Income/

Earned/

Balance

Income/

Earned/

Balance

Income/

Earned/

 

(Dollars in thousands)

    

Sheet

    

Expense

    

Paid

    

Sheet

    

Expense

    

Paid

    

Sheet

    

Expense

    

Paid

 

ASSETS:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Loans

$

1,138,603

$

52,480

 

4.61

%  

$

1,023,861

$

51,551

5.03

%  

$

960,978

$

46,291

4.82

%

PCI loans

 

28,948

4,053

 

14.00

 

35,568

6,042

16.99

 

40,641

5,222

12.85

Total loans

 

1,167,551

56,533

 

4.84

 

1,059,429

57,593

5.44

 

1,001,619

51,513

5.14

Interest bearing bank balances

 

57,022

338

 

0.59

 

15,977

391

2.45

 

13,995

303

2.16

Federal funds sold

 

172

0

 

0.27

 

688

14

2.16

 

242

5

2.03

Securities (taxable)

 

195,155

5,373

 

2.75

 

188,531

5,870

3.11

 

178,086

5,258

2.95

Securities (tax exempt) (1)

 

50,080

1,737

 

3.47

 

55,448

2,001

3.61

 

75,741

2,737

3.61

Total earning assets

 

1,469,980

63,981

 

4.35

 

1,320,073

65,869

4.99

 

1,269,683

59,816

4.71

Allowance for loan losses

 

(11,391)

 

 

(8,821)

 

(9,198)

  

  

Non-earning assets

 

109,379

 

 

101,590

 

92,621

  

  

Total assets

$

1,567,968

 

$

1,412,842

$

1,353,106

  

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

  

  

  

Demand - interest bearing

$

193,919

$

426

 

0.22

$

157,876

$

346

0.22

$

156,541

325

0.21

%

Savings and money market

 

253,118

943

 

0.37

 

221,817

1,268

0.57

 

230,637

1,187

0.51

Time deposits

 

623,403

9,997

 

1.60

 

627,913

12,422

1.98

 

581,619

8,745

1.5

Total interest bearing deposits

 

1,070,440

11,366

 

1.06

 

1,007,606

14,036

1.39

 

968,797

10,257

1.06

Short-term borrowings

 

1,554

24

 

1.55

 

4,422

113

2.56

 

2,856

65

2.28

FHLB and other borrowings

 

69,200

917

 

1.32

 

65,673

1,343

2.04

 

90,966

1,732

1.9

Long-term debt

 

 

 

 

Total interest bearing liabilities

 

1,141,194

12,307

 

1.08

 

1,077,701

15,492

1.44

 

1,062,619

12,054

1.13

Noninterest bearing deposits

 

250,875

 

 

174,163

 

155,003

  

  

Other liabilities

 

13,581

 

  

 

13,235

 

6,219

  

  

Total liabilities

 

1,405,650

 

  

 

1,265,099

 

1,223,841

  

  

Shareholders’ equity

 

162,318

 

  

 

147,743

 

129,265

  

  

Total liabilities and shareholders’ equity

$

1,567,968

 

  

$

1,412,842

$

1,353,106

  

  

Net interest earnings

 

$

51,674

 

  

 

$

50,377

 

  

$

47,762

  

Interest spread

 

  

 

  

 

3.27

%  

 

3.55

%  

 

  

  

3.58

%

Net interest margin

 

  

 

  

 

3.52

%  

 

3.82

%  

 

  

  

3.76

%

Tax equivalent adjustment:

 

  

 

  

 

  

 

 

  

  

  

Securities

 

  

$

364

 

  

 

$

420

 

  

$

576

  

(1)31Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 21% for each of 2020, 2019 and 2018.

35

The following table presents changes in interest income and interest expense and distinguishes between the changes related to increases or decreases in average outstanding balances of interest earning assets and interest bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). No tax equivalent adjustments were made.

EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME

FOR THE YEAR ENDED DECEMBER 31, 20172020 AND 20162019

(Dollars in thousands)

 2017 compared to 2016 2016 compared to 2015 
 Increase (Decrease) Increase (Decrease) 
 Volume Rate Total Volume Rate Total 

2020 compared to 2019

2019 compared to 2018

Increase (Decrease)

Increase (Decrease)

    

Volume

    

Rate

    

Total

    

Volume

    

Rate

    

Total

Interest Income:                        

 

  

 

  

 

  

 

  

 

  

 

  

                        
Loans, including fees $3,796  $507  $4,303  $4,643  $(635) $4,008 

$

5,772

$

(4,843)

$

929

$

3,031

$

2,229

$

5,260

PCI loans  (812)  315   (497)  (1,038)  (607)  (1,645)

PCI loans, including fees

 

(1,125)

 

(864)

 

(1,989)

 

(652)

 

1,472

 

820

Interest bearing bank balances and federal funds sold  (16)  91   75   12   49   61 

 

995

 

(1,062)

(67)

 

52

 

45

 

97

Investments  157   (18)  139   (931)  250   (681)
                        
Total Earning Assets  3,125   895   4,020   2,686   (943)  1,743 
                        

Securities

 

38

 

(743)

(705)

 

(288)

 

319

 

31

Total earning assets

 

5,680

 

(7,512)

 

(1,832)

 

2,143

 

4,065

 

6,208

Interest Expense:                        

 

 

 

 

  

 

  

 

  

Demand deposits  77   184   261   19   (80)  (61)
Savings deposits  14   (7)  7   9   (34)  (25)

Demand - interest bearing

 

79

 

1

 

80

 

3

 

18

 

21

Savings and money market

 

178

 

(503)

 

(325)

 

(45)

 

126

 

81

Time deposits  458   789   1,247   65   420   485 

 

(89)

 

(2,336)

 

(2,425)

 

694

 

2,983

 

3,677

Total deposits  549   966   1,515   93   306   399 
                        

Total interest-bearing deposits

 

168

 

(2,838)

 

(2,670)

 

652

 

3,127

 

3,779

Other borrowed funds  (320)  184   (136)  76   (152)  (76)

 

14

 

(529)

 

(515)

 

(455)

 

113

 

(342)

                        

Total interest-bearing liabilities  229   1,150   1,379   169   154   323 

 

182

 

(3,367)

 

(3,185)

 

197

 

3,240

 

3,437

Net increase (decrease) in net interest income $2,896  $(255) $2,641  $2,517  $(1,097) $1,420 

Net increase in net interest income

$

5,498

$

(4,145)

$

1,353

$

1,946

$

825

$

2,771

32

Provision for Loan Losses

Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on such factors as historical credit loss experience, industry diversification of the commercial loan portfolio, the amount of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the loan portfolio through the internal loan review function and other relevant factors. SeeAllowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

Loans are charged-off against the allowance for loan losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations.

Provision for loan losses for the year ended December 31, 2020 was $4.2 million, compared with $325,000 for the year ended December 31, 2019. The provision recorded during 2020 was due to the heightened risks associated with the loan portfolio that resulted from the economic impact of the rapidly evolving effects of the COVID-19 stay-at-home orders, business shut-downs and increased unemployment. Beginning in the first quarter of 2020, management reviews each loan within the portfolio at least quarterly to identify, and monitor on a going forward basis, those borrowers that management believed to be possibly impacted by the economy. Loans identified with increased risk are aggregated by loan type. During the first half of 2020, this analysis indicated a risk grade migration in a number of loan categories that led to a heightened risk level in the loan portfolio. The impact of the loans’ risk grade migration was applied to the allowance for loan loss calculation, which led to the provision for loan losses for each of the first two quarters of 2020.

36

The Company determined that no provision was necessary for the third or fourth quarters of 2020 after a similar analysis and review process for each quarter.

Due to the COVID-19 pandemic, the Company is closely monitoring loan concentrations in various “at risk areas” that it has deemed most likely to be affected by the stay-at-home orders and lack of general business activity, including a lack of travel in the Company’s geographic territory. As of December 31, 2020, the Company identified the following categories of borrowers as being potentially at risk:

Category

% of Total Loans

Lessors of commercial properties

18.5

%

Consumer

13.9

Lessors of residential properties

12.3

Hotels and other lodging

5.6

Medical and care services

4.2

Food service & drinking

2.2

Retail stores

1.5

Personal services

1.1

The Company is working with borrowers who have currently expressed a need for relief due to the effects of COVID-19.  The Company provided COVID-19 related payment relief on loans totaling $182.4 million as of December 31, 2020. PCI loans comprised $12.2 million of this total. As of December 31, 2020, regular payments have resumed on $143.4 million of these loans, of which PCI comprised $8.4 million. The Company re-extended this payment relief on $52.7 million of these loans, $13.7 of which have resumed regular payments and $2.0 million of which were within the PCI portfolio. In accordance with current regulatory guidance and/or the CARES Act, none of these loans were deemed to be TDRs, as they were all current under their terms as of December 31, 2019.  

The Company is also helping its customers and communities by participating in the PPP.   The Company originated 793 loans totaling $85.1 million net of fees, with the median size for all loans made being approximately $31,500. These loans had an outstanding balance of $49.3 million net of fees at December 31, 2020.  As these loans are 100% guaranteed by the SBA, no allowance for loan losses is required.

In January 2021, the Company began participating in the third round of PPP under the CARES Act, as amended by the Consolidated Appropriations Act (CAA).   As of March 9, 2021, the Company originated 361 loans totaling $35.5 million net of fees under the CAA.

The allowance for loan losses, excluding PCI loans, equaled 276.7% of nonaccrual loans at December 31, 2020 compared with 159.3% at December 31, 2019. The ratio of the allowance for loan losses to total loans, excluding PCI loans, was 1.04% at December 31, 2020 compared with 0.80% at December 31, 2019. Net charge-offs were $289,000 in 2020 compared with net charge-offs of $879,000 in 2019.

The Company records a separate provision for loan losses for its loan portfolio, excluding PCI loans, and the PCI loan portfolio.  Management also actively monitors its PCI loan portfolio for impairment and necessary loan loss provisions. Provisions for PCI loans may be necessary due to a change in expected cash flows or an increase in expected losses within a pool of loans.

The provision for loan losses was $550,000 for Due to the year ended December 31, 2017 compared with $166,000 and $0 for the years ended December 31, 2016 and 2015, respectively. The Company records a separate provision for loan losses forstable nature of its loan portfolioperformance and its PCI loan portfolio. The provision for loan losses on loans, excluding PCI loans, was $550,000 fordeclining balances over time as the year ended December 31, 2017 compared with $450,000 and $0 for the years ended December 31, 2016 and 2015, respectively. The provision for loan losses on PCI loans was a $284,000 credit for the year ended December 31, 2016, which was the result of improvement in expected losses on the Company’s PCI portfolio. There wasportfolio amortizes, no provision for the PCI loan portfolio for the years ended December 31, 2017 and 2015. With respect to the loan portfolio, the provision was taken as additional general reserves to support current period loan growth.

The allowance for loan losses, excluding PCI loans, equaled 99.4%during either of nonaccrual loans atthe years December 31, 2017 compared with 92.7% at December 31, 2016. The ratio of the allowance for loan losses to total loans, excluding PCI loans, was 0.95% at December 31, 2017 compared with 1.14% at December 31, 2016. Net charge-offs were $1.1 million in 2017 compared with net charge-offs of $516,000 in 2016.

2020 and 2019.  While the PCI loan portfolio contains significant risk, it was considered in determining the initial fair value, which was reflected in adjustments recorded at the time of the acquisition. See theAsset Qualitydiscussion below for further analysis.

Noninterest Income

Noninterest income was $4.7$5.9 million for 2020, an increase of $594,000, or 11.1%, over noninterest income of $5.4 million for 2019. Mortgage loan income was $1.1 million, an increase of $630,000 for 2020 over 2019. This increase

37

was created by continuity within the mortgage team, coupled with attractive rates and increased referrals within the Bank. Other noninterest income was $1.3 million for 2020, an increase of $190,000 over the same period in 2019. The increase was primarily the result from 2020 activity that included a $64,000 gain on the extinguishment of a FHLB borrowing combined with a $272,000 increase in swap fee income. These items were partially offset by a decrease of $120,000 from non-recurring insurance proceeds received in 2019. Gains on securities transactions were $284,000 in 2020, an increase of $49,000 over 2019. Offsetting these increases to noninterest income were a decline of $237,000 in service charges and fees, resulting from reduced transaction volumes created by the COVID-19 pandemic stay-at-home orders, offset by a $102,000 one-time account interchange fee received during the fourth quarter of 2020, and a decrease of $35,000 in income on bank owned life insurance. Gain on sale of loans was $11,000 for 2020 compared with $14,000 in 2019.

Noninterest Expenses

Noninterest expenses were $33.7 million for the year ended December 31, 2017,2020, a decrease of $482,000, or 9.3%, from $5.2 million for the year ended December 31, 2016. Securities gains were $210,000 in 2017 compared with $634,000 for 2016. Mortgage loan income declined by $364,000 from 2016 to 2017 and was $242,000. The Bank instituted a lower cost mortgage platform beginning in 2017, which resulted in a steady improvement in results during the year. Offsetting these decreases for 2017 compared with 2016 was an increase of $261,000 in service charges on deposit accounts, which were $2.7 million for the year ended December 31, 2017.

Noninterest income was $5.2 million for the year ended December 31, 2016, an increase of $98,000, or 1.9%, over $5.1 million for the year ended December 31, 2015. Securities gains of $634,000 in 2016 compared with $472,000 for 2015. Likewise, service charges on deposit accounts increased by $151,000 and were $2.4 million for 2016. Income on bank owned life insurance of $870,000 in 2016 is an increase of $119,000, or 15.9%. Offsetting these increases for 2016 compared with 2015 were decreases of $178,000 in mortgage loan income, which was $606,000 in 2016, $87,000 in other noninterest income, which was $649,000 in 2016, and $69,000 in gain on sale of loans in 2015, which was zero in 2016.

Noninterest Expenses

Noninterest expenses were $34.2 million for the year ended December 31, 2017, as compared with $32.8 million for the year ended December 31, 2016. This is an increase of $1.4$2.0 million, or 4.3%.5.6%, year over year. Salaries and employee benefits declined $1.3 million, or 6.0%. The decrease reflects increased $1.2 million in 2017 compared with 2016 reflectingcapitalized internal loan costs relating to the origination of PPP loans and the closure of two branch openingsoffices in 20162019.  The branch closures positively affected salaries as well as other expense categories in 2020, namely occupancy and three in 2017. These new branches also impacted the 2017 increase in occupancyequipment expenses. Occupancy expenses which were $393,000 higher in 2017 than the previous year. Data processing, advertising,$275,000 lower, equipment expenses were $117,000 lower, and supplies all also were affected by the new branches as they increased $249,000, $157,000, $145,000 and $112,000, respectively. Offsetting these increases was a reduction of amortization of intangible assets, which was $1.9 million in 2016 and $898,000 in 2017. The Company has no intangible assets that are being amortized as of December 31, 2017.

Noninterestother operating expenses were $32.8 million for the year ended December 31, 2016 compared with $50.3 million for the year ended December 31, 2015. This is a decrease of $17.5 million, or 34.8%. FDIC indemnification asset amortization was $0 for 2016 and $16.2 million for 2015, as a result of the termination of the shared-loss agreements and associated write-off.decreased $221,000. Other real estate expenses, improved $1.1 millionnet were $152,000 for 2020 and decreased by $566,000 versus the same period in 20162019. In the third quarter of 2019, a nonperforming loan was migrated to OREO and were $175,000. The expenseas part of the process the Bank paid $624,000 in this category in 2015 was primarily from the write-down of $1.1 million in the two bank owned properties and other real estate owned noted previously. Other operating expenses declined $444,000taxes on the property. FDIC assessment was $639,000 for 2020 and increased $343,000 over 2019 mainly due to a $324,000 assessment credit received by the comparison period. Salaries and employee benefits increased $271,000, or 1.5%,FDIC in 20162019. Data processing fees were $2.5 million for 2020, an increase of $124,000 when compared with 2015. FDIC assessment decreased $115,000 and occupancy expenses increased $145,000 in 2016, the result of the Bank’s new branches in Fairfax and Cumberland, Virginia.2019.

33

Income Taxes

For the year ended December 31, 2017,2020, income tax expense of $6.9was $3.8 million represented ancompared with $3.6 million for 2019. The effective tax rate of 48.9% compared with an income tax expense of $3.8 millionwas 19.5% for the year ended December 31, 2016. The increase in income tax expense2020 compared with 18.4% for the year ended December 31, 2017 was2019.  The increase reflects significantly higher tax deductions related to a $3.5 million re-measurement of net deferred tax assets resulting from the new 21% federal corporate tax rate established by the Tax Cuts and Jobs Act of 2017 enactedstock option exercises in December 2017.2019.

For the year ended December 31 2016, income tax expense of $3.8 million represented an effective tax rate of 27.8% compared with an income tax benefit of $2.6 million for the year ended December 31, 2015. The benefit for the year ended 2015 was the result of the net loss for the year generated by the accounting for the termination of the shared-loss agreements.

Loans

Total loans were $986.4 million$1.206 billion at December 31, 2017,2020, increasing $98.1$115.6 million from $888.3 million$1.091 billion at December 31, 2016.2019.  Total loans, excluding PCI loans, were $942.0$1.182 billion at December 31, 2020 versus $1.058 million at December 31, 2017 versus $836.32019, an increase of $124.0 million, or 11.7%.  Loans, net of unamortized fees/costs that the Bank originated under the PPP were $49.3 million at December 31, 2016. Total2020. All of these balances are included in commercial loans.  As a result of the economic conditions that existed during 2020, commercial loans, excluding PCIPPP loans, declined by $15.1 million from December 31, 2019. Construction and land development loans increased $105.7 million, or 12.6%, during 2017. Commercial loans exhibitedby the largest dollar volume increase year-over-yearamount during 2020, $35.7 million, or 24.4%, and were up $29.7 million, or 23.0%, and ended the year at $159.0 million. Commercial mortgage loans of $366.3$182.3 million at December 31, 2017 reflected an increase2020, or 15.4% of 7.8%, or $26.5 million, since year end 2016. This is alsototal loans. Commercial mortgage loans, the largest category of loans in the portfolio. Residential 1-4 family mortgage loans increased $19.7at $474.9 million, or 9.5%, over this time frame40.2% of total loans, at December 31, 2020 grew by $78.0 million. Multifamily loans grew by $5.2 million during 2020 and were $227.5$78.2 million, or 6.6% of total loans. Residential 1 – 4 family loans declined by $26.3 million during 2020 and were $197.2 million, or 16.7% of total loans, as more of the home loans originated by the Bank are sold on the secondary market through its mortgage division, as evidenced by the increase in mortgage loan income in noninterest income. PCI loans were $24.0 million at December 31, 2017. Multifamily loans of $59.0 million at December 31, 2017 was an increase of $19.9 million over the balance at December 31, 2016. PCI loans were $44.3 million at December 31, 2017, $7.62020, $8.5 million lower than at year-end 2016.year end 2019.

38

The following tables indicate the total dollar amount of loans outstanding and the percentage of gross loans as of December 31 of the years presented (dollars in thousands):

  2017 
  Loans  PCI Loans  Total Loans 
Mortgage loans on real estate:                        
Residential 1-4 family $227,542   24.16% $39,805   89.79% $267,347   27.10%
Commercial  366,331   38.89   547   1.23   366,878   37.20 
Construction and land development  107,814   11.44   1,588   3.58   109,402   11.09 
Second mortgages  8,410   0.89   2,136   4.82   10,546   1.07 
Multifamily  59,024   6.27   257   0.58   59,281   6.01 
Agriculture  7,483   0.79         7,483   0.76 
Total real estate loans  776,604   82.44   44,333   100.00   820,937   83.23 
Commercial loans  159,024   16.88         159,024   16.13 
Consumer installment loans  5,169   0.55         5,169   0.52 
All other loans  1,221   0.13         1,221   0.12 
Total loans $942,018   100.00% $44,333   100.00% $986,351   100.00%

  2016 
  Loans  PCI Loans  Total Loans 
Mortgage loans on real estate:                        
Residential 1-4 family $207,863   24.86% $46,623   89.72% $254,486   28.64%
Commercial  339,804   40.63   649   1.25   340,453   38.33 
Construction and land development  98,282   11.75   1,969   3.79   100,251   11.29 
Second mortgages  7,911   0.95   2,453   4.72   10,364   1.17 
Multifamily  39,084   4.67   270   0.52   39,354   4.43 
Agriculture  7,185   0.86         7,185   0.81 
Total real estate loans  700,129   83.72   51,964   100.00   752,093   84.67 
Commercial loans  129,300   15.46         129,300   14.56 
Consumer installment loans  5,627   0.67         5,627   0.63 
All other loans  1,243   0.15         1,243   0.14 
Total loans $836,299   100.00% $51,964   100.00% $888,263   100.00%

34

2020

 

Loans

PCI Loans

Total Loans

 

Mortgage loans on real estate:

    

    

    

    

    

    

Residential 1‑4 family

$

197,228

 

16.68

%  

$

21,720

 

90.35

%  

$

218,948

 

18.15

%

Commercial

 

474,856

 

40.16

 

429

 

1.78

 

475,285

 

39.40

Construction and land development

 

182,277

 

15.42

 

780

 

3.25

 

183,057

 

15.17

Second mortgages

 

6,360

 

0.54

 

904

 

3.76

 

7,264

 

0.60

Multifamily

 

78,158

 

6.61

 

207

 

0.86

 

78,365

 

6.50

Agriculture

 

6,662

 

0.56

 

 

 

6,662

 

0.55

Total real estate loans

 

945,541

 

79.97

 

24,040

 

100.00

 

969,581

 

80.37

Commercial loans

 

225,386

 

19.06

 

 

 

225,386

 

18.68

Consumer installment loans

 

9,996

 

0.85

 

 

 

9,996

 

0.83

All other loans

 

1,439

 

0.12

 

 

 

1,439

 

0.12

Total loans

$

1,182,362

 

100.00

%  

$

24,040

 

100.00

%  

$

1,206,402

 

100.00

%

2019

 

Loans

PCI Loans

Total Loans

 

Mortgage loans on real estate:

    

  

    

  

    

  

    

  

    

  

    

  

Residential 1‑4 family

$

223,538

 

21.12

%  

$

29,465

 

90.58

%  

$

253,003

 

23.19

%

Commercial

 

396,858

 

37.50

 

490

 

1.51

 

397,348

 

36.42

Construction and land development

 

146,566

 

13.85

 

1,172

 

3.60

 

147,738

 

13.54

Second mortgages

 

6,639

 

0.63

 

1,169

 

3.59

 

7,808

 

0.72

Multifamily

 

72,978

 

6.90

 

232

 

0.72

 

73,210

 

6.71

Agriculture

 

8,346

 

0.79

 

 

 

8,346

 

0.77

Total real estate loans

 

854,925

 

80.79

 

32,528

 

100.00

 

887,453

 

81.35

Commercial loans

 

191,183

 

18.06

 

 

 

191,183

 

17.53

Consumer installment loans

 

11,163

 

1.05

 

 

 

11,163

 

1.02

All other loans

 

1,052

 

0.10

 

 

 

1,052

 

0.10

Total loans

$

1,058,323

 

100.00

%  

$

32,528

 

100.00

%  

$

1,090,851

 

100.00

%

2018

 

Loans

PCI Loans

Total Loans

 

Mortgage loans on real estate:

    

  

    

  

    

  

    

  

    

  

    

  

Residential 1-4 family

$

216,268

 

21.77

%  

$

34,240

 

89.43

%  

$

250,508

 

24.27

%

Commercial

 

379,904

 

38.23

 

746

 

1.95

 

380,650

 

36.89

Construction and land development

 

120,413

 

12.12

 

1,326

 

3.46

 

121,739

 

11.80

Second mortgages

 

6,778

 

0.68

 

1,729

 

4.52

 

8,507

 

0.82

Multifamily

 

59,557

 

5.99

 

244

 

0.64

 

59,801

 

5.79

Agriculture

 

8,370

 

0.84

 

 

 

8,370

 

0.81

Total real estate loans

 

791,290

 

79.63

 

38,285

 

100.00

 

829,575

 

80.38

Commercial loans

 

188,722

 

18.99

 

 

 

188,722

 

18.29

Consumer installment loans

 

12,048

 

1.21

 

 

 

12,048

 

1.17

All other loans

 

1,645

 

0.17

 

 

 

1,645

 

0.16

Total loans

$

993,705

 

100.00

%  

$

38,285

 

100.00

%  

$

1,031,990

 

100.00

%

39

  2015 
  Loans  PCI Loans  Total Loans 
Mortgage loans on real estate:                        
Residential 1-4 family $194,576   25.99% $52,696   89.38% $247,272   30.62%
Commercial  317,955   42.47   850   1.44   318,805   39.47 
Construction and land development  67,408   9.00   2,310   3.92   69,718   8.63 
Second mortgages  8,378   1.12   2,822   4.79   11,200   1.39 
Multifamily  45,389   6.06   277   0.47   45,666   5.65 
Agriculture  6,238   0.83         6,238   0.77 
Total real estate loans  639,944   85.47   58,955   100.00   698,899   86.53 
Commercial loans  102,507   13.69         102,507   12.69 
Consumer installment loans  4,928   0.66         4,928   0.61 
All other loans  1,345   0.18         1,345   0.17 
Total loans $748,724   100.00% $58,955   100.00% $807,679   100.00%

  2014 
  Loans  PCI Loans  Total Loans 
Mortgage loans on real estate:                        
Residential 1-4 family $167,171   25.33% $60,171   89.20% $227,342   31.25%
Commercial  282,127   42.75   1,148   1.70   283,275   38.94 
Construction and land development  57,027   8.64   2,456   3.64   59,483   8.18 
Second mortgages  5,997   0.91   3,409   5.05   9,406   1.29 
Multifamily  33,812   5.12   276   0.41   34,088   4.69 
Agriculture  7,163   1.08         7,163   0.98 
Total real estate loans  553,297   83.83   67,460   100.00   620,757   85.33 
Commercial loans  99,783   15.12         99,783   13.72 
Consumer installment loans  5,496   0.83         5,496   0.76 
All other loans  1,444   0.22         1,444   0.19 
Total loans $660,020   100.00% $67,460   100.00% $727,480   100.00%

  2013 
  Loans  PCI Loans  Total Loans 
Mortgage loans on real estate:                        
Residential 1-4 family $144,279   24.20% $64,610   88.18% $208,889   31.20%
Commercial  247,106   41.45   1,389   1.90   248,495   37.12 
Construction and land development  55,238   9.27   2,940   4.01   58,178   8.69 
Second mortgages  6,849   1.15   3,898   5.32   10,747   1.61 
Multifamily  35,748   6.00   266   0.36   36,014   5.38 
Agriculture  9,558   1.60   172   0.23   9,730   1.45 
Total real estate loans  498,778   83.67   73,275   100.00   572,053   85.45 
Commercial loans  90,282   15.14         90,282   13.49 
Consumer installment loans  5,667   0.95         5,667   0.85 
All other loans  1,446   0.24         1,446   0.21 
Total loans $596,173   100.00% $73,275   100.00% $669,448   100.00%

35

2017

 

Loans

PCI Loans

Total Loans

 

Mortgage loans on real estate:

    

    

    

    

    

    

Residential 1‑4 family

$

227,542

 

24.16

%  

$

39,805

 

89.79

%  

$

267,347

 

27.10

%

Commercial

 

366,331

 

38.89

 

547

 

1.23

 

366,878

 

37.20

Construction and land development

 

107,814

 

11.44

 

1,588

 

3.58

 

109,402

 

11.09

Second mortgages

 

8,410

 

0.89

 

2,136

 

4.82

 

10,546

 

1.07

Multifamily

 

59,024

 

6.27

 

257

 

0.58

 

59,281

 

6.01

Agriculture

 

7,483

 

0.79

 

 

 

7,483

 

0.76

Total real estate loans

 

776,604

 

82.44

 

44,333

 

100.00

 

820,937

 

83.23

Commercial loans

 

159,024

 

16.88

 

 

 

159,024

 

16.13

Consumer installment loans

 

5,169

 

0.55

 

 

 

5,169

 

0.52

All other loans

 

1,221

 

0.13

 

 

 

1,221

 

0.12

Total loans

$

942,018

 

100.00

%  

$

44,333

 

100.00

%  

$

986,351

 

100.00

%

2016

 

Loans

PCI Loans

Total Loans

 

Mortgage loans on real estate:

    

    

    

    

    

    

Residential 1‑4 family

$

207,863

 

24.86

%  

$

46,623

 

89.72

%  

$

254,486

 

28.64

%

Commercial

 

339,804

 

40.63

 

649

 

1.25

 

340,453

 

38.33

Construction and land development

 

98,282

 

11.75

 

1,969

 

3.79

 

100,251

 

11.29

Second mortgages

 

7,911

 

0.95

 

2,453

 

4.72

 

10,364

 

1.17

Multifamily

 

39,084

 

4.67

 

270

 

0.52

 

39,354

 

4.43

Agriculture

 

7,185

 

0.86

 

 

 

7,185

 

0.81

Total real estate loans

 

700,129

 

83.72

 

51,964

 

100.00

 

752,093

 

84.67

Commercial loans

 

129,300

 

15.46

 

 

 

129,300

 

14.56

Consumer installment loans

 

5,627

 

0.67

 

 

 

5,627

 

0.63

All other loans

 

1,243

 

0.15

 

 

 

1,243

 

0.14

Total loans

$

836,299

 

100.00

%  

$

51,964

 

100.00

%  

$

888,263

 

100.00

%

The following table indicates the contractual maturity of commercial and construction and land development loans as of December 31, 20172020 (dollars in thousands):

 Commercial Construction and land
development
 

Construction and

    

Commercial

    

land development

Within 1 year $63,464  $69,975 

$

59,816

$

115,761

Variable Rate        

 

  

 

  

One to Five Years $24,534  $3,551 

 

29,743

$

33,265

After Five Years  14,326   15,231 

 

27,516

 

11,320

Total $38,860  $18,782 

 

57,259

$

44,585

Fixed Rate        

 

  

 

  

One to Five Years $47,944  $19,901 

 

98,332

$

22,574

After Five Years  8,756   744 

 

9,979

 

137

Total $56,700  $20,645 

 

108,311

$

22,711

Total Maturities $                 159,024  $109,402 

$

225,386

$

183,057

Asset Quality – Assets, Excluding PCI Loans

The Company maintains a list of loans that have potential weaknesses and thus may need special attention. This nonperforming loan list is used to monitor such loans and is used in the determination of the appropriateness of the allowance for loan losses. At December 31, 2017,2020, nonperforming assets totaled $11.8$8.9 million and net charge-offs were $1.1 million.$289,000. Nonperforming assets totaled $14.7$10.8 million and net charge-offs were $516,000$879,000 at December 31, 2016.2019.

40

Nonperforming loans were $9.0$4.5 million at December 31, 20172020 compared to $10.2$6.2 million at December 31, 2016, a $1.22019. The $1.7 million decrease. Additionsdecrease in nonperforming loans since December 31, 2019 was the net result of $5.3 million in additions to nonaccrualnonperforming loans during 2017 totaledand $7.0 million.million in reductions. The increase related mainly to one construction and land development relationship comprised of commercialtotaling $1.4 million and commercial real estate loans totaling $3.9 million, onefour commercial loan relationship of $1.3 million and several small real estate relationships. There were $1.2 million in charge-offs taken during 2017, including $693,000 relatedrelationships totaling $3.3 million. With respect to the $3.9reductions in nonaccrual loans, $352,000 were payments to existing nonaccrual loans, $619,000 were charge-offs, $5.6 million relationshipwere paid off, including $2.0 million of the additions noted above. The remaining charge-offs were mainly centered in real estateabove, and commercial loans. There were $4.7 million in pay-offs, including $3.2 million related to the $3.9 million relationship noted above. There were also $1.4 million in pay-downs during the year and $926,000 in loans$415,000 returned to accruing status. Foreclosures for the period totaled $23,000.

The following table sets forth selected asset quality data and ratios with respect to assets, excluding PCI loans, at December 31 of the years presented (dollars in thousands):

 2017  2016  2015  2014  2013 

2020

    

2019

    

2018

    

2017

    

2016

Nonaccrual loans $9,026  $10,243  $10,670  $16,571  $12,105 

$

4,460

$

5,292

$

9,500

$

9,026

$

10,243

Loans past due 90 days and accruing interest               

 

45

 

946

 

 

 

Total nonperforming loans  9,026   10,243   10,670   16,571   12,105 

 

4,505

 

6,238

 

9,500

 

9,026

 

10,243

OREO  2,791   4,427   5,490   7,743   6,244 

 

4,361

 

4,527

 

1,099

 

2,791

 

4,427

Total nonperforming assets $11,817  $14,670  $16,160  $24,314  $18,349 

$

8,866

$

10,765

$

10,599

$

11,817

$

14,670

                    

Accruing troubled debt restructure loans $5,271  $4,653  $4,596  $6,195  $9,922 

$

4,679

$

4,593

$

8,359

$

5,271

$

4,653

                    

Balances                    

 

  

 

  

 

  

 

  

 

  

Specific reserve on impaired loans  959   1,130   1,144   1,761   1,636 

 

1,165

 

584

 

2,246

 

959

 

1,130

General reserve related to unimpaired loans  8,010   8,363   8,415   7,506   8,808 

 

11,175

 

7,845

 

6,737

 

8,010

 

8,363

Total allowance for loan losses  8,969   9,493   9,559   9,267   10,444 

 

12,340

 

8,429

 

8,983

 

8,969

 

9,493

Average loans during the year, net of unearned income  870,258   787,245   687,463   621,213   585,343 

 

1,138,603

 

1,023,861

 

960,978

 

870,258

 

787,245

                    

Impaired loans  14,297   18,541   15,266   22,929   22,027 

 

9,139

 

9,885

 

17,859

 

14,297

 

18,541

Non-impaired loans  927,721   817,758   733,476   637,091   574,146 

 

1,173,223

 

1,048,438

 

975,846

 

927,721

 

817,758

Total loans, net of unearned income  942,018   836,299   748,742   660,020   596,173 

 

1,182,362

 

1,058,323

 

993,705

 

942,018

 

836,299

                    

Ratios                    

 

  

 

  

 

  

 

  

 

  

Allowance for loan losses to loans  0.95%  1.14%  1.28%  1.40%  1.75%

 

1.04

%  

 

0.80

%  

 

0.90

%  

 

0.95

%  

 

1.14

Allowance for loan losses to nonaccrual loans  99.37   92.68   89.59   55.92   86.28 

 

276.68

 

159.28

 

94.56

 

99.37

 

92.68

General reserve to non-impaired loans  0.86   1.02   1.15   1.18   1.53 

 

0.95

 

0.75

 

0.69

 

0.86

 

1.02

Nonaccrual loans to loans  0.96   1.22   1.43   2.51   2.03 

 

0.38

 

0.50

 

0.96

 

0.96

 

1.22

Nonperforming assets to loans and OREO  1.25   1.74   2.14   3.64   3.05 

 

0.75

 

1.01

 

1.07

 

1.25

 

1.74

Net charge-offs (recoveries) to average loans  0.12   0.07   (0.04)  0.19   0.42 

Net charge-offs to average loans

 

0.03

 

0.09

 

(0.00)

 

0.12

 

0.07

36

At December 31, 2017, the Company had six construction and land development credit relationships in nonaccrual status. The borrowers for all of these relationships are residential land developers. All of the relationships are secured by the real estate to be developed, and all of such projects are in the Company’s central Virginia market. The total amount of the credit exposure outstanding at December 31, 2017 was $4.3 million. These loans have either been charged down or sufficiently reserved against to equate to the current expected realizable value. The total amount of the allowance for loan losses attributed to all six relationships was $556,000 at December 31, 2017, or 13.00% of the total credit exposure outstanding.

The Company performs troubled debt restructures (TDR) and other various loan workouts whereby an existing loan may be restructured into multiple new loans. The Company had 23 and 19 loans for the years ended December 31, 2017 and 2016, respectively, that met the definition of a TDR, which are loans that for reasons related to the debtor’s financial difficulties have been restructured on terms and conditions that would otherwise not be offered or granted. There were six loans totaling $3.4 million and seven loans totaling $4.1 million for the years ended December 31, 2017 and 2016, respectively, that were restructured using multiple new loans. At December 31, 2017 and 2016, the aggregated outstanding principal of all TDRs was $7.0 million and $6.7 million, respectively, of which $1.7 million and $2.0 million, respectively, were classified as nonaccrual.

The primary benefit of the restructured multiple loan workout strategy is to maximize the potential return by restructuring the loan into a “good loan” (the A loan) and a “bad loan” (the B loan). The impact on interest is positive because the Bank is collecting interest on the A loan rather than potentially not collecting interest on the entire original loan structure. The A loan is underwritten pursuant to the Bank’s standard requirements and graded accordingly. The B loan is classified as either “doubtful” or “loss”. An impairment analysis is performed on the B loan, and, based on its results, all or a portion of the B loan is charged-off or a specific loan loss reserve is established.

The Company does not modify its nonaccrual policies in this arrangement, and the A loan and the B loan stand on their own terms. At inception, this structure meets the definition of a TDR. If the loan is on nonaccrual at the time of restructure, the A loan is held on nonaccrual until six consecutive payments have been received, at which time it may be put back on an accrual status. The B loan is placed on nonaccrual. Under the terms of each loan, the borrower’s payment is contractually due.

The following table presents the composition of the Company’s nonaccrual loans, excluding PCI loans, as of December 31 of the years presented (dollars in thousands):

 2017 2016 2015 2014 2013 

2020

    

2019

    

2018

    

2017

    

2016

Mortgage loans on real estate:                    

Residential 1-4 family $1,962  $2,893  $4,562  $3,342  $4,229 

Residential 1‑4 family

$

1,357

$

1,378

$

1,257

$

1,962

$

2,893

Commercial  1,498   1,758   1,508   607   1,382 

 

730

 

1,006

 

2,123

 

1,498

 

1,758

Construction and land development  4,277   5,495   4,509   4,920   5,882 

 

44

 

376

 

4,571

 

4,277

 

5,495

Second mortgages        13   61   225 

Multifamily

2,463

Agriculture  68            205 

 

45

 

 

 

68

 

Total real estate loans  7,805   10,146   10,592   8,930   11,923 

 

2,176

 

5,223

 

7,951

 

7,805

 

10,146

Commercial loans  1,214   53      7,521   127 

 

2,264

 

62

 

1,549

 

1,214

 

53

Consumer installment loans  7   44   78   120   55 

 

20

 

7

 

 

7

 

44

Total loans $9,026  $10,243  $10,670  $16,571  $12,105 

$

4,460

$

5,292

$

9,500

$

9,026

$

10,243

41

Allowance for CreditLoan Losses on Loans

The allowance for loan losses represents management’s estimate of the amount appropriate to provide for probable losses inherent in the loan portfolio.

Loan quality is continually monitored, and the Company’s management has established an allowance for loan losses that it believes is appropriate for the risks inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and appropriateness of collateral and guarantors, nonperforming loans and current and anticipated economic conditions. There are additional risks of future loan losses, which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends, as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies. SeeAllowance for Loan Losses on Loans in the Critical Accounting Policies section above for further discussion.

In conjunction with the impairment analysis the Company performs as part of its allowance methodology, the Company frequently orders appraisals for all loans with balances in excess of $250,000 when the most recent appraisal is greater than 18 months old and /or deemed to be stale or invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. A ratio analysis is used for all loans with balances less than $250,000. The Company maintains detailed analysis and other information for its allowance methodology, both for internal purposes and for review by its regulators.

37

The following table indicates the dollar amount of the allowance for loan losses, excluding PCI loans, including charge-offs and recoveries by loan type and related ratios as of December 31 of the years presented (dollars in thousands):

 2017 2016 2015 2014 2013 

    

2020

    

2019

    

2018

    

2017

    

2016

 

Balance, beginning of year $9,493  $9,559  $9,267  $10,444  $12,920 

$

8,429

$

8,983

$

8,969

$

9,493

$

9,559

Loans charged-off:                    

 

  

 

  

 

  

 

  

 

  

Commercial  431   -   3   1,217   325 

 

608

 

724

 

45

 

431

 

Real estate  797   687   1,183   1,179   2,999 

 

 

667

 

216

 

797

 

687

Consumer and other loans  285   191   174   134   167 

 

176

 

253

 

220

 

285

 

191

Total loans charged-off  1,513   878   1,360   2,530   3,491 

 

784

 

1,644

 

481

 

1,513

 

878

Recoveries:                    

 

  

 

  

 

  

 

  

 

  

Commercial  5   11   1,211   1,065   82 

 

87

 

184

 

49

 

5

 

11

Real estate  282   245   343   178   857 

 

319

 

465

 

234

 

282

 

245

Consumer and other loans  152   106   98   110   76 

 

89

 

116

 

212

 

152

 

106

Total recoveries  439   362   1,652   1,353   1,015 

 

495

 

765

 

495

 

439

 

362

Net charge-offs (recoveries)  1,074   516   (292)  1,177   2,476 

 

289

 

879

 

(14)

 

1,074

 

516

Provision for loan losses  550   450   -   -   - 

 

4,200

 

325

 

 

550

 

450

Balance, end of year $8,969  $9,493  $9,559  $9,267  $10,444 

$

12,340

$

8,429

$

8,983

$

8,969

$

9,493

Allowance for loan losses to loans  0.95%  1.14%  1.28%  1.40%  1.75%

 

1.04

%  

 

0.80

%  

 

0.90

%  

 

0.95

%  

 

1.14

%

Net charge-offs (recoveries) to average loans  0.12%  0.07%  (0.04)%  0.19%  0.42%

 

0.03

%  

 

0.09

%  

 

(0.00)

%  

 

0.12

%  

 

0.07

%

Allowance to nonperforming loans  99.37%  92.68%  89.59%  55.92%  86.28%

 

276.68

%  

 

159.28

%  

 

94.57

%  

 

99.37

%  

 

92.68

%

During 2017,2020, the Company’s net charge-offs increased $558,000of $289,000 was a decrease of $590,000 from net charge-offs of $879,000 in the prior year. Net charge-offs (recoveries) by loan category to total net charge-offs (recoveries) were the following for 2020: 180.28% for commercial loans, (110.38)% for real estate loans, and 30.1% for consumer loans.

During 2019, the Company’s net charge-offs of $879,000 was an increase of $893,000 from net recoveries of $14,000 in the prior year and were primarily centered in real estatecommercial loans. Net charge-offs by loan category to total net charge-offs were the following for 2017: 39.7%2019: 61.4% for commercial loans, 47.9%23.0% for real estate loans, and 12.4%15.6% for consumer loans.

42

During 2016, the Company’s net charge-offs increased $808,000 from a net recovery in the prior year and were primarily centered in real estate loans. Net charge-offs (recoveries) by loan category to total net charge-offs were the following for 2016: (2.1%) for commercial loans, 85.7% for real estate loans, and 16.4% for consumer loans.Table of Contents

While the entire allowance is available to cover charge-offs from all loan types, the following table indicates the dollar amount allocation of the allowance for loan losses by loan type, as well as the ratio of the related outstanding loan balances to loans, excluding PCI loans, as of December 31 of the years presented (dollars in thousands):

 2017 2016 2015 2014 2013 
 Amount % Amount % Amount % Amount % Amount % 

2020

2019

2018

2017

2016

 

    

Amount

    

%  

    

Amount

    

%  

    

Amount

    

%  

    

Amount

    

%  

    

Amount

    

%  

 

Commercial $1,139   16.9% $602   15.5% $631   13.6% $977   15.2% $1,554   15.1%

$

1,897

 

19.1

%  

$

1,980

 

18.1

%  

$

1,894

 

19.0

%  

$

1,139

 

16.9

%  

$

602

 

15.5

%

Construction and land development  1,247   11.4   2,195   11.7   1,298   9.0   1,792   8.6   2,163   9.3 

 

2,545

 

15.4

 

1,044

 

13.9

 

1,161

 

12.1

 

1,247

 

11.4

 

2,195

 

11.7

Real estate mortgage  6,423   71.0   5,068   72.0   6,914   76.4   4,822   75.2   6,065   74.4 

 

7,772

 

64.5

 

5,246

 

66.9

 

4,499

 

67.5

 

6,423

 

71.0

 

5,068

 

72.0

Consumer and other  113   0.7   142   0.8   118   1.0   131   1.0   160   1.2 

 

126

 

1.0

 

121

 

1.1

 

164

 

1.4

 

113

 

0.7

 

142

 

0.8

Unallocated  47      1,486      598      1,545      502    

 

 

 

38

 

 

1,265

 

 

47

 

 

1,486

 

Total allowance $8,969   100.00% $9,493   100.00% $9,559   100.00% $9,267   100.00% $10,444   100.00%

$

12,340

 

100

%  

$

8,429

 

100

%  

$

8,983

 

100

%  

$

8,969

 

100

%  

$

9,493

 

100

%

The allowance for loan losses for each of the periods presented includes an amount that could not be related to individual types of loans and thus is referred to as the unallocated portion of the allowance. The Company recognizes the inherent imprecision in the estimates of losses due to various uncertainties and variability related to the factors used. Specifically, the provision of $450,000 taken during the year ended 2016 primarily due to loan growth resulted in an elevated unallocated amount of $1.5 million at December 31, 2016. Several factors justified the maintenance of this unallocated amount, including an unusually low level of delinquencies at December 31, 2016, which the Company believed was unsustainable over the next several quarters and was not reflective of the Company’s experience, as well as the fact that the Company believed the allowance as reported was indicative of the credit risks of the loan portfolio at December 31, 2016. During 2017, delinquencies increased $886,000, net charge-offs were $1.1 million, and the Company recorded a provision of $550,000, all of which contributed to the reduction of the unallocated amount to $47,000 at December 31, 2017.

38

Asset Quality and Allowance for Credit Losses – PCI assets

Loans accounted for under FASB ASC 310-30 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans.

The PCI loans are subject to credit review standards for loans. If and when credit deterioration occurs subsequent to the date that they were acquired, a provision for credit loss for PCI loans will be charged to earnings for the full amount. The Company makes an estimate of the total cash flows it expects to collect from a pool of PCI loans, which includes undiscounted expected principal and interest. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as impairments in the current period through the allowance for loan losses. Subsequent increases in expected cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the yield over the remaining life of the pool.

Securities

The Company’s securities portfolio, decreased $10.7excluding restricted equity securities, increased $69.8 million, or 4.0%31.4%, from $271.0since year end 2019, to $292.5 million at December 31, 2016 to $260.32020. State, county and municipal bonds, 50.2% of total securities, increased $22.6 million during the year and totaled $146.9 million at December 31, 2017. This decrease is2020. Gains on securities transactions, net totaled $284,000 during 2020 compared with $235,000 in 2019. The Company actively manages the resultportfolio to improve its liquidity and maximize the return within the desired risk profile.

43

Table of a shift in assets to higher yielding loans. At December 31, 2017, the Company had $204.8 million in securities available for sale and $46.1 million of securities held to maturity. Equity securities totaled $9.3 million. Realized gains of $210,000 occurred during 2017 through sales and call activity.Contents

The Company’s securities portfolio decreased $17.2 million, or 6.0%, from $288.2 million at December 31, 2015 to $271.0 million at December 31, 2016. This decrease is the result of a shift in assets to higher yielding loans. At December 31, 2016, the Company had $216.1 million in securities available for sale and $46.6 million of securities held to maturity. Equity securities totaled $8.3 million. Realized gains of $634,000 occurred during 2016 through sales and call activity.

The following table summarizes the securities portfolio by contractual maturity and issuer, including weighted average yields, excluding restricted stock, as of December 31, 20172020 (dollars in thousands):

  1 Year or Less  1-5 Years  5-10 Years  Over 10 Years  Total 
U.S. Treasury Issue and other                    
U.S. Government agencies                    
Amortized Cost  4,343   26,678   23,487   5,212   59,720 
Fair Value  4,312   26,392   23,414   5,261   59,379 
Weighted Avg Yield  (2.36)%  1.18%  2.24%  3.44%  1.54%
State, county and municipal(1)                    
Amortized Cost  5,575   71,114   75,198   7,823   159,710 
Fair Value  5,621   72,571   76,129   8,006   162,327 
Weighted Avg Yield  5.40%  3.90%  3.96%  4.41%  4.01%
Corporate bonds and other securities                    
Amortized Cost  -   801   4,699   1,823   7,323 
Fair Value  -   786   4,737   1,937   7,460 
Weighted Avg Yield  -   1.78%  1.77%  1.82%  1.78%
Mortgage Backed securities                    
Amortized Cost  -   13,435   9,569   -   23,004 
Fair Value  -   13,324   9,232   -   22,556 
Weighted Avg Yield  -   1.83%  2.22%  -   2.00%
Total                    
Amortized Cost  9,918   112,028   112,953   14,858   249,757 
Fair Value  9,933   113,073   113,512   15,204   251,722 
Weighted Avg Yield  2.00%  2.99%  3.36%  3.75%  3.16%

    

1 Year or Less

    

15 Years

    

510 Years

    

Over 10 Years

    

Total

 

U.S. Treasury Issue and other

 

  

 

  

 

  

 

  

 

  

U.S. Government agencies

 

  

 

  

 

  

 

  

 

  

Amortized Cost

$

23,545

$

12,791

$

4,046

$

8,998

$

49,380

Fair Value

 

23,544

 

12,839

 

4,029

 

8,940

 

49,352

Weighted Avg Yield

 

0.06

%  

 

1.10

%  

 

1.38

%  

 

0.89

%  

 

0.56

%

State, county and municipal(1)

 

  

 

  

 

  

 

  

 

  

Amortized Cost

 

8,226

 

50,008

 

61,749

 

19,805

 

139,788

Fair Value

 

8,300

 

52,936

 

65,721

 

21,020

 

147,977

Weighted Avg Yield

 

3.72

%  

 

3.49

%  

 

3.07

%  

 

3.00

%  

 

3.25

%

Corporate and other bonds

 

  

 

  

 

  

 

  

 

  

Amortized Cost

 

9,596

 

33,725

 

19,656

 

 

62,977

Fair Value

 

9,634

 

34,375

 

20,077

 

 

64,086

Weighted Avg Yield

 

3.95

%  

 

2.49

%  

 

2.20

%  

 

%  

 

2.62

%

Mortgage Backed securities

 

  

 

  

 

  

 

  

 

  

Amortized Cost

 

1,941

 

10,320

 

16,374

 

1,799

 

30,434

Fair Value

 

1,952

 

10,979

 

17,456

 

1,802

 

32,189

Weighted Avg Yield

 

1.46

%  

 

2.58

%  

 

2.39

%  

 

2.60

%  

 

2.41

%

Total

 

  

 

  

 

  

 

  

 

  

Amortized Cost

 

43,308

 

106,844

 

101,825

 

30,602

 

282,579

Fair Value

 

43,430

 

111,129

 

107,283

 

31,762

 

293,604

Weighted Avg Yield

 

1.68

%  

 

2.80

%  

 

2.72

%  

 

2.36

%  

 

2.55

%

(1)(1)Computed on a tax equivalent basis

39

The amortized cost and fair value of securities available for sale and held to maturity as of December 31 of the years presented are as follows (dollars in thousands):

December 31, 2020

Gross Unrealized

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

23,500

$

$

(1)

$

23,499

U.S. Government agencies

25,880

 

114

 

(141)

 

25,853

State, county and municipal

 

118,612

 

7,172

 

(64)

 

125,720

Mortgage backed securities

 

30,434

 

1,756

 

(1)

 

32,189

Asset backed securities

 

36,841

 

704

 

(57)

 

37,488

Corporate bonds

 

26,136

 

480

 

(18)

 

26,598

Total securities available for sale

$

261,403

$

10,226

$

(282)

$

271,347

Securities Held to Maturity

 

  

 

  

 

  

 

  

U.S. Government agencies

$

$

$

$

State, county and municipal

 

21,176

 

1,081

 

 

22,257

Total securities held to maturity

$

21,176

$

1,081

$

$

22,257

44

December 31, 2019

Gross Unrealized

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

 

  

 

  

 

  

 

  

U.S. Government agencies

$

22,104

$

51

$

(219)

$

21,936

State, county and municipal

 

95,467

3,167

(42)

98,592

Mortgage backed securities

 

48,045

808

(113)

48,740

Asset backed securities

 

11,637

49

(82)

11,604

Corporate bonds

 

6,016

84

(3)

6,097

Total securities available for sale

$

183,269

$

4,159

$

(459)

$

186,969

Securities Held to Maturity

 

  

  

  

  

U.S. Government agencies

$

10,000

$

$

(12)

$

9,988

State, county and municipal

 

25,733

913

(1)

26,645

Total securities held to maturity

$

35,733

$

913

$

(13)

$

36,633

December 31, 2018

Gross Unrealized

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

13,460

$

$

(336)

$

13,124

U.S. Government agencies

 

24,689

 

71

 

(151)

 

24,609

State, county and municipal

 

112,465

 

1,018

 

(941)

 

112,542

Mortgage backed securities

 

46,877

 

196

 

(656)

 

46,417

Asset backed securities

 

5,342

 

73

 

(4)

 

5,411

Corporate bonds

 

4,685

 

 

(62)

 

4,623

Total securities available for sale

$

207,518

$

1,358

$

(2,150)

$

206,726

Securities Held to Maturity

 

  

 

  

 

  

 

  

U.S. Government agencies

$

10,000

$

$

(210)

$

9,790

State, county and municipal

 

32,108

 

419

 

(64)

 

32,463

Total securities held to maturity

$

42,108

$

419

$

(274)

$

42,253

     December 31, 2017    
     Gross Unrealized    
  Amortized Cost  Gains  Losses  Fair Value 
Securities Available for Sale                
U.S. Treasury issue and other U.S. Gov’t agencies $40,473  $165  $(382) $40,256 
U.S. Gov’t  sponsored agencies  9,247   55   (24)  9,278 
State, county and municipal  124,032   2,324   (596)  125,760 
Corporate and other bonds  7,323   173   (36)  7,460 
Mortgage backed – U.S. Gov’t agencies  5,551   37   (146)  5,442 
Mortgage backed – U.S. Gov’t sponsored agencies  16,985   26   (373)  16,638 
  Total Securities Available for Sale $203,611  $2,780  $(1,557) $204,834 
                 
Securities Held to Maturity                
U.S. Treasury issue and other U.S. Gov’t agencies $10,000  $  $(155) $9,845 
State, county and municipal  35,678   922   (33)  36,567 
Mortgage backed – U.S. Gov’t agencies  468   8      476 
  Total Securities Held to Maturity $46,146  $930  $(188) $46,888 

     December 31, 2016    
     Gross Unrealized    
  Amortized Cost  Gains  Losses  Fair Value 
Securities Available for Sale                
U.S. Treasury issue and other U.S. Gov’t agencies $58,724  $15  $(763) $57,976 
U.S. Gov’t  sponsored agencies  3,452      (116)  3,336 
State, county and municipal  121,686   2,247   (1,160)  122,773 
Corporate and other bonds  15,936      (433)  15,503 
Mortgage backed – U.S. Gov’t agencies  3,614      (119)  3,495 
Mortgage backed – U.S. Gov’t sponsored agencies  13,330   21   (313)  13,038 
Total Securities Available for Sale $216,742  $2,283  $(2,904) $216,121 
                 
Securities Held to Maturity                
U.S. Treasury issue and other U.S. Gov’t agencies $10,000  $  $(154) $9,846 
State, county and municipal  35,847   568   (185)  36,230 
Mortgage backed – U.S. Gov’t agencies  761   21      782 
Total Securities Held to Maturity $46,608  $589  $(339) $46,858 

     December 31, 2015    
     Gross Unrealized    
  Amortized Cost  Gains  Losses  Fair Value 
Securities Available for Sale                
U.S. Treasury issue and other U.S. Gov’t agencies $50,590  $11  $(660) $49,941 
U.S. Gov’t  sponsored agencies  756      (14)  742 
State, county and municipal  138,965   3,400   (867)  141,498 
Corporate and other bonds  14,997   10   (711)  14,296 
Mortgage backed – U.S. Gov’t agencies  8,654   9   (167)  8,496 
Mortgage backed – U.S. Gov’t sponsored agencies  28,637   22   (362)  28,297 
Total Securities Available for Sale $242,599  $3,452  $(2,781) $243,270 
                 
Securities Held to Maturity                
State, county and municipal $35,456  $1,136  $(35) $36,557 
Mortgage backed – U.S. Gov’t agencies  1,022   32      1,054 
Mortgage backed – U.S. Gov’t sponsored agencies            
Total Securities Held to Maturity $36,478  $1,168  $(35) $37,611 

Deposits

The Company’s lending and investing activities are funded primarily through its deposits. Interest bearing deposits at December 31, 2020 were $1.100 billion, an increase of $114.9 million, or 11.7%, from December 31, 2019. Interest bearing checking accounts (formerly NOW accounts) of $239.6 million grew by $69.1 million, or 40.5%, during 2020, including growth of $38.5 million during the fourth quarter of 2020. Money market deposit accounts were $154.5 million at December 31, 2020 and grew $33.7 million, or 27.9%, during 2020. Savings accounts totaled $124.4 million at December 31, 2020 and grew $27.8 million, or 28.8%, during 2020. Strong growth in these non-maturity categories for the year has allowed the Bank to react to lower interest rates through proactive repricing in certificates of deposit, the highest costing deposit category.  As a result, there has been less growth in time deposits over $250,000, which grew by $8.9 million, or 7.5%, in 2020 and were $128.4 million at December 31, 2020. Time deposits less than or equal to $250,000 declined $24.6 million in 2020 and were $452.9 million at December 31, 2020.  Time deposit balances combined were 52.9% of interest bearing deposits at December 31, 2020 and 41.6% of all deposit balances. This is a decline from 60.6% of interest bearing balances and 51.3% of all deposit balances at December 31, 2019. The growth in interest bearing checking accounts, money market accounts and savings accounts, as well as in noninterest bearing deposits, was $250.9 million, or 44.3%, during 2020. A portion of this growth was associated with the $85.1 million in PPP loans originated during 2020 and stimulus checks issued under the CARES Act, as well as previously postponed business activity that resulted from the COVID-19 stay-at-home orders.

.

45

The following table summarizes the average balance and average rate paid on deposits by product and percent of total deposits for the periods ended December 31 of the years presented (dollars in thousands):

 2017 2016 2015 
    Average     Average     Average 
 Average Rate Average Rate Average Rate 
  Balance  Paid   Balance  Paid   Balance  Paid 

2020

2019

2018

 

% of

% of

% of

 

    

Amount

    

Deposits

    

Amount

    

Deposits

    

Amount

    

Deposits

 

Noninterest bearing

$

298,901

21.4

%  

$

178,584

15.3

%  

$

165,086

14.2

%

Interest bearing:

Interest checking

239,628

17.1

NOW $139,620   0.19% $127,723   0.18% $121,329   0.21%

 

170,532

 

14.7

165,946

 

14.2

MMDA  124,462   0.51   107,848   0.38   107,891   0.41 

 

154,503

 

11.0

 

120,841

 

10.4

 

126,933

 

10.9

Savings  91,687   0.26   86,499   0.27   83,614   0.31 

 

124,384

 

8.9

 

96,570

 

8.3

 

92,910

 

8.0

Time deposits less than $100,000  239,267   1.13   222,475   1.00   233,784   0.94 

 

452,885

 

32.4

 

263,619

 

22.7

 

264,678

 

22.7

Time deposits $100,000 and over  335,363   1.21   308,056   1.07   289,942   0.98 

 

128,400

 

9.2

 

333,302

 

28.6

 

349,422

 

30.0

Total deposits $930,399   0.85  $852,601   0.75  $836,560   0.72 

Total interest bearing deposits

1,099,800

78.6

984,864

84.7

999,889

85.8

$

1,398,701

 

100.0

%  

$

1,163,448

 

100.0

%  

$

1,164,975

 

100.0

%

40

The Company derives a significant amount of its deposits through time deposits, and certificates of deposit specifically. The following table summarizes the contractual maturity of time deposits $100,000 or more, as of December 31, 20172020 (dollars in thousands):

Within 3 months  $55,506 

    

$

98,259

3-6 months   59,434 
6-12 months   102,181 

3‑6 months

 

50,958

6‑12 months

 

127,592

over 12 months   95,136 

 

63,709

Total  $       312,257 

$

340,518

Borrowings

The Company uses borrowings in conjunction with deposits to fund lending and investing activities. Borrowings include overnight borrowings from correspondent banks (federal funds purchased) and funding from the Federal Home Loan Bank (FHLB). The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings.advances. The following information is provided for borrowings balances, rates, and maturities as of December 31 of the years presented (dollars in thousands):

    FHLB Borrowings 
 Federal Funds
Purchased
 Short-term
Advances
 Long-term notes
payable
 Total 
As of December 31, 2017                

FHLB Borrowings

Federal Funds

Short-term

Long-term notes

    

Purchased

    

Advances

    

payable

    

Total

As of December 31, 2020

Amount outstanding at year end $4,849  $70,500  $30,929  $101,429 

$

$

10,000

$

47,833

$

57,833

Maximum month-end outstanding balance  14,878   101,429   31,296     

 

7,254

20,000

 

48,500

Average outstanding balance during the year  1,556   53,884   27,083     

 

1,260

17,554

 

47,995

Average interest rate during the year  1.58%  1.34%  1.37%    

 

1.55

%  

0.70

%  

 

1.11

%  

Average interest rate at year end  1.85%  1.45%  1.62%    

 

%  

0.24

%  

 

1.04

%  

                
As of December 31, 2016                
Amount outstanding at year end $4,714  $55,000  $26,887  $81,887 
Maximum month-end outstanding balance  12,301   121,466   37,082     
Average outstanding balance during the year  1,776   73,806   27,524     
Average interest rate during the year  0.88%  0.96%  1.26%    
Average interest rate at year end  1.10%  0.62%  1.35%    

46

 

FHLB Borrowings

 

Federal Funds

Short-term

 

Long-term notes

    

Purchased

    

Advances

    

payable

    

Total

As of December 31, 2019

Amount outstanding at year end

$

24,437

$

20,000

$

48,500

$

68,500

Maximum month-end outstanding balance

 

24,437

50,000

 

48,667

Average outstanding balance during the year

 

4,422

35,123

 

26,426

Average interest rate during the year

 

2.56

%  

2.45

%  

 

1.76

%  

Average interest rate at year end

 

2.26

%  

1.74

%  

 

1.45

%  

 

FHLB Borrowings

 

Federal Funds

Short-term

 

Long-term notes

    

Purchased

    

Advances

    

payable

    

Total

As of December 31, 2018

Amount outstanding at year end

$

19,440

$

40,000

$

19,447

$

59,447

Maximum month-end outstanding balance

 

20,000

75,500

 

30,929

Average outstanding balance during the year

 

2,856

62,138

 

24,704

Average interest rate during the year

 

2.28

%  

1.97

%  

 

1.76

%  

Average interest rate at year end

 

2.94

%  

2.53

%  

 

1.87

%  

Liquidity

Liquidity represents the Company’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold and certain investment securities. 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.

The Company’s results of operations are significantly affected by its ability to manage effectively the interest rate sensitivity and maturity of its interest earning assets and interest bearing liabilities. A summary of the Company’s liquid assets at December 31, 20172020 and 20162019 was as follows (dollars in thousands):

 December 31, 2017 December 31, 2016 

    

December 31, 2020

    

December 31, 2019

 

Cash and due from banks $14,642  $13,828 

$

17,845

$

16,976

Interest bearing bank deposits  7,316   7,244 

 

45,118

 

11,708

Federal funds sold      

222

Available for sale securities, at fair value, unpledged  168,221   170,898 

 

235,784

 

157,225

Total liquid assets $190,179  $191,970 

$

298,969

$

185,909

        

Deposits and other liabilities $1,212,187  $1,135,280 

$

1,475,155

$

1,275,361

Ratio of liquid assets to deposits and other liabilities  15.69%  16.91%

 

20.27

%  

 

14.58

%

Capital Resources

The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends and economic conditions. The Company seeks to maintain a strong capital base to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Company. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s balance sheet. Moreover, capital levels are regulated and compared with industry standards.

Effective January 22, 2020, the Company’s Board of Directors authorized a share repurchase program to purchase up to 1,000,000 shares of the Company’s common stock. The Company purchased 130,800 shares under the program during the first two quarters of 2020 before suspending activity under it effective April 2, 2020 due to the uncertainties surrounding COVID-19.  On October 26, 2020, the Company authorized the recommencement of the program for the

47

repurchase of up to 200,000 shares of its common stock through January 2021.  The Company purchased an additional 178,900 shares as of December 31, 2020. Shares of common stock may be purchased under the program periodically in privately negotiated transactions or in open market transactions at prevailing market prices, and pursuant to a trading plan in accordance with applicable securities laws. The Company continues to place a heightened emphasis on capital and liquidity to safeguard shareholders, its balance sheet and the needs of its customers.

Management believes that the Company possesses strong capital and liquidity. The actions taken with regard to capital and liquidity as a result of the pandemic were put into effect to safeguard these areas of strength.

In August 2018, the Federal Reserve Board (Board) issued an interim final rule that raises the asset size threshold for determining applicability of the Board’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (Policy Statement) from $1 billion to $3 billion of total consolidated assets and makes related and conforming revisions to the Board’s regulatory capital rule and requirements for bank holding companies. As such, the Company is no longer required to report nor manage regulatory capital ratios on a consolidated basis. The Company is only required to report these ratios for the Bank. Management seeks to maintain a capital level exceeding regulatory statutes of “well capitalized” that is consistent to its overall growth plans, yet allows the Company to provide the optimal return to its shareholders.

41

Under the final rule on Enhanced Regulatory Capital Standards, commonly referred to as Basel III and which became effective January 1, 2015, the federal banking regulators have defined four tests for assessing the capital strength and adequacy of banks, based on threefour definitions of capital. “Common equity tier 1 capital” is defined as common equity, retained earnings, and accumulated other comprehensive income (AOCI), less certain intangibles. “Tier 1 capital” is defined as common equity tier 1 capital plus qualifying perpetual preferred stock, tier 1 minority interests, and grandfathered trust preferred securities. “Tier 2 capital” is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock, non-tier 1 minority interests and a limited amount of the allowance for loan losses. “Total capital” is defined as tier 1 capital plus tier 2 capital. Four risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets, and the ratios are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a risk-weighting and the resulting total is risk-weighted assets. “Common equity tier 1 capital ratio” is common equity tier 1 capital divided by risk-weighted assets. “Tier 1 risk-based capital ratio” is tier 1 capital divided by risk-weighted assets. “Total risk-based capital ratio” is total capital divided by risk-weighted assets. “Leverage ratio” is tier 1 capital divided by total average assets.

Under the Basel III regulatory capital framework, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the CompanyBank does not maintain the full amount of the buffer. The capital conservation buffer will be phased in between January 1, 2016 and January 1, 2019 as follows: 2016 - 0.625%, 2017 – 1.25%, 2018 – 1.875% and 2019 – 2.5%. The CompanyBank had a capital conservation buffer of 4.70%5.61% and 5.16%5.86% at December 31, 20172020 and 2016,2019, respectively, well above the required buffer of 1.25%2.5% for each of 2020 and 0.625% for 2017 and 2016, respectively.

2019.

The following table shows the Company’sBank’s capital ratios at the dates indicated (dollars in thousands):

  December 31, 2017  December 31, 2016 
  Amount  Ratio  Amount  Ratio 
             
Total Capital to risk weighted assets                  
Company   $136,910   12.70% $128,877   13.16%
Bank    134,972   12.52%  127,606   13.03%
Tier 1 Capital to risk weighted assets                  
Company    128,084   11.88%  119,527   12.20%
Bank    126,146   11.71%  118,256   12.07%
Common Equity Tier 1 Capital to risk weighted assets                
Company  123,960   11.50%  115,403   11.78%
Bank  126,146   11.71%  118,256   12.07%
Tier 1 Capital to adjusted average total assets                  
Company    128,084   9.74%  119,527   9.60%
Bank    126,146   9.59%  118,256   9.50%

December 31, 2020

December 31, 2019

 

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Total Capital to risk weighted assets

$

178,363

 

13.61

%  

$

164,783

 

13.86

%

Tier 1 Capital to risk weighted assets

 

166,210

 

12.68

%  

 

156,541

 

13.16

%

Common Equity Tier 1 Capital to risk weighted assets

 

166,210

 

12.68

%  

 

156,541

 

13.16

%

Tier 1 Capital to adjusted average total assets

 

166,210

 

10.14

%  

 

156,541

 

11.03

%

All capital ratios exceed regulatory minimums for well capitalized institutions as referenced in Note 2119 to the Consolidated Financial Statements.

On December 12, 2003, BOE Statutory Trust I, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities. On December 12, 2003, $4.124 million of trust preferred securities were issued through a direct placement. The securities have a LIBOR-indexed floating rate of interest. The average interest rate

48

at December 31, 2017, 20162020 and 20152019, was 4.20%, 3.68%3.98% and 3.28%5.45%, respectively. The securities have a mandatory redemption date of December 12, 2033 and are subject to varying call provisions that began December 12, 2008. The principal asset of the Trust is $4.124 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital securities.

42

Off-Balance Sheet Arrangements

A summary of the contract amount of the Company’s exposure to off-balance sheet risk as of December 31, 20172020 and 2016,2019, is as follows (dollars in thousands):

 December 31, 2017  December 31, 2016 

    

December 31, 2020

    

December 31, 2019

Commitments with off-balance sheet risk:        

 

  

 

  

Commitments to extend credit $163,686  $134,517 

$

245,858

$

210,086

Standby letters of credit  6,532   7,151 

 

15,193

 

15,155

Total commitments with off-balance sheet risks $170,218  $141,668 

$

261,051

$

225,241

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may be drawn upon only to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.clients. The Company holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

On November 7, 2014, theThe Company entered into an interestdesignates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate swapborrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs.  The Company had cash flow hedges with a total notional amountamounts of $30 million.$20 million and $10 million at December 31, 2020 and 2019, respectively. The Company designated the swap asrecorded a cash flow hedge intended to protect against the variabilityfair value liability of $631,000 and $44,000 in the expected future cash flows on the designated variable rate borrowings.  The swap hedges the interest rate risk, wherein the Company will receive an interest rate based on the three month LIBOR from the counterparty and pays an interest rate of 1.69% to the same counterparty calculated on the notional amount for a term of five years.  The Company intends to sequentially issue a series of three month fixed rate debt as part of a planned roll-over of short term debt for five years. The forecasted funding will be provided through one of the following wholesale funding sources: a new FHLB advance, a new repurchase agreement, or a pool of brokered CDs, based on whichever market offers the most advantageous pricingother liabilities at the time that pricing is first initially determined for the effective date of the swap and each reset period thereafter. Each quarter when the Company rolls over the three month debt, it will decide at that time which funding source to use for that quarterly period.

At December 31, 2017, the fair value of the Company’s cash flow hedge was an unrealized gain of $177,000, which was recorded in other assets.2020 and 2019, respectively. The Company’s cash flow hedge ishedges are deemed to be highly effective. Therefore, the net gain was recorded as a component of other comprehensive income recorded in the Company’s Consolidated Statementsconsolidated statements of Comprehensive Income (Loss).comprehensive income.

Contractual Obligations

A summary of the Company’s contractual obligations at December 31, 2017 is as follows (dollars in thousands):

  Total  Less Than 1 Year  1-3 Years  4-5 Years  More Than 5
Years
 
Time deposits $548,356  $376,168  $152,240  $19,948  $ 
Trust preferred debt  4,124            4,124 
Federal Home Loan Bank advances  101,429   80,500   11,096   9,833    
Operating leases  12,205   1,349   2,626   1,464   6,766 
Total contractual obligations $666,114  $458,017  $165,962  $31,245  $10,890 

Financial Ratios

Financial ratios give investors a way to compare companies within industries to analyze financial performance. Return on average assets is net income as a percentage of average total assets. It is a key profitability ratio that indicates how effectively a bank has used its total resources. Return on average equity is net income as a percentage of average stockholders’ equity. It provides a measure of how productively a Company’s equity has been employed. Dividend payout ratio is the percentage of net income paid to common shareholders as cash dividends during a given period. The Company did not pay dividends to common shareholders during the years ended December 31, 2017, 2016 and 2015. It is computed by dividing dividends per share by net income per common share. The Company paid dividends to shareholders of $4.7 million and $2.9 million during the years ended December 31, 2020 and 2019, respectively.  The Company did not pay dividends to shareholders during the years ended December 31, 2018. The Company utilizes leverage within guidelines prescribed by federal banking regulators as described in the “Capital Requirements” section. Leverage is average shareholders’ equity divided by average total assets.

43

49

The following table shows the Company’s financial ratios at the dates indicated:

 Year Ended December 31 
 2017 2016 2015 

Year Ended December 31

 

    

2020

    

2019

    

2018

 

Return on average assets  0.56%  0.83%  (0.22)%

 

0.99

%  

1.11

%  

1.01

%

Return on average equity  5.91%  8.92%  (2.31)%

 

9.58

%  

10.63

%  

10.59

%

Dividend payout

28.57

%  

18.31

Leverage  9.51%  9.29%  9.40%

 

10.35

%  

10.46

%  

9.55

%

ITEM 7A.

Non-GAAP MeasuresQU

The Company accounts for business combinations under FASB ASC 805,Business Combinations, using the acquisition method of accounting. The original merger between the Company, TFC and BOE as well as the SFSB transaction were business combinations accounted for using the purchase method of accounting. The TCB transaction was accounted for as an asset purchase. At December 31, 2017, 2016 and 2015, core deposit intangible assets totaled $0, $898,000 and $2.8 million, respectively.

In reporting the results of 2017, 2016 and 2015 in Item 6 above, the Company has provided supplemental performance measures on an operating or tangible basis. Such measures exclude amortization expense related to intangible assets, such as core deposit intangibles. The Company believes these measures are useful to investors as they exclude non-operating adjustments resulting from acquisition activity and allow investors to see the combined economic results of the organization. Non-GAAP operating earnings (loss) per share were $0.35 for the year ended December 31, 2017 compared with $0.50 in 2016 and $(0.06) in 2015. Non-GAAP return on average tangible common equity and assets for the year ended December 31, 2017 was 6.40% and 0.61%, respectively, compared with 10.23% and 0.94%, respectively, in 2016 and (1.19)% and (0.11)%, respectively, in 2015.

These measures are a supplement to GAAP used to prepare the Company’s financial statements and should not be viewed as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The following table reconciles these non-GAAP measures from their respective GAAP basis measures for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):

  2017  2016  2015 
Net (loss) income $7,203  $9,922  $(2,497)
Plus: core deposit intangible amortization, net of tax  585   1,259   1,259 
Non-GAAP operating earnings $7,788  $11,181  $(1,238)
             
Total shareholders' equity $124,003  $114,536  $104,487 
Preferred stock (net)         
Core deposit intangible (net)     898   2,805 
Common tangible book value $124,003  $113,638  $101,682 
Shares outstanding  22,073   21,960   21,867 
Common tangible book value per share $5.62  $5.17  $4.65 
             
Average assets $1,281,207  $1,197,062  $1,149,796 
Less: average core deposit intangibles  248   1,893   3,797 
Average tangible assets $1,280,959  $1,195,169  $1,145,999 
             
Average equity $121,901  $111,215  $108,110 
Less: average core deposit intangibles  248   1,893   3,797 
Less: average preferred equity         
Average tangible common equity $121,653  $109,322  $104,313 
             
Weighted average shares outstanding, diluted  22,512   22,161   21,827 
Non-GAAP earnings per share, diluted $0.35  $0.50  $(0.06)
Average tangible common equity/average tangible assets  9.50%  9.15%  9.10%
Non-GAAP return on average tangible assets  0.61%  0.94%  (0.11)%
Non-GAAP return on average tangible common equity  6.40%  10.23%  (1.19)%

44

ITEM 7A.ANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of interest rate risk is an important component of the Company’s asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee (ALCO) of the Bank. In this capacity, ALCO develops guidelines and strategies that govern the Company’s asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, affecting net interest income, the primary component of the Company’s earnings. ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While ALCO routinely monitors simulated net interest income sensitivity over various periods, it also employs additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. The simulation model is prepared and results are analyzed at least quarterly. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 400 basis point upward shift and a 400 basis point downward shift in interest rates. The downward shift of 300 or 400 basis points is included in the analysis, although less meaningful in ourthe current rate environment, because all results are monitored regardless of likelihood. A parallel shift in rates over a 12-month period is assumed.

The following table represents the change to net interest income given interest rate shocks up and down 100, 200, 300 and 400 basis points at December 31, 2017, 20162020, 2019 and 20152018 (dollars in thousands):

 2017 2016 2015 
 % $ % $ % $ 

2020

2019

2018

    

%

    

$

    

%

    

$

    

%

    

$

Change in Yield curve                        

+400 bp  4.7   2,132   4.6   1,931   (7.7)  (3,100)

 

11.7

6,175

4.4

2,211

3.8

1,807

+300 bp  3.6   1,637   3.3   1,369   (6.2)  (2,479)

 

8.5

4,459

3.5

1,775

3.1

1,441

+200 bp  2.6   1,185   2.2   897   (4.2)  (1,677)

 

5.0

2,657

2.6

1,286

2.3

1,087

+100 bp  1.4   632   0.9   390   (2.3)  (924)

 

2.0

1,070

1.2

605

1.3

623

most likely                  

 

-100 bp  (1.2)  (554)  0.1   45   2.6   1,054 
-200 bp  (3.9)  (1,782)  (1.4)  (585)  1.1   437 
-300 bp  (4.5)  (2,051)  (1.5)  (644)  0.9   376 
-400 bp  (4.6)  (2,055)  (1.6)  (648)  0.9   374 

‑100 bp

 

(0.3)

(147)

(0.8)

(410)

(1.6)

(758)

‑200 bp

 

(0.3)

(158)

(1.9)

(975)

(3.2)

(1,515)

‑300 bp

 

(0.3)

(161)

(2.0)

(995)

(5.1)

(2,403)

‑400 bp

 

(0.3)

(161)

(2.0)

(995)

(5.2)

(2,430)

At December 31, 2017,2020, the Company’s interest rate risk model indicated that, in a rising rate environment of 400 basis points over a 12 month period, net interest income could increase by 4.7%11.7%. For the same time period, the interest rate risk model indicated that in a declining rate environment of 400 basis points, net interest income could decrease by 4.6%

50

0.3%. While these percentages are subjective based upon assumptions used within the model, management believes the balance sheet is appropriately balanced with acceptable risk to changes in interest rates.

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest rate levels such as yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances about the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

45

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to factors such as prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to, or in anticipation of, changes in interest rates.rates

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

51

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors and Shareholders

Community Bankers Trust Corporation

Richmond, Virginia

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Community Bankers Trust Corporation and its Subsidiary (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of income, (loss), comprehensive income, (loss), 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, referred to as the “consolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Community Bankers Trust Corporation atthe 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 also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), Community Bankers Trust Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 15, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Community Bankers Trust Corporation’sCompany’s management. Our responsibility is to express an opinion on Community Bankers Trust Corporation’s consolidatedthe Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the CorporationCompany in accordance with the 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 auditaudits to obtain reasonable assurance about whether the consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

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 separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – Loans Collectively Evaluated for Impairment – Quantitative & Qualitative Allocations

Description of the Matter

As described in Note 1 (Summary of Significant Accounting Policies) and Note 3 (Loans and Related Allowance for Loan Losses) to the consolidated financial statements, the Company maintains an allowance for loan losses that it believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience.  The Company’s allowance for loan losses has three basic components: specific, general and unallocated. At December 31, 2020, the general allowance represented $11,175,000 of the total allowance for loan losses of $12,340,000 and the unallocated represented $0. For loans that are not specifically identified for impairment, the general allowance uses historical loss experience along with various quantitative and qualitative allocations to develop a general reserve for each

53

loan segment.  The adjustments to the historical loss experience are established by applying quantitative allocations based on risk grade migration trends, severe delinquency trends, concentration trends and qualitative allocations for internal and external environmental factors. Quantitative and qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio. Management evaluates qualitative factors, primarily considering loan review results; policy exceptions; collateral values; management changes; and economic factors.    

Management exercised significant judgment when assessing the quantitative and qualitative allocations in estimating the allowance for loan losses. We identified the assessment of the quantitative and qualitative allocations as a critical audit matter as auditing these allocations 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:

/s/ BDO USA, LLP
Substantively testing management’s process, including evaluating their judgments and assumptions for developing the quantitative and qualitative allocations, which included:
We have servedEvaluating the completeness and accuracy of data inputs used as Community Bankers Trust Corporation's auditor since 2015.a basis for the quantitative and qualitative allocations.
Richmond, VirginiaEvaluating the reasonableness of management’s judgments related to the determination of quantitative and qualitative allocations.
March 15, 2018Evaluating the quantitative and qualitative allocations for directional consistency and for reasonableness.
Testing the mathematical accuracy of the allowance calculation, including the application of the quantitative and qualitative allocations.

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

47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have served as the Company's auditor since 2018.

Board of Directors and Shareholders

Community Bankers Trust Corporation

Richmond, Virginia

March 15, 2021

Opinion on Internal Control over Financial Reporting

 

We have audited Community Bankers Trust Corporation’s internal control over financial reporting as

54

Table of December 31, 2017, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, Community Bankers Trust Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.Contents

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

Basis for Opinion

Community Bankers Trust Corporation’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, included in the accompanying “Item 9A, Management’s Report on Internal Controls over Financial Reporting”. Our responsibility is to express an opinion on Community Bankers Trust Corporation’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 Community Bankers Trust Corporation 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 of internal control over financial reporting 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/ BDO USA, LLP
Richmond, Virginia
March 15, 2018

48

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 20172020 AND DECEMBER 31, 20162019

(dollars in thousands)thousands, except share data)

    

December 31, 2020

    

December 31, 2019

ASSETS

Cash and due from banks

$

17,845

$

16,976

Interest bearing bank deposits

 

45,118

 

11,708

Federal funds sold

222

Total cash and cash equivalents

 

63,185

 

28,684

Securities available for sale, at fair value

 

271,347

 

186,969

Securities held to maturity, at cost (fair value of $22,257 and $36,633, respectively)

 

21,176

 

35,733

Equity securities, restricted, at cost

 

8,436

 

8,855

Total securities

 

300,959

 

231,557

Loans held for sale

 

 

501

Loans

 

1,182,362

 

1,058,323

Purchased credit impaired (PCI) loans

 

24,040

 

32,528

Total loans

 

1,206,402

 

1,090,851

Allowance for loan losses (loans of $12,340 and $8,429, respectively; PCI loans of $156 and $156, respectively)

 

(12,496)

 

(8,585)

Net loans

 

1,193,906

 

1,082,266

Bank premises and equipment, net

 

27,897

 

29,472

Bank premises and equipment held for sale

 

1,507

 

1,589

Right-of-use lease assets

5,530

6,472

Other real estate owned

 

4,361

 

4,527

Bank owned life insurance

 

30,029

 

29,340

Other assets

 

17,435

 

16,432

Total assets

$

1,644,809

$

1,430,840

LIABILITIES

 

  

 

  

Deposits:

 

  

 

  

Noninterest bearing

$

298,901

$

178,584

Interest bearing

 

1,099,800

 

984,864

Total deposits

 

1,398,701

 

1,163,448

Federal funds purchased

 

-

 

24,437

Federal Home Loan Bank borrowings

 

57,833

 

68,500

Trust preferred capital notes

 

4,124

 

4,124

Lease liabilities

5,787

6,737

Other liabilities

 

8,710

 

8,115

Total liabilities

 

1,475,155

 

1,275,361

SHAREHOLDERS’ EQUITY

 

  

 

  

Common stock (200,000,000 shares authorized, $0.01 par value; 22,200,929 and 22,422,621 shares issued and outstanding, respectively)

 

222

 

224

Additional paid in capital

 

149,822

 

150,728

Retained earnings

 

13,419

 

2,562

Accumulated other comprehensive income

 

6,191

 

1,965

Total shareholders’ equity

 

169,654

 

155,479

Total liabilities and shareholders’ equity

$

1,644,809

$

1,430,840

  December 31, 2017  December 31, 2016 
ASSETS        
Cash and due from banks $14,642  $13,828 
Interest bearing bank deposits  7,316   7,244 
Total cash and cash equivalents  21,958   21,072 
         
Securities available for sale, at fair value  204,834   216,121 
Securities held to maturity, at cost (fair value of $46,888 and $46,858, respectively)  46,146   46,608 
Equity securities, restricted, at cost  9,295   8,290 
Total securities  260,275   271,019 
         
Loans  942,018   836,299 
Purchased credit impaired (PCI) loans  44,333   51,964 
 Total  loans  986,351   888,263 
Allowance for loan losses (loans of $8,969 and $9,493, respectively; PCI loans of $200 and $200, respectively)  (9,169)  (9,693)
  Net loans  977,182   878,570 
         
Bank premises and equipment, net  30,198   28,357 
Other real estate owned  2,791   4,427 
Bank owned life insurance  28,099   27,339 
Core deposit intangibles, net     898 
Other assets  15,687   18,134 
Total assets $1,336,190  $1,249,816 
         
LIABILITIES        
Deposits:        
Noninterest bearing $153,028  $128,887 
Interest bearing  942,736   908,407 
Total deposits  1,095,764   1,037,294 
         
Federal funds purchased  4,849   4,714 
Federal Home Loan Bank borrowings  101,429   81,887 
Long-term debt     1,670 
Trust preferred capital notes  4,124   4,124 
Other liabilities  6,021   5,591 
Total liabilities  1,212,187   1,135,280 
         
SHAREHOLDERS’ EQUITY        
Common stock (200,000,000 shares authorized, $0.01 par value; 22,072,523 and 21,959,648 shares issued and outstanding, respectively)  221   220 
Additional paid in capital  147,671   146,667 
Retained deficit  (23,932)  (31,128)
Accumulated other comprehensive income (loss)  43   (1,223)
Total shareholders’ equity  124,003   114,536 
Total liabilities and shareholders’ equity $1,336,190  $1,249,816 

See accompanying notes to consolidated financial statements

49

55

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2017, 20162020 AND 20152019

(dollars and shares in thousands, except per share data)

2020

    

2019

Interest and dividend income

  

 

  

Interest and fees on loans

$

52,480

$

51,551

Interest and fees on PCI loans

 

4,053

 

6,042

Interest on federal funds sold

 

-

 

14

Interest on deposits in other banks

 

338

 

391

Interest and dividends on securities

 

  

 

  

Taxable

 

5,373

 

5,870

Nontaxable

 

1,373

 

1,581

Total interest and dividend income

 

63,617

 

65,449

Interest expense

 

  

 

  

Interest on deposits

 

11,366

 

14,036

Interest on borrowed funds

 

941

 

1,456

Total interest expense

 

12,307

 

15,492

Net interest income

 

51,310

 

49,957

Provision for loan losses

 

4,200

 

325

Net interest income after provision for loan losses

 

47,110

 

49,632

Noninterest income

 

  

 

  

Service charges and fees

 

2,594

 

2,831

Gain on securities transactions, net

 

284

 

235

Gain on sale of other loans

 

11

 

14

Income on bank owned life insurance

 

689

 

724

Mortgage loan income

 

1,116

 

486

Other

 

1,254

 

1,064

Total noninterest income

 

5,948

 

5,354

Noninterest expense

 

  

 

  

Salaries and employee benefits

 

20,138

 

21,423

Occupancy expenses

 

3,178

 

3,453

Equipment expenses

 

1,367

 

1,484

FDIC assessment

 

639

 

296

Data processing fees

 

2,453

 

2,329

Other real estate expense, net

 

152

 

718

Other operating expenses

 

5,805

 

6,026

Total noninterest expense

 

33,732

 

35,729

Income before income taxes

 

19,326

 

19,257

Income tax expense

 

3,778

 

3,552

Net income

$

15,548

$

15,705

Net income per share — basic

$

0.70

$

0.71

Net income per share — diluted

$

0.69

$

0.70

Weighted average number of shares outstanding

 

  

 

  

Basic

 

22,331

 

22,264

Diluted

 

22,539

 

22,531

  2017  2016  2015 
Interest and dividend income            
Interest and fees on loans $40,301  $35,998  $31,990 
Interest and fees on PCI loans  5,733   6,230   7,875 
Interest on federal funds sold  1      2 
Interest on deposits in other banks  196   122   59 
Interest and dividends on securities            
Taxable  4,682   4,696   5,469 
Nontaxable  2,402   2,249   2,157 
Total interest and dividend income  53,315   49,295   47,552 
Interest expense            
Interest on deposits  7,897   6,382   5,983 
Interest on borrowed funds  1,302   1,438   1,514 
Total interest expense  9,199   7,820   7,497 
Net interest income  44,116   41,475   40,055 
Provision for loan losses  550   166    
Net interest income after provision for loan losses  43,566   41,309   40,055 
Noninterest income            
Service charges on deposit accounts  2,681   2,420   2,269 
Gain on securities transactions, net  210   634   472 
Gain on sale of loans, net        69 
Income on bank owned life insurance  939   870   751 
Mortgage loan income  242   606   784 
Other  625   649   736 
Total noninterest income  4,697   5,179   5,081 
Noninterest expense            
Salaries and employee benefits  19,604   18,412   18,141 
Occupancy expenses  3,130   2,737   2,592 
Equipment expenses  1,144   999   1,035 
FDIC assessment  726   823   938 
Data processing fees  1,923   1,674   1,709 
FDIC indemnification asset amortization        16,195 
Amortization of intangibles  898   1,907   1,908 
Other real estate expense, net  162   175   1,275 
Other operating expenses  6,570   6,023   6,467 
Total noninterest expense  34,157   32,750   50,260 
Income (loss) before income taxes  14,106   13,738   (5,124)
Income tax expense (benefit)  6,903   3,816   (2,627)
Net income (loss) $7,203  $9,922  $(2,497)
Net income (loss) per share — basic $0.33  $0.45  $(0.11)
Net income (loss) per share — diluted $0.32  $0.45  $(0.11)
Weighted average number of shares outstanding            
Basic  22,014   21,914   21,827 
Diluted  22,512   22,161   21,827 

See accompanying notes to consolidated financial statements

50

56

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2017, 20162020 AND 20152019

(dollars in thousands)

2020

    

2019

Net income

$

15,548

$

15,705

Other comprehensive income:

Unrealized gain on investment securities:

Change in unrealized gain on investment securities

 

6,528

 

4,727

Tax related to unrealized gain on investment securities

 

(1,435)

 

(1,039)

Reclassification adjustment for gain on securities sold

 

(284)

 

(235)

Tax related to realized gain on securities sold

 

62

 

52

Defined benefit pension plan:

Change in prior service cost

 

5

 

5

Change in unrealized loss on plan assets

 

(243)

 

(41)

Tax related to defined benefit pension plan

 

51

 

7

Cash flow hedge:

Change in unrealized loss on cash flow hedge

 

(587)

 

(297)

Tax related to cash flow hedge

 

129

 

65

Total other comprehensive income

 

4,226

 

3,244

Total comprehensive income

$

19,774

$

18,949

  2017  2016  2015 
Net income (loss) $7,203  $9,922  $(2,497)
             
Other comprehensive income (loss):            
Unrealized gain on investment securities:            
Change in unrealized (loss) gain in investment securities  2,054   (658)  (1,056)
Tax related to unrealized  loss (gain) in investment securities  (712)  224   359 
Reclassification adjustment for gain in securities sold  (210)  (634)  (472)
Tax related to realized gain in securities sold  73   215   160 
Defined benefit pension plan:            
Change in prior service cost  5   4   5 
Change in unrealized gain (loss) in plan assets  (185)  199   (142)
Tax related to defined benefit pension plan  74   (69)  47 
Cash flow hedge:            
Change in unrealized gain (loss) in cash flow hedge  246   129   (234)
Tax related to cash flow hedge  (86)  (44)  80 
Total other comprehensive income (loss)  1,259   (634)  (1,253)
Total comprehensive income (loss) $8,462  $9,288  $(3,750)

See accompanying notes to consolidated financial statements

51

57

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2017, 20162020 AND 20152019

(dollars and shares in thousands)

Accumulated

Additional

Retained

Other

Common Stock

Paid in

Earnings

Comprehensive

    

Shares

    

Amount

    

Capital

    

(Deficit)

    

Income (Loss)

    

Total

Balance December 31, 2018

22,132

$

221

$

148,763

$

(10,244)

$

(1,279)

$

137,461

Issuance of common stock

27

 

 

215

 

 

 

215

Exercise and issuance of employee stock options

264

 

3

 

1,750

 

 

 

1,753

Net income

 

 

 

15,705

 

 

15,705

Dividends paid on common stock ($0.13 per share)

 

 

 

(2,899)

 

 

(2,899)

Other comprehensive income

 

 

 

 

3,244

 

3,244

Balance December 31, 2019

22,423

$

224

$

150,728

$

2,562

$

1,965

$

155,479

Issuance of common stock

26

 

 

208

 

 

 

208

Exercise and issuance of employee stock options

62

 

1

 

998

 

 

 

999

Stock purchased under stock repurchase program

(310)

(3)

(2,112)

(2,115)

Net income

 

 

 

15,548

 

 

15,548

Dividends paid on common stock ($0.20 per share)

 

 

 

(4,691)

 

 

(4,691)

Other comprehensive income

 

 

 

 

4,226

 

4,226

Balance December 31, 2020

22,201

$

222

$

149,822

$

13,419

$

6,191

$

169,654

              Accumulated    
        Additional     Other    
  Common Stock  Paid in  Retained  Comprehensive    
  Shares  Amount  Capital  Deficit  Income (Loss)  Total 
                   
Balance December 31, 2014  21,792  $218  $145,321  $(38,553) $664  $107,650 
Issuance of common stock  42   1   276         277 
Exercise and issuance of employee stock options  33      310         310 
Net loss           (2,497)     (2,497)
Other comprehensive loss              (1,253)  (1,253)
Balance December 31, 2015  21,867   219   145,907   (41,050)  (589)  104,487 
Issuance of common stock  29      155        ��155 
Exercise and issuance of employee stock options  64   1   605         606 
Net income           9,922      9,922 
Other comprehensive loss              (634)  (634)
Balance December 31, 2016  21,960   220   146,667   (31,128)  (1,223)  114,536 
Issuance of common stock  19      159         159 
Exercise and issuance of employee stock options  94   1   845         846 
Net income           7,203      7,203 
Impact of the Tax Cut and Jobs Act           (7)  7    
Other comprehensive income              1,259   1,259 
Balance December 31, 2017  22,073  $221  $147,671  $(23,932) $43  $124,003 

See accompanying notes to consolidated financial statements

52

58

COMMUNITY BANKERS TRUST CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017, 20162020 AND 20152019

(Dollarsdollars in thousands)

2020

    

2019

Operating activities:

Net income

$

15,548

$

15,705

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

 

1,815

 

2,039

Right-of-use lease asset amortization

942

936

Stock-based compensation expense

 

1,134

 

1,075

Tax benefit of exercised stock options

 

(63)

 

(260)

Amortization of purchased loan premium

 

330

 

311

Deferred tax (benefit) expense

 

(834)

 

420

Provision for loan losses

 

4,200

 

325

Amortization of security premiums and accretion of discounts, net

 

687

 

1,170

Net gain on sale of securities

 

(284)

 

(235)

Net loss (gain) on sale and valuation of other real estate owned

 

32

 

(56)

Net loss on disposal of premises and equipment

82

7

Net gain on sale of loans

 

(11)

 

(14)

Net gain on sale of mortgages held for sale

(1,116)

(486)

Originations of mortgages held for sale

 

(26,126)

 

(21,061)

Proceeds from sales of mortgages held for sale

 

27,743

 

21,192

Increase in bank owned life insurance investment

(689)

(724)

Changes in assets and liabilities:

 

(Increase) decrease in other assets

 

(953)

 

686

Decrease in accrued expenses and other liabilities

 

(879)

(16)

Net cash provided by operating activities

 

21,558

 

21,014

Investing activities:

 

  

 

  

Proceeds from sales/calls/maturities/paydowns of available for sale securities

 

92,825

 

94,371

Proceeds from calls/maturities/paydowns of held to maturity securities

 

14,475

 

6,290

Proceeds from sales of restricted equity securities

 

2,139

 

1,511

Purchase of available for sale securities

 

(171,281)

 

(70,972)

Purchase of restricted equity securities

 

(1,720)

 

(2,566)

Proceeds from sale of other real estate owned

 

134

 

826

Net increase in loans

 

(117,286)

 

(66,338)

Principal recoveries of loans previously charged off

 

495

 

587

Purchase of premises and equipment, net

 

(240)

 

(367)

Purchase small business investment company fund investment

 

(646)

 

(2,142)

Proceeds from bank owned life insurance investment

 

 

218

Proceeds from sale of loans

 

632

 

1,516

Net cash used in investing activities

 

(180,473)

 

(37,066)

Financing activities:

 

  

 

  

Net increase (decrease) in deposits

 

235,253

 

(1,527)

Net (decrease) increase in federal funds purchased

 

(24,437)

 

4,997

Net decrease in short-term Federal Home Loan Bank borrowings

 

(10,000)

 

(20,000)

Proceeds from long-term Federal Home Loan Bank borrowings

 

40,000

 

40,000

Payments on long-term Federal Home Loan Bank borrowings

 

(40,667)

 

(10,947)

Proceeds from issuance of common stock

 

73

 

893

Cash dividends paid

(4,691)

(2,899)

Repurchase of common stock

 

(2,115)

 

Net cash provided by financing activities

 

193,416

 

10,517

Net increase (decrease) in cash and cash equivalents

 

34,501

 

(5,535)

Cash and cash equivalents:

 

  

 

  

Beginning of the period

 

28,684

 

34,219

End of the period

$

63,185

$

28,684

Supplemental disclosures of cash flow information:

 

  

 

  

Interest paid

$

12,880

$

15,465

Income taxes paid

 

4,513

 

3,145

Transfers of loans to other real estate owned

 

 

4,198

Right-of-use lease assets in exchange for lease liability

7,408

Transfers of building premises and equipment to held for sale

 

 

337

  2017  2016  2015 
Operating activities:            
Net income (loss) $7,203  $9,922  $(2,497)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:            
Depreciation and intangibles amortization  2,601   3,447   3,494 
Stock-based compensation expense  745   566   467 
Tax benefit of exercised stock options  (163)  (62)  (34)
Amortization of purchased loan premium  195   243   304 
Deferred tax expense (benefit)  3,729      (6,077)
Provision for loan losses  550   166    
Amortization of security premiums and accretion of discounts, net  1,848   1,691   2,546 
Net gain on sale of securities  (210)  (634)  (472)
Net (gain) loss on sale and valuation of other real estate owned  (5)  (122)  1,111 
Net gain on sale of loans        (69)
Originations of mortgages held for sale     (49,185)  (55,465)
Proceeds from sales of mortgages held for sale     51,286   53,564 
Increase in bank owned life insurance investment  (760)  (719)  (751)
Loss on termination of FDIC shared-loss agreement        13,084 
Changes in assets and liabilities:            
(Increase) decrease in other assets  (1,490)  467   4,558 
Increase (decrease) in accrued expenses and other liabilities  741   (127)  1,522 
Net cash provided by operating activities  14,984   16,939   15,285 
             
Investing activities:            
Proceeds from available for sale securities  61,825   108,226   146,906 
Proceeds from held to maturity securities  946   10,484   4,583 
Proceeds from equity securities  1,255   3,961   1,845 
Purchase of available for sale securities  (50,174)  (83,357)  (121,854)
Purchase of held to maturity securities  (642)  (20,683)  (2,221)
Purchase of equity securities  (2,260)  (3,828)  (1,452)
Proceeds from sale of other real estate owned  2,141   2,376   2,900 
Improvements of other real estate, net of insurance proceeds     (34)  (516)
Net increase in loans  (100,296)  (83,115)  (85,675)
Principal recoveries of loans previously charged off  439   362   1,652 
Purchase of premises and equipment, net  (3,544)  (2,524)  (1,768)
Proceeds from termination of FDIC shared-loss agreements        3,100 
Purchase of small business investment company fund investment  (525)      
Proceeds from sale of loans     224   3,380 
Purchase of bank owned life insurance investment     (5,000)   
Proceeds from sale of premises and equipment     145   2,120 
Net cash used in investing activities  (90,835)  (72,763)  (47,000)
             
Financing activities:            
Net increase in deposits  58,470   91,775   26,574 
Net increase (decrease) in federal funds purchased  135   (14,207)  4,421 
Net increase (decrease) in short-term Federal Home Loan Bank borrowings  15,500   (15,000)  20,000 
Proceeds from long-term Federal Home Loan Bank borrowings  10,000   12,000    
Payments on long-term Federal Home Loan Bank borrowings  (5,958)  (10,769)  (20,745)
Proceeds from issuance of common stock  260   133   86 
Payments on long-term debt  (1,670)  (4,005)  (4,005)
Net cash provided by financing activities  76,737   59,927   26,331 
             
Net increase (decrease) in cash and cash equivalents  886   4,103   (5,384)
             
Cash and cash equivalents:            
Beginning of the period  21,072   16,969   22,353 
End of the period $21,958  $21,072  $16,969 
             
Supplemental disclosures of cash flow information:            
Interest paid $9,124  $7,706  $7,533 
Income taxes paid  3,570   4,784   1,995 
Transfers of loans to other real estate owned  500   1,187   821 
Transfers of building premises and equipment to held for sale        2,118 

See accompanying notes to consolidated financial statements

53

59

COMMUNITY BANKERS TRUST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Banking Activities and Significant Accounting Policies

Organization

Community Bankers Trust Corporation (the “Company”) is headquartered in Richmond, Virginia and is the holding company for Essex Bank (the “Bank”), a Virginia state bank with 2624 full-service offices, 18 of which are in Virginia and 6 of which are in Maryland. The Bank also operates one2 loan production office in Virginia.

offices.

The Bank engages in a general commercial banking business and provides a wide range of financial services primarily to individuals, and small businesses and larger commercial companies, including individual and commercial demand and time deposit accounts, commercial and industrial loans, consumer and small business loans, real estate and mortgage loans, investment services, on-line and mobile banking products, and safe deposit box facilities.cash management services.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and the Bank, its wholly-owned subsidiary (and subsidiaries of the Bank).subsidiary. All intercompany balances and transactions have been eliminated in consolidation. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810,Consolidation, requires that the Company no longer eliminate through consolidation the equity investment in BOE Statutory Trust I, which was $124,000 at each of December 31, 20172020 and 2016.2019. The Company issued subordinated debt ofto the Trust, which is reflected as a liability ofon the Company.Company’s consolidated balance sheet.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company has defined cash and cash equivalents as cash and due from banks and interest-bearing bank balances.

Restricted Cash

The Bank is required to maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. At December 31, 2017 and 2016, the Bank’s levels of vault cash sufficiently covered the reserve requirement.

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. 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.

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 in fair value. Gains and losses on the sale of securities are determined using the specific identification method.

Restricted Securities

The Company is required to maintain an investment in the capital stock of certain correspondent banks. The Company’s investment in these securities is recorded at cost.

60

Loans Held for Sale

LoansMortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Mortgage loans held for sale are sold with the mortgage servicing rights released by the Company.

The Company enters into commitments to originate certain mortgage loans whereby the interest rate on the loans is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and the sale of the loan generally ranges from thirty to forty-five days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Company is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity. Because of this high correlation, the gain or loss that occurs on the rate lock commitments is immaterial.

Loans

The Bank grants mortgage, commercial and consumer loans to customers. A significant portion of the loan portfolio is represented by 1-4 family residential and commercial mortgage loans. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Bank’s market area.

54

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 charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective interest method.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or 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 status. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses on loans

Loans

The allowance for loan losses is established as losses are estimated to have occurred through a provision for 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 is an amount that management believes is appropriate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not

61

include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. The evaluation also considers the following risk characteristics of each loan portfolio:

·Residential 1-4 family mortgage loans include HELOCs and single family investment properties secured by first liens. The carry risks associated with owner-occupied and investment properties are the continued credit-worthiness of the borrower, changes in the value of the collateral, successful property maintenance and collection of rents due from tenants. The Company manages these risks by using specific underwriting policies and procedures and by avoiding concentrations in geographic regions.

·Commercial real estate loans, including owner occupied and non-owner occupied mortgages, carry risks associated with the successful operations of the principal business operated on the property securing the loan or the successful operation of the real estate project securing the loan. General market conditions and economic activity may impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by avoiding concentrations to any one business or industry, and by diversifying the lending to various lines of businesses, such as retail, office, office warehouse, industrial and hotel.

·Construction and land development loans are generally made to commercial and residential builders/developers for specific construction projects, as well as to consumer borrowers. These carry more risk than real estate term loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market and state and local government regulations. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding concentrations to any one business or industry and by diversifying lending to various lines of businesses, in various geographic regions and in various sales or rental price points.

·Second mortgages on residential 1-4 family loans carry risk associated with the continued credit-worthiness of the borrower, changes in value of the collateral and a higher risk of loss in the event the collateral is liquidated due to the inferior lien position. The Company manages risk by using specific underwriting policies and procedures.

·Multifamily loans carry risks associated with the successful operation of the property, general real estate market conditions and economic activity. In addition to using specific underwriting policies and procedures, the Company manages risk by avoiding concentrations toin geographic regions and by diversifying the lending to various unit mixes, tenant profiles and rental rates.

55

·Agriculture loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time and inventory that may be affected by weather, biological, price, labor, regulatory and economic factors. The Company manages risks by using specific underwriting policies and procedures, as well as avoiding concentrations to individual borrowers and by diversifying lending to various agricultural lines of business (i.e., crops, cattle, dairy, etc.).

·Commercial loans carry risks associated with the successful operation of the business, changes in value of non-real estate collateral that may depreciate over time, accounts receivable whose collectability may change and inventory values that may be subject to various riskrisks including obsolescence. General market conditions and economic activity may also impact the performance of these loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by diversifying the lending to various industries and avoids geographic concentrations.

·Consumer installment loans carry risks associated with the continued credit-worthiness of the borrower and the value of rapidly depreciating assets or lack thereof. These types of loans are more likely than real estate loans to be quickly and adversely affected by job loss, divorce, illness or personal bankruptcy. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

·All other loans generally support the obligations of state and political subdivisions in the U.S. and are not a material source of business for the Company. The loans carry risks associated with the continued credit-worthiness of the obligations and economic activity. The Company manages risk by using specific underwriting policies and procedures for these types of loans.

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the

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Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific, general and unallocated components. For loans that are also classified as impaired, an allowance is established when the collateral value (or 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-classified loans and is based on historical loss experience adjusted for qualitative factors. The unallocated component covers uncertainties that could affect management’s estimate of probable losses.

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 the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.impairment as a pool. Accordingly, the Company does not separately identifyanalyze these individual consumer and residential loans for impairment disclosures.

Accounting for Certain Loans Acquired in a Transfer

FASB ASC 310,Receivables requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit arrangements are excluded from the scope of FASB ASC 310 which limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments through the allowance for loan losses.

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The Company’s acquired loans from the Suburban Federal Savings Bank (SFSB) transaction (the “PCI loans”), subject to FASB ASC Topic 805,Business Combinations,were recorded at fair value and no separate valuation allowance was recorded at the date of acquisition. FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. The Company is applying the provisions of FASB ASC 310-30 to all loans acquired in the SFSB transaction. The Company has grouped loans together based on common risk characteristics including product type, delinquency status and loan documentation requirements among others.

The PCI loans are subject to the credit review standards described above for loans. If and when credit deterioration occurs subsequent to the date that the loans were acquired, a provision for loan loss for PCI loans will be charged to earnings for the full amount.

The Company has made an estimate of the total cash flows it expects to collect from each pool of loans, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the pool is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the life of the pool. The Company also determines each pool’s contractual principal and contractual interest payments. The excess of that amount over the total cash flows that it expects to collect from the pool is referred to as nonaccretable difference, which is not accreted into income.recorded. Judgmental prepayment assumptions are applied to both contractually required payments and cash

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flows expected to be collected at acquisition. Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected. Subsequent decreases in cash flows expected to be collected over the life of the pool are recognized as an impairment in the current period through the allowance for loan loss. Subsequent increases in expected or actual cash flows are first used to reverse any existing valuation allowance for that loan or pool. Any remaining increase in cash flows expected to be collected is recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the pool.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Depreciation of bank premises and equipment is computed on the straight-line method over estimated useful lives of 10 to 50 years for premises and 3 to 10 years for equipment, furniture and fixtures.

Costs of maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Upon sale or retirement of depreciable properties, the cost and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is included in the determination of income.

Other Real Estate Owned

Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at the fair value at the date of foreclosure net of estimated disposal costs, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or the fair value less costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses. Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred. The Company had $2.8$4.4 million and $4.4$4.5 million in other real estate at December 31, 20172020 and 2016,2019, respectively.

Other Intangibles

The Company is accounting for other intangible assets in accordance with FASB ASC 350,Intangibles - Goodwill and Others. Under FASB ASC 350, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. The costs of purchased deposit relationships and other intangible assets, based on independent valuation by a qualified third party, are being amortized over their estimated lives. The core deposit intangible is evaluated for impairment in accordance with FASB ASC 350.

Bank Owned Life Insurance

The Company is the owner and beneficiary of bank owned life insurance (BOLI) policies on certain current and former Bank employees. These policies are recorded at their cash surrender value and can be liquidated, if necessary, with associated tax costs. Income generated from these policies is recorded as noninterest income. The Bank is exposed to credit risk to the extent an insurance company is unable to fulfill its financial obligations under a policy.

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Advertising Costs

The Company follows the policy of expensing advertising costs as incurred, which totaled $656,000, $499,000$376,000 and $651,000$526,000 for 2017, 20162020 and 2015,2019, respectively.

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 balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. The Company had no uncertain tax positions at each of December 31, 2020 and 2019. The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities. Interest expense is recognized beginning in the first period that such interest would begin accruing. Penalties are recognized in the period

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that the Company claims the position in the tax return. Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income. The Company had no interest or penalties during the years ended December 31, 2017, 20162020 or 2015.2019. Under FASB ASC 740,Income Taxes,a valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies that would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that the deferred tax assets are realizable; therefore no allowance is required.

The Company and its subsidiaries are subject to U. S. federal income tax as well as Virginia and Maryland state income tax.tax for various states. All years from 20142017 through 20172020 are open to examination by the respective tax authorities.

Earnings Per Share

Basic earnings per share (EPS) is computed based on the weighted average number of shares outstanding and excludes any dilutive effects of options, warrants and convertible securities. Diluted EPS is computed in a manner similar to basic EPS, except for certain adjustments to the numerator and the denominator. Diluted EPS gives effect to all dilutive potential common shares that were outstanding at the end of the period. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. ThereDividends of $4.7 million and $2.9 million were no dividends declared orand paid in each ofduring the years 2017, 2016year ended 2020 and 2015.2019, respectively.

Stock-Based Compensation

In April 2009, the Company adopted the Community Bankers Trust Corporation 2009 Stock Incentive Plan, which iswas authorized to issue up to 2,650,000 shares of common stock. The 2009 Plan terminated June 17, 2019. In 2019, the Company adopted the Community Bankers Trust Corporation 2019 Stock Incentive Plan, which is authorized to issue up to 2,500,000 shares of common stock. See Note 1413 for details regarding this plan.these plans.

Derivatives - Cash Flow Hedge

The Company uses interest rate derivatives to manage certain amounts of its exposure to interest rate movements. To accomplish this objective, the Company is a party to interest rate swaps whereby the Company pays fixed amounts to a counterparty in exchange for receiving variable payments over the life of an underlying agreement without the exchange of underlying notional amounts.

Derivatives designated as cash flow hedges are used primarily to minimize the variability in cash flows of assets or liabilities caused by interest rates. Cash flow hedges are periodically tested for effectiveness, which measures the correlation of the cash flows of the hedged item with the cash flows from the derivative. The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recorded in accumulated other comprehensive lossincome and is subsequently reclassified into net income in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings. The Company’s cash flow hedge was deemed effective for each of the years ended 20172020 and 2016.2019.

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Recent Accounting Pronouncements

ChangeAdopted in Accounting Principles

2020

In FebruaryAugust 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-02,2018-13, Income Statement – Reporting Comprehensive Income, in responseFair Value Measurement (Topic 820): Disclosure Framework—Changes to the recently passed Tax CutsDisclosure Requirements for Fair Value Measurement. The ASU removes, modifies, and Jobs Actadds to existing fair value measurement disclosure requirements.

The following public company disclosure requirements are removed:

Transfers between Level 1 and Level 2 of the fair value hierarchy
The policy for determining when transfers between any of the three levels have occurred
The valuation processes used for Level 3 measurements

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The following public company disclosure requirements are modified:

For certain investments that calculate the net asset value, timing of liquidation and redemption restrictions lapsing if the latter has been communicated to the reporting entity
A clarification that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date

The following public company disclosure requirements are new:

The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet date
The range and weighted average of significant unobservable inputs used for Level 3 measurements. For certain unobservable inputs, an option to disclose other quantitative information in place of the weighted average is available to the extent that it would be a more reasonable and rational method to reflect the distribution of unobservable inputs.

The ASU was effective January 1, 2018. As a result of the Act, the Company recorded $3.5 millionfor all entities in income tax expense to adjust the net deferred tax asset to reflect the reduction in the corporate income tax rate. This ASU allows for the reclassification of the stranded tax effects in accumulated other comprehensive income (loss) (AOCI) resulting from the Act effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company has elected early adoption and has reclassified $7,000 from AOCI to retained deficit at December 31, 2017.

Recent Accounting Pronouncements

Adopted in 2017

In March 2016, the FASB issued ASU No. 2016-09,Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including:(a) income tax consequences;(b) classification of awards as either equity or liabilities; and(c) classification on the statement of cash flows. The only amendment to potentially impact earnings is the one relating to income tax consequences, which refers to a change in the recording of the related tax effects of share-based compensation awards. Currently, an entity must determine for each award whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess tax benefit or a tax deficiency. Excess tax benefits are recognized in additional paid-in capital while tax deficiencies are recognized as income tax expense. Under the amendment, all excess tax benefits and tax deficiencies should be recognized as income tax benefit or expense in the income statement.

For public companies, the amendments were effective for annual periods beginning after December 15, 2016,2019 and interim periods within those annual periods.fiscal years. Early adoption is permitted. In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date. The Company chose this early adoption option for the year ended December 31, 2018. The Company adopted thisthe remaining guidance with no material impact on its consolidated financial statements as stock based compensation is not expected to be a material component of earnings.

statements.

In March 2017,August 2018, the FASB issued ASU No. 2017-08,2018-14, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premiumCompensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the earliest call date.

Under current U.S. generally accepted accounting principles (GAAP), entities normally amortizeDisclosure Requirements for Defined Benefit Plan. This ASU modifies the premium as an adjustment of yield over the contractual life of the instrument. Stakeholders have expressed concerns with the current approach on the basisdisclosure requirements for employers that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. Further, there is diversity in practice in (1) the amortization period for premiums of callable debt securities and (2) how the potential for exercise of a call is factored into current impairment assessments.

The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

The amendments are effective for public business entities for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. The Company adopted this guidance in 2017 with no material impact on its consolidated financial statements.

Adopted January 1, 2018

Also in March 2017, the FASB issued ASU No. 2017-07,Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.The amendments apply to all employers, including not-for-profit entities, that offer to their employeessponsor defined benefit pension plans,or other postretirement benefit plans orby eliminating the requirement to disclose the amounts in accumulated other types of benefits accounted for under Topic 715,Compensation — Retirement Benefits.

The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are requiredcomprehensive income expected to be presented in the income statement separately from the service cost component. The line item or items used in the income statement to present the other components of net benefit cost must be disclosed.

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The amendments were effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permittedrecognized as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company adopted this guidance with no material impact on its consolidated financial statements. The Company does not offer a post retirement benefit plan. As the Company’s pension plan is frozen, no additional service cost will be incurred. The remaining components of net periodic benefit cost are not expectedover the next fiscal year and adding a requirement to be significant. See Note 13disclose an explanation of the reasons for further details.

In January 2017,significant gains and losses related to changes in the FASB issuedbenefit obligation for the period. The ASU No. 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business, clarifying the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business.

The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. They also provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.

For public companies, this ASU was effective for annual periods beginningfiscal years ending after December 15, 2017, including interim periods within those periods. 2020. Early adoption is permitted. The Company adopted the guidance with no material impact on its consolidated financial statementsstatements.

In March 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides relief from certain requirements under GAAP. Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (TDRs) under FASB ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors, in certain situations. Under FASB ASC 310-40, a restructuring of debt constitutes a 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. Section 4013 of the CARES Act permits the suspension of FASB ASC 310-40 for loan modifications that are made by financial institutions in response to the coronavirus (COVID-19) pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. These modifications must be made between March 1, 2020 and the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning COVID–19 declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates (the “applicable period”).

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 COVID-19. The agencies noted that there are circumstances in which a loan modification may not be eligible for non-TDR treatment under Section 4013 of the CARES Act or in which an institution elects not to apply Section 4013. For example, a loan that is modified after the end of the applicable period would not be eligible under Section 4013. For such loans, the agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the impact of 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

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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. The interagency statement was effective immediately.

In December 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 extending the period established by Section 4013 of the CARES Act under which consideration of troubled debt restructuring identification and accounting triggered by effects of the COVID-19 epidemic are suspended. That period is extended to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates. In addition, Section 541 of this Act amended the relief to expand beyond financial institutions to include insurance companies. The requirement that the subject specific loans not be more that 30 days past due as of December 31, 2019 was not changed.

The Company provided COVID-19 related payment relief on loans totaling $182.4 million as of December 31, 2020. PCI loans comprised $12.2 million of this total. As of December 31, 2020, regular payments have resumed on $143.4 million of these loans, of which PCI comprised $8.4 million. The Company re-extended this payment relief on $52.7 million of these loans, $13.7 of which have resumed regular payments and $2.0 million of which were within the PCI portfolio.

The CARES Act and interagency statement are expected to have a material impact on the Company’s financial statements; however, due to the natureuncertainties regarding the economic effects of the entities that it may reasonablyCOVID-19, this impact cannot be expected to enter into business combinations with.

quantified at this time.

In November 2016,March 2020, the FASB issued ASU No. 2016-18,2020-04, StatementReference Rate Reform (Topic 848): Facilitation of Cash Flows (Topic 230): Restricted Cash.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 amendments applyASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities that have restricted cash or restricted cash equivalents and are required to present a statementas of cash flows. The amendments address diversityMarch 12, 2020 through December 31, 2022. Subsequently, in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows.

The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents.

For public business entities, this ASU was effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the guidance with no material impact on its consolidated financial statements, as the primary impact deals with classification within the statement of cash flows.

In January 2016,2021, the FASB issued ASU No. 2016-01,2021-01 Financial Instruments – Overall (Subtopic 825-10)Reference Rate Reform (Topic 848): RecognitionScope. This ASU clarifies that certain optional expedients and Measurementexceptions 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 Financial Assetsthe scope clarification and Financial Liabilities. Theto 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 guidancemodifications from any date within the interim period that includes or is intendedsubsequent to improveJanuary 7, 2021, up to the recognitiondate 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 measurementto new eligible hedging relationships entered into after the beginning of financial instruments. The new guidance makes targeted improvements to existing GAAP by:the interim period that includes March 12, 2020.

·Requiring 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;

·Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;

·Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements;

·Eliminating 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 on the balance sheet; and

·Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

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The new guidance was effective for public companies for fiscal years beginningCompany’s cash flow hedges contracts allow it to covert the swaps to another index any time after December 15, 2017, including interim periods within those fiscal years.March 12, 2020, in accordance with the optional expedient provided in Topic 848.  Otherwise, the hedges will be converted to a Secured Financing Overnight Rate (SOFR) index at the end of June 2023.  The Company adopted this guidance with no material impact on its consolidated financial statements,is anticipating converting to the SOFR rate in effect as the Company has an insignificant amount of equity investments and its currently methodology incorporates exit price.June 2023.

From 2014 to 2016,Issued But Not Yet Adopted

In November 2019, the FASB issued ASU No. 2014-09,2019-11, Revenue from Contracts with Customers;ASU No. 2015-14,Deferral of the Effective Date;ASU No. 2016-08,Principal versus Agent Considerations;ASU No. 2016-10,Identifying Performance Obligations and Licensing;ASU No. 2016-12,Narrow-Scope Improvements and Practical Expedients; andASU No. 2016-20,Technical Corrections andCodification Improvements to Topic 606, Revenue from Contracts with Customers.326, Financial Instruments – Credit Losses.These ASUs supersede This ASU addresses issues raised by stakeholders during the revenue recognition requirementsimplementation of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in ASC Topic 605,Revenue Recognition, and most industry-specific guidance throughout the Industry Topicswhich an organization recognizes a full or partial write-off of the Codification.amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected

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recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (PCD assets, currently known as PCI loans). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The core principle of the ASUs isASU includes effective dates and transition requirements that vary depending on whether or not an entity should recognize revenuehas already adopted ASU 2016-13.

Also in November 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to depictalign with FASB ASC 326. It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the transferresults of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASUs may be adopted either retrospectively or on a modified retrospective basis to new contractssystematic methodology; and existing contracts, with remaining performance obligations as of the effective date. For public companies, the ASUs were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.(4) validating a systematic methodology.

The Company has evaluated the anticipated effects of these ASUs on its consolidated financial statements and related disclosures. While the guidance will replace most existing revenue recognition guidance in GAAP, the ASUs are not applicable to financial instruments and, therefore, will not impact a majority of the Company’s revenue, including interest income. The Company’s analysis indicates that service charges on deposit accounts and certain components within other noninterest income contain revenue streams that are in scope of these updates; however, there will not be a material change in the timing or measurement of these revenues. The updates are expected to impact the presentation and disclosure related to these revenues. The Company has analyzed the underlying contracts, as applicable, related to these revenues in determining the ultimate impact of these updates. The Company adopted the standards beginning January 1, 2018 utilizing the modified retrospective method of adoption with no cumulative effect adjustment being required.

Issued But Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires 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 in developing 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. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

For public companies,As a smaller reporting company, the ASU is effectiveCompany will be required to apply the guidance for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2022. The Company is currently evaluating the impact this guidance will have on its accounting, but it expects to recognize a one-time cumulative-effect adjustment to its allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Company has formed an implementation committee and is working with a third-party vendor to build a model which it plans to run parallel with its current model in the months prior to implementation. The Company cannot yet determine the magnitude of any suchthe one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations, as the final impact will be dependent, among other things, upon the loan portfolio composition and credit quality at the adoption date, as well as economic conditions, financial models used and forecasts at thatthe time.

In February 2016,October 2020, the FASB issued its new lease accounting guidance inASC 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs. This ASU No. 2016-02,Leases (Topic 842).Underclarifies that an entity should reevaluate whether a callable debt security is within the new guidance, lessees will be required to recognize the followingscope of ASC paragraph 310-20-35-33 for all leases (with the exception of short-term leases) at the commencement date:

61

·A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and

·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 new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.

Publiceach reporting period. For public business entities, should apply the amendments in ASU 2016-02is effective for fiscal years beginning after December 15, 2018, including2021, and interim periods within those fiscal years (i.e., January 1, 2019, foryears. Early adoption is not permitted. All entities should apply ASU 2020-08 on a calendar year entity). Early application is permitted. 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,prospective basis as of the beginning of the earliest comparative period presented inof adoption for existing or newly purchased callable debt securities. The Company does not expect 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 adoption of this standard is expectedASU 2020-08 to result in additional assets and liabilities, as the Company will be required to recognize operating leaseshave a material impact on the Consolidated Balance Sheet. Other implementation matters to be addressed include, but are not limited to, the determination of effects on the financial and capital ratios and the quantification of the impacts that this accounting guidance will have on the Company'sits consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of 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. Management estimates that are particularly susceptible to significant change in the near term relate to the determination

68

of the allowance for loan losses, the valuation of other real estate owned, projected cash flows relating to certain acquired loans, the value of the indemnification asset, and the valuation of deferred tax assets.

Reclassifications

Certain reclassifications have been made to prior period balances on the consolidated statement cash flows to conform to the current year presentations. Such reclassifications had no impact on net income or shareholders’ equity.

Note 2. Securities

Amortized costs and fair values of securities available for sale and held to maturity atas of December 31, 20172020 and 20162019 were as follows(dollars in thousands):

December 31, 2020

Gross Unrealized

  

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

23,500

$

$

(1)

$

23,499

U.S. Government agencies

25,880

 

114

 

(141)

 

25,853

State, county and municipal

 

118,612

 

7,172

 

(64)

 

125,720

Mortgage backed securities

 

30,434

 

1,756

 

(1)

 

32,189

Asset backed securities

 

36,841

 

704

 

(57)

 

37,488

Corporate bonds

 

26,136

 

480

 

(18)

 

26,598

Total securities available for sale

$

261,403

$

10,226

$

(282)

$

271,347

Securities Held to Maturity

 

  

 

  

 

  

 

  

State, county and municipal

$

21,176

 

1,081

 

 

22,257

Total securities held to maturity

$

21,176

$

1,081

$

$

22,257

December 31, 2019

Gross Unrealized

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Securities Available for Sale

U.S. Government agencies

$

22,104

$

51

$

(219)

$

21,936

State, county and municipal

 

95,467

 

3,167

 

(42)

 

98,592

Mortgage backed securities

 

48,045

 

808

 

(113)

 

48,740

Asset backed securities

 

11,637

 

49

 

(82)

 

11,604

Corporate bonds

 

6,016

 

84

 

(3)

 

6,097

Total securities available for sale

$

183,269

$

4,159

$

(459)

$

186,969

Securities Held to Maturity

 

  

 

  

 

  

 

  

U.S. Government agencies

$

10,000

$

$

(12)

$

9,988

State, county and municipal

 

25,733

 

913

 

(1)

 

26,645

Total securities held to maturity

$

35,733

$

913

$

(13)

$

36,633

     December 31, 2017    
      Gross Unrealized    
  Amortized Cost  Gains  Losses  Fair Value 
Securities Available for Sale                
U.S. Treasury issue and other U.S. Gov’t agencies $40,473  $165  $(382) $40,256 
U.S. Gov’t  sponsored agencies  9,247   55   (24)  9,278 
State, county and municipal  124,032   2,324   (596)  125,760 
Corporate and other bonds  7,323   173   (36)  7,460 
Mortgage backed – U.S. Gov’t agencies  5,551   37   (146)  5,442 
Mortgage backed – U.S. Gov’t sponsored agencies  16,985   26   (373)  16,638 
Total Securities Available for Sale $203,611  $2,780  $(1,557) $204,834 
                 
Securities Held to Maturity                
U.S. Treasury issue and other U.S. Gov’t agencies $10,000  $  $(155) $9,845 
State, county and municipal  35,678   922   (33)  36,567 
Mortgage backed – U.S. Gov’t agencies  468   8      476 
Total Securities Held to Maturity $46,146  $930  $(188) $46,888 

62

     December 31, 2016    
      Gross Unrealized    
  Amortized Cost  Gains  Losses  Fair Value 
Securities Available for Sale                
U.S. Treasury issue and other U.S. Gov’t agencies $58,724  $15  $(763) $57,976 
U.S. Gov’t  sponsored agencies  3,452      (116)  3,336 
State, county and municipal  121,686   2,247   (1,160)  122,773 
Corporate and other bonds  15,936      (433)  15,503 
Mortgage backed – U.S. Gov’t agencies  3,614      (119)  3,495 
Mortgage backed – U.S. Gov’t sponsored agencies  13,330   21   (313)  13,038 
Total Securities Available for Sale $216,742  $2,283  $(2,904) $216,121 
                 
Securities Held to Maturity                
U.S. Treasury issue and other U.S. Gov’t agencies $10,000  $  $(154) $9,846 
State, county and municipal  35,847   568   (185)  36,230 
Mortgage backed – U.S. Gov’t agencies  761   21      782 
Total Securities Held to Maturity $46,608  $589  $(339) $46,858 

The amortized cost and fair value of securities atas of December 31, 20172020 by final contractual maturity are shown below. Expected maturities may differ from final contractual maturities because issuers may have the right to call or prepay obligations without any penalties.

 Held to Maturity  Available for Sale 

Held to Maturity

Available for Sale

(dollars in thousands) Amortized Cost  Fair Value  Amortized Cost  Fair Value 

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

Due in one year or less $3,866  $3,903  $6,052  $6,030 

$

2,007

$

2,028

$

41,301

$

41,402

Due after one year through five years  23,928   24,013   88,100   89,061 

 

13,989

 

14,770

 

92,855

 

96,359

Due after five years through ten years  12,768   13,206   100,185   100,304 

 

4,928

 

5,169

 

96,896

 

102,114

Due after ten years  5,584   5,766   9,274   9,439 

 

252

 

290

 

30,351

 

31,472

Total securities $46,146  $46,888  $203,611  $204,834 

$

21,176

$

22,257

$

261,403

$

271,347

69

Proceeds from sales and calls of securities available for sale were $41.4 million, $103.7$39.4 million and $105.8$64.6 million during the years ended December 31, 2017, 20162020 and 2015,2019, respectively. Gains and losses on the sale of securities are determined using the specific identification method. Gross realized gains and losses on sales of securities available for sale during the years ended December 31, 2017, 20162020 and 20152019 were as follows (dollars in thousands):

2020

    

2019

Gross realized gains

$

388

$

507

Gross realized losses

 

(104)

 

(272)

Net securities gain

$

284

$

235

  2017  2016  2015 
Gross realized gains $520  $1,265  $974 
Gross realized losses  (310)  (631)  (502)
Net securities gains $210  $634  $472 

In estimating other than temporary impairment (OTTI) losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and short-term prospects for the issuer, and the intent and ability of management to hold its investment for a period of time to allow a recovery in fair value. There were no0 investments held that had OTTI losses for the years ended December 31, 2017, 20162020 and 2015.

2019.

The fair value and gross unrealized losses for securities, segregated 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 (dollars in thousands):

December 31, 2020

Less than 12 Months

12 Months or More

Total

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

Securities Available for Sale

U.S. Treasury securities

$

23,499

$

(1)

$

$

$

23,499

$

(1)

U.S. Government agencies

6,726

 

(25)

 

8,266

 

(116)

 

14,992

(141)

State, county and municipal

 

6,203

 

(49)

 

301

 

(15)

 

6,504

(64)

Mortgage backed securities

 

118

 

(1)

 

 

 

118

(1)

Asset backed securities

 

12,427

 

(8)

 

4,410

 

(49)

 

16,837

(57)

Corporate bonds

 

7,216

 

(18)

 

 

 

7,216

(18)

Total

$

56,189

$

(102)

$

12,977

$

(180)

$

69,166

$

(282)

      December 31, 2017    
 Less than 12 Months  12 Months or More  Total 
 Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss 

December 31, 2019

Less than 12 Months

12 Months or More

Total

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

    

Fair Value

    

Unrealized Loss

Securities Available for Sale             

U.S. Treasury issue and other U.S. Gov’t agencies $5,097  $(36) $19,443  $(346) $24,540  $(382)
U.S. Gov’t sponsored agencies  497   (3)  5,040   (21)  5,537   (24)

U.S. Government agencies

 

6,396

$

(102)

$

8,020

$

(117)

$

14,416

$

(219)

State, county and municipal  20,740   (188)  9,569   (408)  30,309   (596)

 

7,088

 

(32)

 

308

 

(10)

 

7,396

 

(42)

Corporate and other bonds  -   -   2,772   (36)  2,772   (36)
Mortgage backed – U.S. Gov’t agencies  1,722   (25)  1,876   (121)  3,598   (146)
Mortgage backed – U.S. Gov’t sponsored agencies  6,525   (111)  7,985   (262)  14,510   (373)

Mortgage backed securities

 

11,001

 

(40)

 

4,287

 

(73)

 

15,288

 

(113)

Asset backed securities

 

4,861

 

(74)

 

625

 

(8)

 

5,486

 

(82)

Corporate bonds

 

248

 

(3)

 

 

 

248

 

(3)

Total $34,581  $(363) $46,685  $(1,194) $81,266  $(1,557)

$

29,594

$

(251)

$

13,240

$

(208)

$

42,834

$

(459)

                        

Securities Held to Maturity                        

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Treasury issue and other U.S. Gov’t agencies $-  $-  $9,845  $(155) $9,845  $(155)

U.S. Government agencies

$

$

$

9,988

$

(12)

$

9,988

$

(12)

State, county and municipal  1,485   (14)  1,262   (19)  2,747   (33)

 

31

 

 

622

 

(1)

 

653

(1)

Total $1,485  $(14) $11,107  $(174) $12,592  $(188)

$

31

$

$

10,610

$

(13)

$

10,641

$

(13)

63

        December 31, 2016    
  Less than 12 Months  12 Months or More  Total 
 Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss 
Securities Available for Sale                  
U.S. Treasury issue and other U.S. Gov’t agencies $29,756  $(324) $25,155  $(439) $54,911  $(763)
U.S. Gov’t  sponsored agencies  -   -   2,523   (116)  2,523   (116)
State, county and municipal  39,713   (848)  3,885   (312)  43,598   (1,160)
Corporate and other bonds  6,864   (103)  8,639   (330)  15,503   (433)
Mortgage backed – U.S. Gov’t agencies  1,598   (18)  1,897   (101)  3,495   (119)
Mortgage backed – U.S. Gov’t sponsored agencies  9,247   (313)  -   -   9,247   (313)
Total $87,178  $(1,606) $42,099  $(1,298) $129,277  $(2,904)
                         
Securities Held to Maturity                        
U.S. Treasury issue and other U.S. Gov’t agencies $9,846  $(154) $-  $-  $9,846  $(154)
State, county and municipal  8,052   (185)  -   -   8,052   (185)
Total $17,898  $(339) $-  $-  $17,898  $(339)

The unrealized losses (impairments) in the investment portfolio at December 31, 20172020 and 20162019 are generally a result of market fluctuations that occur daily. The unrealized losses are from 11247 securities at December 31, 2017.2020. Of those, 9933 are investment grade, have U.S. government agency guarantees, or are backed by the full faith and credit of local municipalities throughout the United States. TwelveNaN investment grade asset-backed securities comprised of student loan pools, which are 97% U.S. government guaranteed, included in corporate obligations and one5 corporate bondbonds make up the remaining securities with unrealized losses at December 31, 2017.2020. The Company considers the reason for impairment, length of impairment, and intent and ability to hold until the full value is recovered in determining if the

70

impairment is temporary in nature. Based on this analysis, the Company has determined these impairments to be temporary in nature. The Company does not intend to sell and it is more likely than not that the Company will not be required to sell these securities until they recover in value or reach maturity.

Market prices are affected by conditions beyond the control of the Company. Investment decisions are made by the management group of the Company and reflect the overall liquidity and strategic asset/liability objectives of the Company. Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the Company’s income statement and balance sheet.

Securities with amortized costs of $71.7$52.2 million and $80.2$47.3 million at December 31, 20172020 and 2016,2019, respectively, were pledged to secure the cash flow hedge and public deposits as required or permitted by law. Securities with amortized costs of $5.0 million and $5.8 million at December 31, 2020 and 2019, respectively, were pledged to secure lines of credit at the Federal Reserve discount window with a lendable collateral value of $5.0 million at December 31, 2020. At each of December 31, 20172020 and 2016,2019, there were no0 securities purchased from a single issuer, other than U.S. Treasury issuesecurities and other U.S. Government agencies that comprised more than 10% of the consolidated shareholders’ equity.

Note 3. Loans and Related Allowance for Loan Losses

The Company’s loans, net of deferred fees and costs, atas of December 31, 20172020 and 20162019 were comprised of the following (dollars in thousands):

December 31, 2020

December 31, 2019

 

    

Amount

    

% of Loans

    

Amount

    

% of Loans

 

Mortgage loans on real estate:

Residential 1‑4 family

$

197,228

 

16.68

%  

$

223,538

 

21.12

%

Commercial

 

474,856

 

40.16

 

396,858

 

37.50

Construction and land development

 

182,277

 

15.42

 

146,566

 

13.85

Second mortgages

 

6,360

 

0.54

 

6,639

 

0.63

Multifamily

 

78,158

 

6.61

 

72,978

 

6.90

Agriculture

 

6,662

 

0.56

 

8,346

 

0.79

Total real estate loans

 

945,541

 

79.97

 

854,925

 

80.79

Commercial loans

 

225,386

 

19.06

 

191,183

 

18.06

Consumer installment loans

 

9,996

 

0.85

 

11,163

 

1.05

All other loans

 

1,439

 

0.12

 

1,052

 

0.10

Total loans

$

1,182,362

 

100.00

%  

$

1,058,323

 

100.00

%

  December 31, 2017  December 31, 2016 
  Amount  % of Loans  Amount  % of Loans 
Mortgage loans on real estate:                
Residential 1-4 family $227,542   24.16% $207,863   24.86%
Commercial  366,331   38.89   339,804   40.63 
Construction and land development  107,814   11.44   98,282   11.75 
Second mortgages  8,410   0.89   7,911   0.95 
Multifamily  59,024   6.27   39,084   4.67 
Agriculture  7,483   0.79   7,185   0.86 
Total real estate loans  776,604   82.44   700,129   83.72 
Commercial loans  159,024   16.88   129,300   15.46 
Consumer installment loans  5,169   0.55   5,627   0.67 
All other loans  1,221   0.13   1,243   0.15 
Total loans $942,018   100.00% $836,299   100.00%

64

The Company held $18.0$10.7 million and $15.8$12.7 million in balances of loans guaranteed by the United States Department of Agriculture (USDA), which are included in various categories in the table above, at December 31, 20172020 and 2016,2019, respectively. As these loans are 100% guaranteed by the USDA, no loan loss allowance is required. These loan balances included a purchase premium of $824,000$804,000 and $749,000$1.0 million at December 31, 20172020 and 2016,2019, respectively. The purchase premium is amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method. Any unamortized purchase premium remaining on loans prepaid by the borrower is written off.

During 2020, the Company originated loans under the Paycheck Protection Program (PPP) of the Small Business Administration (SBA).  These PPP loans totaled $49.3 million at December 31, 2020 and are included in commercial loans.  As these loans are 100% guaranteed by the SBA, 0 loan loss allowance is required. The majority of the PPP loans have a two year term; however, most are expected to be forgiven by the SBA as borrowers use the funds for qualified expenses. These loan balances included net fees of $920,000 at December 31, 2020, which are being amortized as an adjustment of the related loan yield on a straight line basis, which is substantially equivalent to the results obtained using the effective interest method. Any unamortized net fee remaining on loans forgiven or prepaid by the borrower is recorded as income.  

71

At December 31, 20172020 and 2016,2019, the Company’s allowance for creditloan losses was comprised of the following: (i) a specific valuation component calculated in accordance with FASB ASC 310,Receivables,(ii) a general valuation component calculated in accordance with FASB ASC 450,Contingencies, based on historical loan loss experience, current economic conditions and other qualitative risk factors, and (iii) an unallocated component to cover uncertainties that could affect management’s estimate of probable losses. Management identified loans subject to impairment in accordance with ASC 310.

The following table summarizes information related to impaired loans as of December 31, 20172020 and 20162019 (dollars in thousands):

  December 31, 2017  December 31, 2016 
 Recorded
Investment(1)
  Unpaid
Principal
Balance(2)
  Related
Allowance
  Recorded
Investment(1)
  Unpaid
Principal
Balance(2)
  Related
Allowance
 
With no related allowance recorded:                  
Mortgage loans on real estate:                        
Residential 1-4 family $1,901  $2,246  $  $1,704  $1,931  $ 
Commercial  3,862   4,477      6,570   7,078    
Construction and land development                  
Agriculture                  
Total real estate loans  5,763   6,723      8,274   9,009    
Commercial loans  1,108   1,108      1,200   1,200    
Consumer installment loans                  
Subtotal impaired loans with no valuation allowance  6,871   7,831      9,474   10,209    
With an allowance recorded:                        
Mortgage loans on real estate:                        
Residential 1-4 family  2,216   2,640   290   2,621   3,062   283 
Commercial  533   958   65   617   1,051   73 
Construction and land development  4,277   5,537   556   5,495   6,746   730 
Agriculture  68   71   8          
Total real estate loans  7,094   9,206   919   8,733   10,859   1,086 
Commercial loans  325   446   39   53   53   7 
Consumer installment loans  7   7   1   281   285   37 
Subtotal impaired loans with a valuation allowance  7,426   9,659   959   9,067   11,197   1,130 
Total:                        
Mortgage loans on real estate:                        
Residential 1-4 family  4,117   4,886   290   4,325   4,993   283 
Commercial  4,395   5,435   65   7,187   8,129   73 
Construction and land development  4,277   5,537   556   5,495   6,746   730 
Agriculture  68   71   8          
Total real estate loans  12,857   15,929   919   17,007   19,868   1,086 
Commercial loans  1,433   1,554   39   1,253   1,253   7 
Consumer installment loans  7   7   1   281   285   37 
Total impaired loans $14,297  $17,490  $959  $18,541  $21,406  $1,130 

December 31, 2020

December 31, 2019

    

    

Unpaid

    

    

    

Unpaid

    

Recorded

Principal

Related

Recorded

Principal

Related

Investment (1)

Balance (2)

Allowance

Investment (1)

Balance (2)

Allowance

With no related allowance recorded:

Mortgage loans on real estate:

Residential 1‑4 family

$

624

$

787

$

$

1,483

$

1,850

$

Commercial

 

3,458

 

4,198

 

 

3,226

 

3,966

 

Construction and land development

328

328

Multifamily

 

 

 

 

2,463

 

2,463

 

Total real estate loans

 

4,082

 

4,985

 

 

7,500

 

8,607

 

Subtotal impaired loans with no valuation allowance

 

4,082

 

4,985

 

 

7,500

 

8,607

 

With an allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

 

2,200

 

2,573

 

640

 

1,498

 

1,808

 

380

Commercial

 

200

 

715

 

57

 

378

 

876

 

87

Construction and land development

 

44

 

149

 

12

 

48

 

147

 

11

Agriculture

 

45

 

46

 

13

 

 

 

Total real estate loans

 

2,489

 

3,483

 

722

 

1,924

 

2,831

 

478

Commercial loans

 

2,549

 

2,549

 

437

 

454

 

460

 

105

Consumer installment loans

 

19

 

19

 

6

 

7

 

7

 

1

Subtotal impaired loans with a valuation allowance

 

5,057

 

6,051

 

1,165

 

2,385

 

3,298

 

584

Total:

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

 

2,824

 

3,360

 

640

 

2,981

 

3,658

 

380

Commercial

 

3,658

 

4,913

 

57

 

3,604

 

4,842

 

87

Construction and land development

 

44

 

149

 

12

 

376

 

475

 

11

Multifamily

 

 

 

 

2,463

 

2,463

 

Agriculture

 

45

 

46

 

13

 

 

 

Total real estate loans

 

6,571

 

8,468

 

722

 

9,424

 

11,438

 

478

Commercial loans

 

2,549

 

2,549

 

437

 

454

 

460

 

105

Consumer installment loans

 

19

 

19

 

6

 

7

 

7

 

1

Total impaired loans

$

9,139

$

11,036

$

1,165

$

9,885

$

11,905

$

584

(1)The amount of the investment in a loan which is not net of a valuation allowance, but which does reflect any direct write-down of the investment

(2)The contractual amount due which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs or valuation allowance

65

72

The following table summarizes the average recorded investment of impaired loans for the years ended December 31, 2017, 2016,2020 and 20152019 (dollars in thousands):

2020

2019

    

Average Investment

    

Interest Recognized

    

Average Investment

    

Interest Recognized

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

Residential 1‑4 family

$

2,987

$

75

$

3,395

$

87

Commercial

 

3,303

 

141

 

4,096

 

145

Construction and land development

 

778

 

 

2,709

 

Multifamily

 

493

 

 

2,519

 

Agriculture

 

30

 

 

 

Total real estate loans

 

7,591

 

216

 

12,719

 

232

Commercial loans

 

1,494

 

59

 

1,386

 

16

Consumer installment loans

 

13

 

 

5

 

Total impaired loans

$

9,098

$

275

$

14,110

$

248

  2017  2016  2015 
  Average Investment  Interest Recognized  Average Investment  Interest Recognized  Average Investment  Interest Recognized 
Mortgage loans on real estate:                  
  Residential 1-4 family $4,317  $106  $5,301  $78  $5,544  $73 
  Commercial  5,808   160   5,217   284   5,066  173 
  Construction and land development  4,531      5,178      5,054  
  Second mortgages        86      42  
Agriculture  79               
Total real estate loans  14,735   266   15,782   362   15,706 246 
Commercial loans  1,471   4   283   49   2,987  
Consumer installment loans  74      266   4   92   
Total impaired loans $16,280  $270  $16,331  $415  $18,785  $246 

Troubled debt restructures and some substandard loans still accruing interest are loans that management expects to ultimately collect all principal and interest due, but not under the terms of the original contract. A reconciliation of impaired loans to nonaccrual loans atas of December 31, 20172020 and December 31, 20162019 is set forth in the table below (dollars in thousands):

     
 December 31, 2017  December 31, 2016 

    

December 31, 2020

    

December 31, 2019

Nonaccruals $9,026  $10,243 

$

4,460

$

5,292

Trouble debt restructure and still accruing  5,271   4,653 

 

4,679

 

4,593

Substandard and still accruing     3,645 
Total impaired $14,297  $18,541 

$

9,139

$

9,885

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. The Company recognized $277,000 of cash basis income during the year ended December 31, 2020.  There was an insignificant amount of cash basis income recognized during the years ended December 31, 2017 and 2016. Cash basis income of $465,000 was recognized during the year ended December 31, 2015.2019. For the years ended December 31, 2017, 20162020 and 2015,2019, estimated interest income of $625,000, $681,000$172,000 and $734,000,$345,000, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

There were no loans greater than 90 days old and still accruing interest at December 31, 2017 and 2016. The following tables present an age analysis of past due status of loans excluding PCI loans, by category as of December 31, 20172020 and 20162019 (dollars in thousands):

December 31, 2020

    

3089 Days

    

90+ Days Past

    

Total Past

    

    

Total Loans

Past Due

Due and Accruing

Nonaccrual

Due

Current

Receivable

Mortgage loans on real estate:

 

  

 

  

  

 

  

 

  

 

  

Residential 1‑4 family

$

1,324

$

33

$

1,357

$

2,714

$

194,514

$

197,228

Commercial

 

438

 

 

730

 

1,168

 

473,688

 

474,856

Construction and land development

 

157

 

 

44

 

201

 

182,076

 

182,277

Second mortgages

 

227

 

 

 

227

 

6,133

 

6,360

Multifamily

 

 

 

 

 

78,158

 

78,158

Agriculture

 

 

 

45

 

45

 

6,617

 

6,662

Total real estate loans

 

2,146

 

33

 

2,176

 

4,355

 

941,186

 

945,541

Commercial loans

 

60

 

 

2,264

 

2,324

 

223,062

 

225,386

Consumer installment loans

 

 

12

 

20

 

32

 

9,964

 

9,996

All other loans

 

 

 

 

 

1,439

 

1,439

Total loans

$

2,207

$

45

$

4,460

$

6,711

$

1,175,651

$

1,182,362

  December 31, 2017 
  30-89 Days
Past Due
  Nonaccrual  Total Past
Due
  Current  Total Loans
Receivable
 
Mortgage loans on real estate:                    
Residential 1-4 family $1,056  $1,962  $3,018  $224,524  $227,542 
Commercial  104   1,498   1,602   364,729   366,331 
Construction and land development     4,277   4,277   103,537   107,814 
Second mortgages           8,410   8,410 
Multifamily           59,024   59,024 
Agriculture  19   68   87   7,396   7,483 
  Total real estate loans  1,179   7,805   8,984   767,620   776,604 
Commercial loans  48   1,214   1,262   157,762   159,024 
Consumer installment loans  12   7   19   5,150   5,169 
All other loans           1,221   1,221 
Total  loans $1,239  $9,026  $10,265  $931,753  $942,018 

66

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Table of Contents

  December 31, 2016 
  30-89 Days
Past Due
  Nonaccrual  Total Past
Due
  Current  Total Loans
Receivable
 
Mortgage loans on real estate:                    
Residential 1-4 family $296  $2,893  $3,189  $204,674  $207,863 
Commercial     1,758   1,758   338,046   339,804 
Construction and land development  54   5,495   5,549   92,733   98,282 
Second mortgages           7,911   7,911 
Multifamily           39,084   39,084 
Agriculture           7,185   7,185 
  Total real estate loans  350   10,146   10,496   689,633   700,129 
Commercial loans     53   53   129,247   129,300 
Consumer installment loans  3   44   47   5,580   5,627 
All other loans           1,243   1,243 
Total  loans $353  $10,243  $10,596  $825,703  $836,299 

December 31, 2019

    

3089 Days

    

90+ Days Past

    

Total Past

    

    

Total Loans

Past Due

Due and Accruing

Nonaccrual

Due

Current

Receivable

Mortgage loans on real estate:

 

  

 

  

  

 

  

 

  

 

  

Residential 1‑4 family

$

1,308

$

$

1,378

$

2,686

$

220,852

$

223,538

Commercial

 

552

 

 

1,006

 

1,558

 

395,300

 

396,858

Construction and land development

 

166

 

 

376

 

542

 

146,024

 

146,566

Second mortgages

 

229

 

 

 

229

 

6,410

 

6,639

Multifamily

 

 

 

2,463

 

2,463

 

70,515

 

72,978

Agriculture

 

 

 

 

 

8,346

 

8,346

Total real estate loans

 

2,255

 

 

5,223

 

7,478

 

847,447

 

854,925

Commercial loans

 

1,085

 

946

 

62

 

2,093

 

189,090

 

191,183

Consumer installment loans

 

41

 

 

7

 

48

 

11,115

 

11,163

All other loans

 

 

 

 

 

1,052

 

1,052

Total loans

$

3,381

$

946

$

5,292

$

9,619

$

1,048,704

$

1,058,323

Activity in the allowance for loan losses on loans excluding PCI loans, by segment for the years ended December 31, 2017, 20162020 and 20152019 is presented in the following tables (dollars in thousands):

    

Year Ended December 31, 2020

Provision

December 31, 2019

Allocation

Charge-offs

Recoveries

December 31, 2020

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

$

2,685

$

(102)

$

$

55

$

2,638

Commercial

 

2,196

 

2,283

 

 

89

 

4,568

Construction and land development

 

1,044

 

1,342

 

 

159

 

2,545

Second mortgages

 

79

 

(77)

 

 

16

 

18

Multifamily

 

248

 

260

 

 

 

508

Agriculture

 

38

 

2

 

 

 

40

Total real estate loans

 

6,290

 

3,708

 

 

319

 

10,317

Commercial loans

 

1,980

 

438

 

(608)

 

87

 

1,897

Consumer installment loans

 

114

 

92

 

(176)

 

89

 

119

All other loans

 

7

 

0

 

 

 

7

Unallocated

 

38

 

(38)

 

 

 

Total loans

$

8,429

$

4,200

$

(784)

$

495

$

12,340

 December 31, 2016  Provision
Allocation
  Charge-offs  Recoveries  December 31, 2017 

Year Ended December 31, 2019

Provision

    

December 31, 2018

    

Allocation

    

Charge-offs

    

Recoveries

    

December 31, 2019

Mortgage loans on real estate:                    

  

  

  

  

  

Residential 1-4 family $2,769  $726  $(146) $117  $3,466 

Residential 1‑4 family

$

2,281

$

315

$

(178)

$

267

$

2,685

Commercial  1,952   879   (457)  49   2,423 

 

1,810

 

583

 

(277)

 

80

 

2,196

Construction and land development  2,195   (817)  (194)  63   1,247 

 

1,161

 

24

 

(212)

 

71

 

1,044

Second mortgages  72   (101)     53   24 

 

20

 

53

 

 

6

 

79

Multifamily  260   236         496 

 

371

 

(164)

 

 

41

 

248

Agriculture  15   (1)        14 

 

17

 

21

 

 

 

38

Total real estate loans  7,263   922   (797)  282   7,670 

 

5,660

 

832

 

(667)

 

465

 

6,290

Commercial loans  602   963   (431)  5   1,139 

 

1,894

 

626

 

(724)

 

184

 

1,980

Consumer installment loans  135   108   (285)  152   110 

 

152

 

99

 

(253)

 

116

 

114

All other loans  7   (4)        3 

 

12

 

(5)

 

 

 

7

Unallocated  1,486   (1,439)        47 

 

1,265

 

(1,227)

 

 

 

38

Total loans $9,493  $550  $(1,513) $439  $8,969 

$

8,983

$

325

$

(1,644)

$

765

$

8,429

  December 31, 2015  Provision
Allocation
  Charge-offs  Recoveries  December 31, 2016 
Mortgage loans on real estate:                    
Residential 1-4 family $2,884  $303  $(560) $142  $2,769 
Commercial  3,769   (1,772)  (112)  67   1,952 
Construction and land development  1,298   886   (15)  26   2,195 
Second mortgages  96   (34)     10   72 
Multifamily  141   119         260 
Agriculture  24   (9)        15 
Total real estate loans  8,212   (507)  (687)  245   7,263 
Commercial loans  631   (40)     11   602 
Consumer installment loans  93   127   (191)  106   135 
All other loans  25   (18)        7 
Unallocated  598   888         1,486 
Total loans $9,559  $450  $(878) $362  $9,493 

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Table of Contents

  December 31, 2014  Provision
Allocation
  Charge-offs  Recoveries  December 31, 2015 
Mortgage loans on real estate:                    
Residential 1-4 family $2,698  $593  $(490) $83  $2,884 
Commercial  1,963   1,773      33   3,769 
Construction and land development  1,792   (31)  (593)  130   1,298 
Second mortgages  49   50   (100)  97   96 
Multifamily  54   87         141 
Agriculture  58   (34)        24 
Total real estate loans  6,614   2,438   (1,183)  343   8,212 
Commercial loans  977   (1,554)  (3)  1,211   631 
Consumer installment loans  72   97   (174)  98   93 
All other loans  59   (34)        25 
Unallocated  1,545   (947)        598 
Total loans $9,267  $  $(1,360) $1,652  $9,559 

The increase in provision expense reflects the significant increase in commercial real estate and construction and land development loans classified as special mention due to the inherent economic impact COVID-19 may have on these borrowers due to potential lost rental income, declining hospitality revenues, and construction material shortages. The allowance for loan losses at December 31, 2016 as presented on Consolidated Statementcould be further impacted by COVID-19; however, the amount of Income (Loss) included a credit of $284,000 related to the PCI loans. See Note 4 for more details.that impact is not currently estimable.

The following tables present information on the loans evaluated for impairment in the allowance for loan losses as of December 31, 20172020 and 20162019 (dollars in thousands):

December 31, 2020

Allowance for Loan Losses

Recorded Investment in Loans

    

Individually

    

Collectively

    

    

Individually

    

Collectively

    

Evaluated for

Evaluated for

Evaluated for

Evaluated for

Impairment

Impairment

Total

Impairment

Impairment

Total

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1‑4 family

$

640

$

1,998

$

2,638

$

2,824

$

194,404

$

197,228

Commercial

 

57

 

4,511

 

4,568

 

3,658

 

471,198

 

474,856

Construction and land development

 

12

 

2,533

 

2,545

 

44

 

182,233

 

182,277

Second mortgages

 

 

18

 

18

 

 

6,360

 

6,360

Multifamily

 

 

508

 

508

 

 

78,158

 

78,158

Agriculture

 

13

 

27

 

40

 

45

 

6,617

 

6,662

Total real estate loans

 

722

 

9,595

 

10,317

 

6,571

 

938,970

 

945,541

Commercial loans

 

437

 

1,460

 

1,897

 

2,549

 

222,837

 

225,386

Consumer installment loans

 

6

 

113

 

119

 

19

 

9,977

 

9,996

All other loans

 

 

7

 

7

 

 

1,439

 

1,439

Unallocated

 

 

 

 

 

 

Total loans

$

1,165

$

11,175

$

12,340

$

9,139

$

1,173,223

$

1,182,362

 December 31, 2017 
 Allowance for Loan Losses  Recorded Investment in Loans 
 Individually
Evaluated for
Impairment
  Collectively
Evaluated for
Impairment
  Total  Individually
Evaluated for
Impairment
  Collectively
Evaluated for
Impairment
  Total 

December 31, 2019

Allowance for Loan Losses

Recorded Investment in Loans

    

Individually

    

Collectively

    

    

Individually

    

Collectively

    

Evaluated for

Evaluated for

Evaluated for

Evaluated for

Impairment

Impairment

Total

Impairment

Impairment

Total

Mortgage loans on real estate:                        

 

  

 

  

 

  

 

  

 

  

 

  

Residential 1-4 family $290  $3,176  $3,466  $4,117  $223,425  $227,542 

Residential 1‑4 family

$

380

$

2,305

$

2,685

$

2,981

$

220,557

$

223,538

Commercial  65   2,358   2,423   4,396   361,935   366,331 

 

87

 

2,109

 

2,196

 

3,604

 

393,254

 

396,858

Construction and land development  556   691   1,247   4,276   103,538   107,814 

 

11

 

1,033

 

1,044

 

376

 

146,190

 

146,566

Second mortgages     24   24      8,410   8,410 

 

 

79

 

79

 

 

6,639

 

6,639

Multifamily     496   496      59,024   59,024 

 

 

248

 

248

 

2,463

 

70,515

 

72,978

Agriculture  8   6   14   68   7,415   7,483 

 

 

38

 

38

 

 

8,346

 

8,346

Total real estate loans  919   6,751   7,670   12,857   763,747   776,604 

 

478

 

5,812

 

6,290

 

9,424

 

845,501

 

854,925

Commercial loans  39   1,100   1,139   1,433   157,591   159,024 

 

105

 

1,875

 

1,980

 

454

 

190,729

 

191,183

Consumer installment loans  1   109   110   7   5,162   5,169 

 

1

 

113

 

114

 

7

 

11,156

 

11,163

All other loans     3   3      1,221   1,221 

 

 

7

 

7

 

 

1,052

 

1,052

Unallocated     47   47          

 

 

38

 

38

 

 

 

Total loans $959  $8,010  $8,969  $14,297  $927,721  $942,018 

$

584

$

7,845

$

8,429

$

9,885

$

1,048,438

$

1,058,323

  December 31, 2016 
  Allowance for Loan Losses  Recorded Investment in Loans 
  Individually
Evaluated for
Impairment
  Collectively
Evaluated for
Impairment
  Total  Individually
Evaluated for
Impairment
  Collectively
Evaluated for
Impairment
  Total 
Mortgage loans on real estate:                        
Residential 1-4 family $283  $2,486  $2,769  $4,325  $203,538  $207,863 
Commercial  73   1,879   1,952   7,187   332,617   339,804 
Construction and land development  730   1,465   2,195   5,495   92,787   98,282 
Second mortgages     72   72      7,911   7,911 
Multifamily     260   260      39,084   39,084 
Agriculture     15   15      7,185   7,185 
Total real estate loans  1,086   6,177   7,263   17,007   683,122   700,129 
Commercial loans  7   595   602   1,253   128,047   129,300 
Consumer installment loans  37   98   135   281   5,346   5,627 
All other loans     7   7      1,243   1,243 
Unallocated     1,486   1,486          
Total loans $1,130  $8,363  $9,493  $18,541  $817,758  $836,299 

68

Loans are monitored for credit quality on a recurring basis. These credit quality indicators are defined as follows:

Pass -  A pass loan is not adversely classified, as it does not display any of the characteristics for adverse classification. This category includes purchased loans that are 100% guaranteed by U.S. Government agencies of $18.0$10.7 million and $15.8$12.7 million at December 31, 20172020 and 2016, respectively.2019, respectively, and PPP loans 100% guaranteed by the SBA of $49.3 million at December 31, 2020.

75

Special Mention- A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention loans are not adversely classified and do not warrant adverse classification.

Substandard- A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well definedwell-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful- A doubtful loan has all the weaknesses inherent in a loan classified as substandard with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. The possibility of loss is extremely high.

The following tables present the composition of loans excluding PCI loans, by credit quality indicator atas of December 31, 20172020 and 20162019 (dollars in thousands):

December 31, 2020

Special

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

Mortgage loans on real estate:

Residential 1‑4 family

$

189,617

$

6,253

$

1,358

$

$

197,228

Commercial

 

433,748

39,001

2,107

474,856

Construction and land development

 

173,668

8,565

44

182,277

Second mortgages

 

5,495

865

6,360

Multifamily

 

71,923

6,235

78,158

Agriculture

 

6,208

409

45

6,662

Total real estate loans

 

880,659

61,328

3,554

945,541

Commercial loans

 

199,762

17,843

7,781

225,386

Consumer installment loans

 

9,959

18

19

9,996

All other loans

 

1,424

15

1,439

Total loans

$

1,091,804

$

79,204

$

11,354

$

$

1,182,362

 December 31, 2017 
 Pass  Special
Mention
  Substandard  Doubtful  Total 

December 31, 2019

Special

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

Mortgage loans on real estate:                    

 

  

 

  

 

  

 

  

 

  

Residential 1-4 family $222,026  $3,442  $2,074  $  $227,542 

Residential 1‑4 family

$

219,210

$

2,964

$

1,364

$

$

223,538

Commercial  355,188   8,145   2,998      366,331 

 

391,251

 

3,188

 

2,419

 

 

396,858

Construction and land development  103,356   182   4,276      107,814 

 

145,782

 

408

 

376

 

 

146,566

Second mortgages  8,187   223         8,410 

 

6,096

 

543

 

 

 

6,639

Multifamily  56,452      2,572      59,024 

 

70,515

 

 

2,463

 

 

72,978

Agriculture  7,010   385   88      7,483 

 

8,098

 

248

 

 

 

8,346

Total real estate loans  752,219   12,377   12,008      776,604 

 

840,952

 

7,351

 

6,622

 

 

854,925

Commercial loans  156,604   1,171   1,249      159,024 

 

185,123

 

2,770

 

3,290

 

 

191,183

Consumer installment loans  5,137   25   7      5,169 

 

11,140

 

16

 

7

 

 

11,163

All other loans  1,221            1,221 

 

1,052

 

 

 

 

1,052

Total loans $915,181  $13,573  $13,264  $  $942,018 

$

1,038,267

$

10,137

$

9,919

$

$

1,058,323

  December 31, 2016 
  Pass  Special
Mention
  Substandard  Doubtful  Total 
Mortgage loans on real estate:                    
Residential 1-4 family $199,973  $4,612  $3,278  $  $207,863 
Commercial  330,851   3,168   5,785      339,804 
Construction and land development  92,556   234   5,492      98,282 
Second mortgages  7,474   437         7,911 
Multifamily  36,474      2,610      39,084 
Agriculture  7,067   118         7,185 
  Total real estate loans  674,395   8,569   17,165      700,129 
Commercial loans  122,129   5,879   1,292      129,300 
Consumer installment loans  5,563   20   44      5,627 
All other loans  1,243            1,243 
Total loans $803,330  $14,468  $18,501  $  $836,299 

In accordance with FASB ASU 2011-02,Receivables (Topic 310): A Creditor'sCreditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, the Company assesses all loan modifications to determine whether they are considered troubled debt restructurings (TDRs) under the guidance. The Company had 2319 and 1724 loans that met the definition of a TDR at December 31, 20172020 and 2016,2019, respectively.

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76

During the year ended December 31, 2017,2020, the Company modified three 1-4 family loans and one agriculture loan that were considered to be TDRs. The Company extended the terms for two of the 1-4 family loans and lowered the interest rate for each of these loans, which had a pre- and post-modification balance of $1.1 million. The Company extended the term for the agriculture loan, which had a pre- and post-modification balance of $258,000.

During the year ended December 31, 2016, the Company modified four loans that were considered to be TDRs. The Company extended the terms for all four loans and the interest rate was lowered for three of these loans. The following table presents information relating to loans modified as TDRs during the year ended December 31, 2016 (dollars in thousands):

  Year ended December 31, 2016 
  Number of
Contracts
  Pre-Modification Outstanding
Recorded Investment
  Post-Modification Outstanding
Recorded Investment
 
Mortgage loans on real estate:            
Residential 1-4 family                                    1  $81  $93 
Commercial  1   298   298 
Construction and land development  1   217   217 
Total real estate loans  3   596   608 
Consumer loans  1   248   248 
Total loans               4  $844  $856 

During the year ended December 31, 2015, the Company modified one residential 1-4 family1 commercial real estate loan that was considered to be a TDR. The Company extendedgranted the termsborrower relief consisting of a six month payment deferral followed by six months of interest only payments. The loan is 100% guaranteed by the USDA and lowered the interest rate for this loan, which had a pre-pre- and post-modification balance of $68,000.$438,000. The Company had no loan modifications considered to be TDRs during the year ended December 31, 2019.

During the year ended December 31, 2020, there were 0 TDRs that had been restructured during the previous 12 months that resulted in default.A loan is considered to be in default if it is 90 days or more past due. There were no TDRsDuring the year ended December 31, 2019, 1 loan defaulted that had been restructured during the previous 12 months that resulted in default duringprior to the years ended December 31, 2017, 2016 and 2015.default. This multifamily real estate loan had a recorded investment of $2.5 million.

In the determination of the allowance for loan losses, management considers TDRs and subsequent defaults in these restructures by reviewing for impairment in accordance with FASB ASC 310-10-35, Receivables, Subsequent Measurement.

At December 31, 20172020 the Company had 1-4 family mortgages in the amount of $139.8$84.9 million pledged as collateral to the Federal Home Loan Bank for a total borrowing capacity of $113.9$71.1 million.

Note 4. PCI Loans and Related Allowance for Loan Losses

On January 30, 2009, the Company entered into a Purchase and Assumption Agreement with the FDIC to assume all of the deposits and certain other liabilities and acquire substantially all assets of SFSB. The Company is applying the provisions of FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, to all loans acquired in the SFSB transaction (the “PCI” loans). Of the total $198.3 million in loans acquired, $49.1 million met the criteria of FASB ASC 310-30. These loans, consisting mainly of construction loans, were deemed impaired at the acquisition date. The remaining $149.1 million of loans acquired, comprised mainly of residential 1-4 family, were analogized to meet the criteria of FASB ASC 310-30. Analysis of this portfolio revealed that SFSB utilized weak underwriting and documentation standards, which led the Company to believe that significant losses were probable given the economic environment at the time.

As of December 31, 20172020 and 2016,2019, the outstanding contractual balance of the PCI loans was $71.0$43.2 million and $81.1$53.2 million, respectively. The carrying amount, by loan type, as of these dates is as follows (dollars in thousands):

December 31, 2020

December 31, 2019

 

    

    

% of PCI

    

    

% of PCI

 

Amount

Loans

Amount

Loans

 

Mortgage loans on real estate:

Residential 1‑4 family

$

21,720

 

90.35

%  

$

29,465

 

90.58

%

Commercial

 

429

 

1.78

 

490

 

1.51

Construction and land development

 

780

 

3.25

 

1,172

 

3.60

Second mortgages

 

904

 

3.76

 

1,169

 

3.59

Multifamily

 

207

 

0.86

 

232

 

0.72

Total real estate loans

 

24,040

 

100.00

 

32,528

 

100.00

Total PCI loans

$

24,040

 

100.00

%  

$

32,528

 

100.00

%

  December 31, 2017  December 31, 2016 
  Amount  % of PCI
Loans
  Amount  % of PCI
Loans
 
Mortgage loans on real estate:                
Residential 1-4 family $39,805   89.79% $46,623   89.72%
Commercial  547   1.23   649   1.25 
Construction and land development  1,588   3.58   1,969   3.79 
Second mortgages  2,136   4.82   2,453   4.72 
Multifamily  257   0.58   270   0.52 
  Total real estate loans  44,333   100.00   51,964   100.00 
     Total PCI loans $44,333   100.00% $51,964   100.00%

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There was no0 activity in the allowance for loan losses on PCI loans for either of the years ended December 31, 20172020 and 2015. The only activity in the allowance for the year ended December 31, 2016 was a $284,000 credit to the provision for loan losses on PCI loans, which was the result2019.

77

The following table presents information on the PCI loans collectively evaluated for impairment in the allowance for loan losses atas of December 31, 20172020 and 20162019 (dollars in thousands):

December 31, 2020

December 31, 2019

    

Allowance

    

Recorded

    

    

Recorded

for loan

investment in

Allowance for

investment in

losses

loans

loan losses

loans

Mortgage loans on real estate:

 

  

 

  

 

  

 

  

Residential 1‑4 family

$

156

$

21,720

$

156

$

29,465

Commercial

 

 

429

 

 

490

Construction and land development

 

 

780

 

 

1,172

Second mortgages

 

 

904

 

 

1,169

Multifamily

 

 

207

 

 

232

Total real estate loans

 

156

 

24,040

 

156

 

32,528

Total PCI loans

$

156

$

24,040

$

156

$

32,528

  December 31, 2017  December 31, 2016 
  Allowance
for loan
losses
  Recorded
investment in
loans
  Allowance
for loan
losses
  Recorded
investment in
loans
 
Mortgage loans on real estate:                
Residential 1-4 family $200  $39,805  $200  $46,623 
Commercial     547      649 
Construction and land development     1,588      1,969 
Second mortgages     2,136      2,453 
Multifamily     257      270 
Total real estate loans  200   44,333   200   51,964 
Total PCI loans $200  $44,333  $200  $51,964 

The change in the accretable yield balance for the years ended December 31, 2017, 20162020 and 20152019 is as follows (dollars in thousands):

    

    

Balance, January 1, 2019

$

38,107

Accretion

 

(6,010)

Reclassification from nonaccretable difference

 

1,369

Balance, December 31, 2019

$

33,466

Accretion

 

(4,024)

Reclassification to nonaccretable difference

 

(253)

Balance, December 31, 2020

$

29,189

Balance, January 1, 2015 $51,082 
Accretion  (7,811)
Reclassification from nonaccretable yield  5,857 
Balance, December 31, 2015 49,128 
Accretion  (6,206)
Reclassification from nonaccretable yield  5,433 
Balance, December 31, 2016 48,355 
Accretion  (5,729)
Reclassification from nonaccretable yield  1,500 
Balance, December 31, 2017 $44,126 

The PCI loans were not classified as nonperforming assets as of December 31, 20172020 or 2016,2019, as the loans are accounted for on a pooled basis, and interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all PCI loans.

Note 5. FDIC AgreementsBank Premises and FDIC Indemnification AssetEquipment Held for Sale

On January 30, 2009, the Company entered into a PurchaseBank premises and Assumption Agreement with the FDICequipment held for sale includes 2 buildings relating to assume all of the deposits and certain other liabilities and acquire substantially all assets of SFSB. Under the shared-loss agreements thatbranch closures, which are part of that agreement, the FDIC reimbursed the Bankcurrently listed for 80% of losses arising from the acquired loans and foreclosed real estate assets, on the first $118 millionsale. The Prince Street branch in losses on such loans and foreclosed real estate assets, and for 95% of losses on acquired loans and foreclosed real estate assets thereafter. Under the shared-loss agreements, a “loss” on an acquired loan or foreclosed real estate was defined generally as a realized loss incurred through a permitted disposition, foreclosure, short-sale or restructuring of the acquired loan or foreclosed real estate.Tappahannock, Virginia closed in 2018. The reimbursements for losses on single family, residential 1-4 family mortgage assets were to be made quarterly through March 2019 for losses incurred through January 2019, and the reimbursements for losses on other assets were made quarterly through March 2014. The shared-loss agreements provided for indemnification from the first dollar of losses without any threshold requirement. The reimbursable losses from the FDIC were based on the book value of $470,000 reflects the relevant loan as determined by the FDIC at the datelower of the transaction, January 30, 2009. New loans made after that date were not covered by the shared-loss agreements. Thecost or fair market value of the shared-loss agreements is detailed below.

The Company accounted for the shared-loss agreements with the FDIC as an indemnification asset pursuant to the guidance in FASB ASC 805,Business Combinations. The FDIC indemnification asset was required to be measured in the same manner as the asset or liability to which it related. The FDIC indemnification asset was measured separately from the acquired loans and other real estate owned assets (OREO) because it was not contractually embedded in the acquired loan and OREO and was not transferable had the Company chosen to dispose of them. Fair value was estimated using projected cash flows available for loss sharing based on the credit adjustments estimated for each loan pool and other real estate owned and the loss sharing percentages outlined in the shared-loss agreements. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.

71

During the third quarter of 2015, the Company terminated the shared-loss agreement relating to the single family, residential 1-4 family mortgage assets. As part of this termination, the FDIC paid the Company $3.1 million as consideration for the early termination of the shared-loss agreement. All rights and obligations of the parties under the shared-loss agreements, including the provision to reimburse recoveries received related to the agreement that terminated in March 2014, have been eliminated under the termination agreement. The proceeds from the FDIC were first applied to the outstanding FDIC receivable of $775,000. The remaining FDIC indemnification asset balance of $13.1 million was charged-off as additional FDIC indemnification asset amortization expense.

The following table presents the balances of the FDIC indemnification asset at December 31, 2015 (dollars2020 after an $82,000 write down during 2020 to reflect current market pricing. The book value was $552,000 at December 31, 2019. The Cumberland branch in thousands):Cumberland, Virginia closed in 2019. The book value of $337,000 reflects the lower of cost or fair market value at each of December 31, 2020 and 2019.

Also included in bank premises and equipment held for sale is a piece of land the Company had been holding as a possible future branch site. The Company has decided not to pursue that location and is marketing the property. The book value of $700,000 reflects the lower of cost or fair market value at each of December 31, 2020 and 2019.

  Anticipated
Expected Losses
  Estimated Loss
Sharing Value
  Amortizable
Premium
(Discount) at
Present Value
  FDIC
Indemnification
Asset Total
 
January 1, 2015 $5,551  $4,441  $14,168  $18,609 
Increases:                
Writedown of OREO property to FMV             
Decreases:                
Net amortization of premium          (3,104)  (3,104)
Charge-off due to termination of shared-loss agreement          (13,091)  (13,091)
Reclassifications to FDIC receivable:                
Net loan charge-offs and recoveries  34   27       27 
OREO sales  (131)  (105)      (105)
Reimbursements requested from FDIC  (2,920)  (2,336)      (2,336)
Reforecasted Change in Anticipated Expected Losses  (2,534)  (2,027)  2,027    
December 31, 2015 $  $  $  $ 

78

Note 6. Premises and Equipment

A summary of the bank premises and equipment is as follows (dollars in thousands):

December 31

    

2020

    

2019

Land

$

7,769

$

7,797

Land improvements and buildings

 

21,409

 

21,248

Leasehold improvements

 

3,739

 

3,739

Furniture and equipment

 

11,955

 

11,652

Construction in progress

 

28

 

222

Total

 

44,900

 

44,658

Less accumulated depreciation and amortization

 

(17,003)

 

(15,186)

Bank premises and equipment, net

$

27,897

$

29,472

  December 31 
  2017  2016 
Land $8,623  $8,035 
Land improvements and buildings  22,475   20,048 
Leasehold improvements  802   762 
Furniture and equipment  9,840   8,797 
Construction in progress  290   892 
Total  42,030   38,534 
Less accumulated depreciation and amortization  (11,832)  (10,177)
Bank premises and equipment, net $30,198  $28,357 

Depreciation expense was $1.7 million, $1.5$1.8 million and $1.6$2.0 million for the years ended December 31, 2017, 20162020 and 2015,2019, respectively.

Note 7. Other Real Estate Owned

The following table presents the balances of other real estate owned atas of December 31, 20172020 and December 31, 20162019 (dollars in thousands):

    

December 31, 2020

    

December 31, 2019

Residential 1‑4 family

$

21

$

21

Commercial

 

 

Construction and land development

 

4,340

 

4,506

Total other real estate owned

$

4,361

$

4,527

  December 31, 2017  December 31, 2016 
       
Residential 1-4 family $486  $1,276 
Commercial  15   643 
Construction and land development  2,290   2,508 
Total other real estate owned $2,791  $4,427 

72

At December 31, 2017,2020, the Company had $1.0 million$289,000 in residential 1-4 family loans and PCI loans that were in the process of foreclosure.

Note 8. Other Intangibles

Core deposit intangibles are recognized, amortized and evaluated for impairment as required by FASB ASC 350,Intangibles. As a result of the mergers with TransCommunity Financial Corporation (TFC), and BOE Financial Services of Virginia, Inc. (BOE) on May 31, 2008, the Company recorded $15.0 million in core deposit intangible assets, which are being amortized over 9 years. Core deposit intangibles resulting from the Georgia and Maryland transactions, in 2008 and 2009, respectively, equaled $3.2 million and $2.1 million, respectively, and are being amortized over 9 years. The core deposit intangible related to the Georgia transaction was written off in conjunction with the sale of the branches in that market in 2013. The Company recognized amortization expense of $898,000 in the year ended December 31, 2017, which was the final year of amortization.

Other intangible assets are presented in the following table (dollars in thousands):

  December 31, 2017  December 31, 2016 
       
Core deposit intangibles $20,290  $20,290 
Accumulated amortization  (18,817)  (17,919)
Reduction due to sale of deposits  (1,473)  (1,473)
Balance $-  $898 

Note 9.  Deposits

The following table provides interest bearing deposit information, by type, as of December 31, 20172020 and 20162019 (dollars in thousands):

    

December 31, 2020

    

December 31, 2019

Interest bearing checking

$

239,628

$

NOW

170,532

MMDA

 

154,503

 

120,841

Savings

 

124,384

 

96,570

Time deposits less than or equal to $250,000

 

452,885

 

477,461

Time deposits over $250,000

 

128,400

 

119,460

Total interest bearing deposits

$

1,099,800

$

984,864

  December 31, 2017  December 31, 2016 
       
NOW $157,037  $137,332 
MMDA  143,363   111,346 
Savings  93,980   90,340 
Time deposits less than or equal to $250,000  437,810   440,699 
Time deposits over $250,000  110,546   128,690 
Total interest bearing deposits $942,736  $908,407 

Effective January 1, 2020, the Company re-classified all NOW accounts to interest bearing checking accounts, thereby eliminating the seven days withdrawal notification requirement imposed on NOW accounts.

79

The scheduled maturities of time deposits at December 31, 20172020 are as follows (dollars in thousands):

    

    

2021

$

460,700

2022

 

77,485

2023

 

19,247

2024

 

12,909

2025

 

10,944

Total

$

581,285

2018 $376,168 
2019  130,343 
2020  21,897 
2021  13,068 
2022  6,880 
2023   
Total $     548,356 

Brokered deposits totaled $13.6$29.3 million and $53.4$11.6 million at December 31, 20172020 and 2016,2019, respectively.

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Note 10.9. Borrowings

The Company uses borrowings in conjunction with deposits to fund lending and investing activities. Borrowings include overnight borrowings from correspondent banks (federal funds purchased) and funding from the Federal Home Loan Bank (FHLB). The Company classifies all borrowings that will mature within a year from the date on which the Companycompany enters into them as short-term borrowings.

advances.

The following table presents the Company’s borrowings atas of December 31, 20172020 and 20162019 (dollars in thousands):

December 31

    

2020

    

2019

Federal funds purchased

$

$

24,437

FHLB:

 

  

 

  

Short-term advances

$

10,000

$

20,000

Long-term notes payable

 

47,833

 

48,500

Total

$

57,833

$

68,500

  As of December 31 
  2017  2016 
       
Federal funds purchased $4,849  $4,714 
         
FHLB:        
Short-term advances $70,500  $55,000 
Long-term notes payable  30,929   26,887 
Total $101,429  $81,887 
         
Long-term debt $  $1,670 

The average interest rate of federal funds purchased during the years ended December 31, 20172020 and 20162019 was 1.58%1.55% and 0.88%2.56%, respectively.

The Company has an available line of credit with the FHLB of Atlanta which allows the companyCompany to borrow on a collateralized basis. As of December 31, 2017,2020, the Company had residential 1-4 family mortgages in the amount of $139.8$84.9 million pledged as collateral to the FHLB for a total borrowing capacity of $113.9$71.1 million. FHLB advances are considered short-term borrowings and are used to manage liquidity as needed. The average interest rate of FHLB advances during the years ended December 31, 20172020 and 20162019 was 1.34%0.70% and 0.96%2.45%, respectively. Long-term notes payable have interest rates ranging from1.07%from 0.56% to 2.07% with maturities ranging from 2018-2022.2022-2030. The Company had $29.6 million and $11.6 million in0 variable LIBOR rate long-term notes payable at either of December 31, 20172020 and 2016, respectively

On April 23, 2014, the Company repurchased the then outstanding 10,680 shares of Series A Preferred Stock. The Company funded the repurchase through an unsecured third-party term loan. The term loan, which had a maturity date of April 21, 2017, required that the Company make quarterly payments of 7.5% of the initial outstanding principal, plus accrued interest, during a six-quarter period beginning with the quarter ending December 31, 2014, quarterly payments of 10% of the initial outstanding principal, plus accrued interest, during the subsequent four-quarter period and the remaining principal amount and accrued interest at maturity. The interest rate reset quarterly based on three-month LIBOR plus 3.50% per annum. The terms of the loan required the Company to be in compliance with certain covenants, such as maintenance of minimum regulatory capital ratios, minimum return on assets, minimum cash on hand, minimum dividend capacity, and subsidiary dividend restrictions.

In January 2017, the Company paid the then remaining outstanding balance of $1.7 million. There were no prepayment penalties related to this transaction

2019.

Maturities of long-term debt at December 31, 20172020 are as follows (dollars in thousands):

    

    

2022

$

7,833

2023

10,000

2025

10,000

2030

 

20,000

Total

$

47,833

2018 $10,000 
2019  11,096 
2022  9,833 
Total $          30,929 

80

The Company had unsecured lines of credit with correspondent banks available for overnight borrowing totaling $35.0$75.0 million at December 31, 2017.2020.

74

Note 11.10. Accumulated Other Comprehensive Income (Loss)

The following tables present activity net of tax in accumulated other comprehensive income (loss) (AOCI) for the years ended December 31, 2017, 20162020 and 20152019 (dollars in thousands):

Year ended December 31, 2020

    

Unrealized

    

Defined

    

Gain (Loss) on

    

Total Other

Gain (Loss) on

Benefit

Cash Flow

Comprehensive

Securities

Pension Plan

Hedge

Income (Loss)

Beginning balance

$

2,887

$

(886)

$

(36)

$

1,965

Other comprehensive income (loss) before reclassifications

 

5,093

 

(191)

 

(458)

 

4,444

Amounts reclassified from AOCI

 

(222)

 

4

 

 

(218)

Net current period other comprehensive income (loss)

 

4,871

 

(187)

 

(458)

 

4,226

Ending balance

$

7,758

$

(1,073)

$

(494)

$

6,191

 December 31, 2017 
 Unrealized Gain
(Loss) on Securities
  Defined Benefit
Pension Plan
  Gain (Loss) on
Cash Flow Hedge
  Total Other
Comprehensive
Income (Loss)
 
         

Year ended December 31, 2019

    

Unrealized

    

Defined

    

Gain (Loss) on

    

Total Other

Gain (Loss) on

Benefit

Cash Flow

Comprehensive

Securities

Pension Plan

Hedge

Income (Loss)

Beginning balance $(410) $(767) $(46) $(1,223)

$

(618)

$

(857)

$

196

$

(1,279)

Other comprehensive (loss) income before reclassifications  1,342   (109)  160   1,393 

Other comprehensive income (loss) before reclassifications

 

3,688

 

(33)

 

(232)

 

3,423

Amounts reclassified from AOCI  (137)  3      (134)

 

(183)

 

4

 

 

(179)

Net current period other comprehensive (loss) income  1,205   (106)  160   1,259 
Impact of the Tax Cuts and Jobs Act  159   (175)  23   7 

Net current period other comprehensive income (loss)

 

3,505

 

(29)

 

(232)

 

3,244

Ending balance $954  $(1,048) $137  $43 

$

2,887

$

(886)

$

(36)

$

1,965

  December 31, 2016 
  

Unrealized Gain

(Loss) on Securities

  Defined Benefit
Pension Plan
  Gain (Loss) on
Cash Flow Hedge
  Total Other
Comprehensive
Income (Loss)
 
              
Beginning balance $443  $(901) $(131) $(589)
Other comprehensive (loss) income before reclassifications  (434)  131   85   (218)
Amounts reclassified from AOCI   (419)  3      (416)
Net current period other comprehensive (loss) income   (853)  134   85   (634)
Ending balance $(410) $(767) $(46) $(1,223)

  December 31, 2015 
  Unrealized Gain
(Loss) on Securities
  Defined Benefit
Pension Plan
  Gain (Loss) on
Cash Flow Hedge
  Total Other
Comprehensive
Income (Loss)
 
             
Beginning balance $1,452  $(811) $23  $664 
Other comprehensive (loss) income before reclassifications  (697)  (93)  (154)  (944)
Amounts reclassified from AOCI  (312)  3      (309)
Net current period other comprehensive (loss) income  (1,009)  (90)  (154)  (1,253)
Ending balance $443  $(901) $(131) $(589)

The Company releases the income tax effects included in AOCI when income or loss from the related items has been recognized in earnings. The following tables present the effects of reclassifications out of AOCI on line items of consolidated (loss) income for the years ended December 31, 2017, 20162020 and 20152019 (dollars in thousands):

Affected Line Item in the Unaudited Consolidated

Details about AOCI Components

Amount Reclassified from AOCI

Statement of Income

Year ended

    

December 31, 2020

    

December 31, 2019

    

  

Securities available for sale:

 

  

 

  

 

  

Unrealized gains on securities available for sale

$

(284)

$

(235)

 

Gain on securities transactions, net

Related tax expense

 

62

 

52

 

Income tax expense

$

(222)

$

(183)

 

Net of tax

Defined benefit plan

 

  

 

  

 

  

Amortization of prior service cost

$

5

$

5

 

Salaries and employee benefits

Related tax (benefit) expense

 

(1)

 

(1)

 

Income tax expense

$

4

$

4

 

Net of tax

Total reclassifications for the period

$

(218)

$

(179)

 

  

Details about AOCI Amount Reclassified from AOCI  Affected Line Item in the
Consolidated Statement of Income
  Year ended   
  December 31, 2017  December 31, 2016  December 31, 2015   
Securities available for sale              
Unrealized gains on securities available for sale $(210) $(634) $(472) Gain on securities transactions, net
Related tax expense  73   215   160  Income tax expense (benefit)
   (137)  (419)  (312) Net of tax
               
Defined benefit plan              
Amortization of prior service cost  5   4   5  Salaries and employee benefits
Related tax benefit  (2)  (1)  (2) Income tax expense (benefit)
   3   3   3  Net of tax
Total reclassifications for the period $(134) $(416) $(309)  

75

81

Note 12.11. Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2020 and 2019 are as follows (dollars in thousands):

  2017  2016  2015 
Deferred tax assets:            
Allowance for loan losses $1,971  $3,228  $3,415 
Deferred compensation  686   761   493 
Unrealized loss on available for sale securities     211    
Pension adjustment  294   395   464 
Purchase accounting adjustment  3,544   5,730   5,696 
OREO  394   608   569 
Other  123   392   440 
   7,012   11,325   11,077 
Deferred tax liabilities:            
Accrued pension  253   367   426 
Unrealized gain on available for sale securities  269      228 
Depreciation premises and equipment  367   496   287 
Other  51   18   18 
   940   881   959 
Net deferred tax asset $6,072  $10,444  $10,118 

    

2020

    

2019

Deferred tax assets:

 

  

 

  

Allowance for loan losses

$

2,712

$

1,852

Deferred compensation

 

831

 

762

Pension adjustment

 

302

 

249

Purchase accounting adjustment(1)

 

2,492

 

2,625

OREO

 

59

 

59

Right-of-use lease asset

1,272

1,481

Other

 

436

 

185

 

8,104

 

7,213

Deferred tax liabilities:

 

  

 

  

Accrued pension

 

342

 

226

Unrealized gain on available for sale securities

 

2,185

 

813

Depreciation premises and equipment

 

366

 

399

Lease liability

1,215

1,422

Other

 

12

 

12

 

4,120

 

2,872

Net deferred tax asset

$

3,984

$

4,341

(1)Purchase accounting adjustment includes timing differences related to PCI loans, purchased fixed assets, and differences in income recognition on the purchase transactions.

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded that it has no0 liability related to uncertain tax positions in accordance with FASB ASC 740,Income Taxes.

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) reduced the Company’s federal corporate income tax rate from 34% to 21% effective January 1, 2018. In accordance with FASB ASC 740, the Company recorded additional income tax expense of $3.5 million to write down the net deferred tax asset to reflect the realizable value as of December 31, 2017 based on the new 21% tax rate. The Company has determined that the impacts of the Act are final as of December 31, 2017.

Allocation of the income tax expense between current and deferred portions is as follows (dollars in thousands):

    

2020

    

2019

Current tax provision

$

4,612

$

3,132

Deferred tax (benefit) expense

 

(834)

 

420

Income tax expense

$

3,778

$

3,552

  2017  2016  2015 
Current tax expense $3,174  $3,816  $3,450 
Deferred tax expense (benefit)  3,729      (6,077)
             
Income tax expense (benefit) $6,903  $3,816  $(2,627)

The following is a reconciliation of the expected income tax expense (benefit) with the reported expense for each year:

    

2020

    

2019

 

Statutory federal income tax rate

 

21

%  

21

%

(Reduction) Increase in taxes resulting from:

 

  

 

  

Municipal interest

 

(1.4)

 

(1.5)

Bank owned life insurance income

 

(0.7)

 

(0.8)

Stock compensation

 

0.7

 

(0.4)

Other, net

 

(0.1)

 

0.1

Effective tax rate

 

19.5

%  

18.4

%

  2017  2016  2015 
Statutory federal income tax rate  34.0%  34.0%  (34.0)%
(Reduction) Increase in taxes resulting from:            
Impact of the Act  25.2       
Municipal interest  (5.5)  (5.3)  (13.6)
Bank owned life insurance income  (2.2)  (1.9)  (4.9)
Other, net  (2.6)  1.0   1.2 
Effective tax rate  48.9%  27.8%  (51.3)%

76

Note 13.12. Employee Benefit Plans

The Company adopted the Bank of Essex noncontributory, defined benefit pension plan for all full-time pre-merger Bank of Essex employees over 21 years of age. Benefits are generally based upon upon��years of service and the employees’ compensation. The Company funds pension costs, which are included in salaries and employee benefits in

82

the consolidated statement of income, in accordance with the funding provisions of the Employee Retirement Income Security Act.

The Company has frozenfroze the plan benefits for all the Defined Benefit Plandefined benefit plan participants effective December 31, 2010. The following table provides a reconciliation ofInformation pertaining to the changesactivity in the plan’s benefit obligations and fair value of assets for the year ended December 31, 2017 and 2016 (dollars in thousands):

  December 31 
  2017  2016 
Change in Benefit Obligation        
Benefit obligation, beginning of year $3,997  $4,836 
Interest cost  158   190 
Actuarial (gain)/loss  481   29 
Benefits paid  (76)  (1,068)
Settlement gain     10 
Benefit obligation, ending $4,560  $3,997 
         
Change in Plan Assets        
Fair value of plan assets, beginning of year $3,915  $4,725 
Actual return on plan assets  530   258 
Benefits paid  (76)  (1,068)
Fair value of plan assets, ending  4,369   3,915 
Funded Status $(191) $(82)
         
Amounts Recognized in the Balance Sheet        
Other liabilities $(191) $(82)
Amounts Recognized in Accumulated Other Comprehensive Income (Loss)        
Net loss $1,293  $1,108 
Prior service cost  49   54 
Deferred tax  (294)  (395)
Total amount recognized $1,048  $767 

The accumulated benefit obligation for the defined benefit pension plan at December 31, 2017 and 2016 was $4.6 million and $4.0 million, respectively.

The following table provides the components of net periodic benefit cost (income) for the plan for the years ended December 31, 2017, 20162020 and 20152019 is as follows (dollars in thousands):

Years ended December 31

    

2020

    

2019

Change in Benefit Obligation

Benefit obligation, beginning of year

$

4,114

$

4,112

Interest cost

 

130

 

162

Actuarial loss/(gain)

 

546

 

473

Benefits paid

 

(58)

 

(635)

Settlement loss

2

Benefit obligation, ending

$

4,732

$

4,114

Change in Plan Assets

 

  

 

  

Fair value of plan assets, beginning of year

$

4,006

$

4,180

Actual return on plan assets

 

467

 

461

Employer contribution

500

Benefits paid

 

(58)

 

(635)

Fair value of plan assets, ending

 

4,915

 

4,006

Funded status

$

183

$

(108)

Amounts Recognized in the Balance Sheet

 

  

 

  

Other assets

$

183

$

Other liabilities

(108)

Amounts Recognized in Accumulated Other Comprehensive Income (Loss)

 

  

 

  

Net loss

$

1,339

$

1,095

Prior service cost

 

36

 

40

Deferred tax

 

(302)

 

(249)

Total amount recognized

$

1,073

$

886

Accumulated benefit obligation

$

4,732

$

4,114

 2017  2016  2015 

 

Components of net periodic (income) cost

    

    

Interest cost $158   190  $189 

$

130

$

162

Expected return on plan assets  (281)  (326)  (353)

 

(215)

 

(214)

Amortization of prior service cost  5   4   5 

 

5

 

5

Recognized net loss due to settlement     253   70 

 

 

140

Recognized net actuarial loss  46   54   43 

 

49

 

47

Net periodic benefit cost (income) $(72) $175  $(46)
            
Total recognized in net periodic benefit cost (income) and accumulated other comprehensive (loss) income $281  $(29) $92 

Net periodic (income) cost

$

(31)

$

140

Other changes in plan assets and benefit obligations recognized in other comprehensive income

Net (gain) loss

 

$

243

 

$

41

Amortization of prior service cost

(5)

(5)

Total amount recognized

$

238

$

36

Total recognized in net periodic benefit (income) cost and accumulated other comprehensive (loss) income

 

$

207

 

$

176

77

83

The weighted-average assumptions used in the measurement of the Company’s benefit obligation and net periodic benefit cost are shown in the following table:

December 31

 

    

2020

    

2019

 

Discount rate used for net periodic pension cost

 

3.25

%  

4.25

%

Discount rate used to determine obligation

 

2.50

%  

3.25

%

Expected return on plan assets

 

5.50

%  

5.50

%

  December 31 
  2017  2016  2015 
Discount rate used for net periodic pension cost  4.00%  4.25%  4.00%
Discount rate used to determine obligation  3.50%  4.00%  4.25%
Expected return on plan assets  7.25%  7.50%  7.50%

Other changes in plan assets and benefit obligations recognized in other comprehensive income during 2017 are as follows (dollars in thousands):

Net loss $185 
Amortization of prior service cost  (5)
Total amount recognized $180 

The estimated amounts that will amortize from accumulated other comprehensive income into net periodic benefit cost in 2018 are as follows (dollars in thousands):

Prior service cost $4 
Net loss  60 
Total amount recognized $64 

Long-Term Rate of Return

The plan sponsor selects the expected long-term rate of return on assets assumption in consultation with its investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience that may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.

Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).

Asset Allocation

The pension plan’s weighted-average asset allocations as of December 31, 20172020 and 20162019 by asset category were as follows:

December 31

 

    

2020

    

2019

 

Asset Category

 

  

 

  

Mutual funds — fixed income

 

73.00

%  

74.00

%

Mutual funds — equity

 

27.00

 

26.00

Cash and equivalents

 

0

 

0

Total

 

100.00

%  

100.00

%

  December 31 
  2017  2016 
Asset Category        
Mutual funds — fixed income  74.00%  39.00%
Mutual funds — equity  26.00   61.00 
Cash and equivalents  0.00   0.00 
Total  100.00%  100.00%

The fair value of plan assets is measured based on the fair value hierarchy as discussed in Note 22,20, “Fair Values of Assets and Liabilities”, to the Consolidated Financial Statements. The valuations are based on third party data received as of the balance sheet date. All plan assets are considered Level 1 assets, as quoted prices exist in active markets for identical assets.

84

The following table presents the fair value of plan assets as of December 31, 20172020 and 20162019 (dollars in thousands):

Assets measured at Fair Value (Level 1)

    

December 31, 2020

    

December 31, 2019

Cash

$

1

$

4

Mutual funds:

 

  

 

  

Fixed income funds

 

3,583

 

2,956

International funds

 

502

 

272

Large cap funds

 

468

 

364

Mid cap funds

 

166

 

137

Small cap funds

 

51

 

79

Real Estate Fund

144

Stock fund

 

 

194

$

4,915

$

4,006

  Assets measured at Fair Value (Level 1) 
  December 31, 2017  December 31, 2016 
       
Cash $5  $ 
Mutual funds:        
Fixed income funds  3,239   1,517 
International funds  319   568 
Large cap funds  390   807 
Mid cap funds  145   412 
Small cap funds  76   185 
Stock fund  195   426 
  $4,369  $3,915 

78

The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 74%73% fixed income and 26%27% equities. The investment manager selects investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the implementation of the plan’s investment strategy. The investment manager will consider both actively and passively managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure.

It is the responsibility of the trustee to administer the investments of the trust within reasonable costs, being careful to avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees, transaction costs and other administrative costs chargeable to the trust.

Estimated future contributions and benefit payments, which reflect expected future service, as appropriate, are as follows (dollars in thousands):

Expected Employer Contributions

    

2021

$

Expected Benefit Payments

 

  

2021

 

195

2022

 

132

2023

 

66

2024

 

188

2025

 

82

2026-2030

 

3,179

Expected Employer Contributions    
2018 $ 
Expected Benefit Payments    
2018  100 
2019  649 
2020  192 
2021  76 
2022  137 
2023-2027  1,739 

401(k) Plan

The Company maintains the Essex Bank 401(k) plan. The employee may contribute up to 100% of compensation, subject to statutory limitations. The Company matches 100% of employee contributions on the first 3% of compensation, then the Company matches 50% of employee contributions on the next 2% of compensation.

The amounts charged to expense under these plans for the years ended December 31, 2017, 20162020 and 20152019 were $595,000, $568,000$611,000 and $584,000,$614,000, respectively.

Deferred Compensation Agreements

The Company has deferred compensation agreements with certain key employees and the Board of Directors. The retirement benefits to be provided are fixed based upon the amount of compensation earned and deferred. Deferred

85

compensation expense amounted to $155,000, $290,000$147,000 and $154,000$110,000 for the years ended December 31, 2017, 20162020 and 2015,2019, respectively. The associated liabilities related to these agreements were $2.1 million and $2.4$2.1 million at each of December 31, 20172020 and 2016, respectively. During 2016, the2019.

The Company changed the discount rate related to these plans from 6% to 5%. This resulted in an expense of $134,000 for the year ended December 31, 2016.

Effective June 1, 2016, the Company commencedalso has a non-qualified defined contribution retirement plan for certain key executive officers. The purpose of the plan is to enhance the retirement benefits that the Company provides to each officer and to recognize each officer for overall performance through additional incentive-based compensation.  For 2017 and 2016, theThe planned contributions were based on the same metrics that the Company used for its annual incentive plan for executive officers. All contributions were 100% vested as of December 31, 2017.2020. The expense related to this plan was $515,000$396,000 and $345,000$444,000 for the years ended December 31, 20172020 and 2016,2019, respectively, with an associated liability of $860,000$1.2 million and $345,000$1.6 million at December 31, 20172020 and 2016,2019, respectively.

Note 14.13. Stock Option Plans

2009 Stock Option Plan

In 2009,2019, the Company adopted the Community Bankers Trust Corporation 20092019 Stock Incentive Plan (the “Plan”). The purpose of the Plan is to further the long-term stability and financial success of the Company by attracting and retaining employees and directors through the use of stock incentives and other rights that promote and recognize the financial success and growth of the Company. The Company believes that ownership of company stock will stimulate the efforts of such employees and directors by further aligning their interests with the interest of the Company’s shareholders. The Plan is to be used to grant restricted stock awards, stock options in the form of incentive stock options and nonstatutory stock options, stock appreciation rights and other stock-based awards to employees and directors of the Company for up to 2,650,0002,500,000 shares of common stock. No more than 1,500,000 sharesstock, all of which may be issued in connection with the exercise of incentive stock options. Annual grants of stock options are limited to 500,000200,000 shares for each participant.

79

participant, except that each non-employee directors is limited to 20,000 shares.

The exercise price of an incentivea stock option cannot be less than 100% of the fair market value of such shares on the date of grant, provided that if the participant owns, directly or indirectly, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the exercise price of an incentive stock option shall not be less than 110% of the fair market value of such shares on the date of grant. The exercise price of nonstatutory stock option awards cannot be less than 100% of the fair market value of such shares on the date of grant. The option exercise price may be paid in cash or with shares of common stock, or a combination of cash and common stock, if permitted under the participant’s option agreement. The Plan will expireterminate on June 17, 2019,May 16, 2029, unless terminated sooner by the Board of Directors.

The Company’s previously adopted 2009 Stock Incentive Plan terminated June 17, 2019. The 2009 Plan had the same general terms as the newly adopted 2019 Plan. Outstanding awards under the 2009 Plan will be administered in accordance with their terms under such plan.

The fair value of each option granted is estimated on the date of grant using the “Black Scholes Option Pricing” method with the following assumptions for the years ended December 31, 2017, 20162020 and 2015:2019:

    

2020

    

2019

 

Expected volatility

 

34

%  

40

%

Expected term (years)

 

6.25

 

6.25

Risk free rate

 

1.69

%  

2.66

%

  2017  2016  2015 
Expected volatility  40.0%  50.0%  50.0%
Expected dividend        1.0%
Expected term (years)  6.25   6.25   6.25 
Risk free rate  1.97% -2.02%   1.70%   1.67%

The expected volatility is an estimate of the volatility of the Company’s share price based on historical performance. The risk free interest rates for periods within the contractual life of the awards are based on the U. S. Treasury Zero CouponBill implied yield at the time of the grant correlating to the expected term. The expected term is based on the simplified method as provided by the Securities and Exchange Commission Staff Accounting Bulletin No 110 (SAB 110). In accordance with SAB 110, the Company has chosen to use the simplified method, as this is the first plan issued by the Company as Community Bankers Trust Corporation; therefore, minimal historical exercise data exists. The dividend yield assumption is based on the Company’s history and expectation

86

The Company plans to issue new shares of common stock when options are exercised. The Company recognizes forfeitures as they occur.

The Company issues equity grants to non-employee directors as payment for annual retainer fees. The fair market value of these grants was the closing price of the Company’s stock at the grant date. A summary of these grants for the years ended December 31, 2017, 20162020 and 20152019 is shown in the following table:

For the Year Ended

2020

2019

Month

    

Shares Issued

    

Fair Value

    

Shares Issued

    

Fair Value

March

 

6,599

$ 8.17

6,675

$ 8.08

June

 

8,937

5.48

6,723

7.28

September

 

9,643

5.08

7,459

7.76

December

 

8,829

6.38

6,210

8.69

  For the Year Ended 
  2017  2016  2015 
Month Shares
Issued
  Fair Market
Value
  Shares
Issued
  Fair Market
Value
  Shares
Issued
  Fair Market
Value
 
March  4,875   8.00   7,956   4.90   8,882   4.39 
May  391   8.20             
June  4,807   8.10   7,400   5.27   8,862   4.40 
September  4,612   8.45   7,166   5.44   7,722   5.05 
December  4,690   8.30   6,182   6.30   7,205   5.41 

The Company granted 320,000322,000 options in 2015, 263,0002019 and 314,500 options in 2016, and 293,000 options in 20172020 to employees which vest ratably over the requisite service period of four years. A summary of options outstanding for the year ended December 31, 2017,2020, is shown in the following table:

    

    

Weighted

    

Average

Aggregate

Number of Shares

Exercise Price

Intrinsic Value

Outstanding at beginning of year

 

1,593,750

$

5.92

Granted

 

314,500

 

9.45

Forfeited

 

(500)

 

9.45

 

  

Exercised

 

(54,000)

 

1.36

 

  

Outstanding at end of year

 

1,853,750

 

6.65

$

1,943,813

Options outstanding and exercisable at end of year

 

1,103,250

 

5.37

$

1,943,813

Weighted average remaining contractual life for outstanding and exercisable shares at year end

 

58 months

 

  

 

  

  Number of Shares  Weighted
Average
Exercise Price
  Aggregate
Intrinsic Value
 
          
Outstanding at beginning of year  1,135,000  $3.58     
Granted  293,000   7.40     
Forfeited  (2,000)  7.40     
Expired          
Exercised  (87,250)  2.98     
Outstanding at end of year  1,338,750   4.45  $4,949,273 
Options outstanding and exercisable at end of year  674,750   3.06  $3,437,595 
             
Weighted average remaining contractual life for outstanding and exercisable shares at year end  64 months         

80

The weighted average fair value per option of options granted during the year was $3.12, $2.52,$2.69 and $1.97$3.34 for the years ended December 31, 2017, 20162020 and 2015,2019, respectively. The aggregate intrinsic value of a stock option in the table above represents the aggregate pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by option holders had all option holders exercised their options on December 31, 2017.2020. This amount changes with changes in the market value of the Company’s stock. The Company received $260,000, $133,000 $73,000 and $86,000$893,000 in cash related to option exercises with a total intrinsic value of $452,000, $167,000$285,000 and $93,000$1.2 million during the years ended December 31, 2017, 20162020 and 2015,2019, respectively. A tax benefit in connection with the option exercises of $63,000 and issuances of restricted stock of $163,000$260,000 was recognized in income tax expense during 2017,2020 and $62,000 and $34,000 was recognized in additional paid-in-capital during 2016 and 2015, respectively.

2019, respectively.

The Company recorded total stock-based compensation expense of $745,000, $566,000 and $467,000$1.1 million for each of the years ended December 31, 2017, 20162020 and 2015,2019, respectively. Of the $745,000$1.1 million in expense that was recorded in 2017, $586,0002020, $925,000 related to employee grants and is classified as salaries and employee benefits expense; $159,000$205,000 related to the non-employee director grants and is classified as other operating expenses. Of the $566,000$1.1 million in expense that was recorded in 2016, $410,0002019, $860,000 related to employee grants and is classified as salaries and employee benefits expense; $156,000$215,000 related to the non-employee director grants and is classified as other operating expenses. Of the $467,000 in expense that was recorded in 2015, $310,000 related to employee grants and is classified as salaries and employee benefits expense; $157,000 related to the non-employee director grants and is classified as other operating expenses.

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The following table summarizes non-vested options and restricted stock outstanding atas of December 31, 2017:2020:

Weighted Average

Grant-Date

    

Number of Shares

    

Fair Value

Non-vested at beginning of the year

 

707,250

$

3.32

Granted

 

314,500

 

2.69

Vested

 

(270,750)

 

3.18

Forfeited

 

(500)

 

2.69

Non-vested at end of year

 

750,500

 

3.10

  Options  Restricted Stock 
    Weighted
Average
Grant-Date
    Weighted
Average
Grant-Date
 
  Number of Shares  Fair Value  Number of Shares  Fair Value 
             
Non-vested at beginning of the year  584,000  $2.13   6,250  $2.86 
Granted  293,000   3.12       
Vested  (211,000)  1.95   (6,250)  2.86 
Forfeited  (2,000)  3.12       
Non-vested  at end of year  664,000   2.62       

The unrecognized compensation expense related to non-vested options was $1.2$1.4 million at December 31, 20172020 to be recognized over a weighted average period of 3027 months.   The total fair market value of shares vested during the years ended December 31, 2017, 20162020 and 20152019 was $410,000, $284,000$861,000 and $148,000,$782,000, respectively.

Note 15.14. Earnings (Loss) Per Common Share

Basic earnings (loss) per common share (EPS) is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of all potentially dilutive common shares outstanding attributable to stock instruments. The following table presents basic and diluted EPS for the years ended December 31, 2017, 20162020 and 20152019 (dollars and shares in thousands, except per share data):

    

    

Weighted Average

    

Net Income

Shares

Per

(Numerator)

(Denominator)

Share Amount

For the year ended December 31, 2020

Basic EPS

$

15,548

 

22,331

$

0.70

Effect of dilutive stock awards

 

 

208

 

(0.01)

Diluted EPS

$

15,548

 

22,539

$

0.69

For the year ended December 31, 2019

 

  

 

  

 

  

Basic EPS

$

15,705

 

22,264

$

0.71

Effect of dilutive stock awards

 

 

267

 

(0.01)

Diluted EPS

$

15,705

 

22,531

$

0.70

  Net Income (Loss)
(Numerator)
  Weighted Average
Common Shares
(Denominator)
  Per Common
Share Amount
 
For the year ended December 31, 2017            
Basic EPS $7,203   22,014  $0.33 
Effect of dilutive stock awards     498    
Diluted EPS $7,203   22,512  $0.32 
             
For the year ended December 31, 2016            
Basic EPS $9,922   21,914  $0.45 
Effect of dilutive stock awards     247    
Diluted EPS $9,922   22,161  $0.45 
             
For the year ended December 31, 2015            
Basic EPS $(2,497)  21,827  $(0.11)
Effect of dilutive stock awards         
Diluted EPS $(2,497)  21,827  $(0.11)

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Antidilutive common shares issuable under awards or options of 953,0001.2 million were excluded from the computation of diluted earnings per common share for the year ended 2015. 2020.There were no0 antidilutive exclusions from the computation of diluted earnings per common share for the years ended 2017 and 2016, respectively.December 31, 2019.

Note 16.15. Related Party Transactions

In the ordinary course of business, the Bank has and expects to continue to have transactions, including borrowings, with its executive officers, directors, and their affiliates. The table below presents the activity forBank had an insignificant amount of such loans outstanding at December 31, 20172020 and 2016 (dollars in thousands).

  December 31 
  2017  2016 
Balance, beginning of year $6,524  $6,727 
Principal additions  35   1,481 
Repayments and reclassifications  (679)  (1,684)
Balance, end of year $5,880  $6,524 

2019, respectively.

The Bank held deposits of related parties in the amount of $3.0$2.0 million and $2.0$2.5 million as of December 31, 2020 and 2019, respectively.

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Note 16. Cash Flow Hedge

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings, such as FHLB borrowings, repurchase agreements, and brokered CDs. The Company had interest rate swaps designated as cash flow hedges with total notional amounts of $20 million and $10 million at December 31, 20172020 and 2016,2019, respectively.

Note 17. Cash Flow Hedge

On November 7, 2014, the Company entered into an interest rate swap with a total notional amount of $30 million. The Company designated the swap as a cash flow hedge intended to protect against the variability in the expected future cash flows on the designated variable rate borrowings.  The swap hedges the interest rate risk, wherein the Company will receive an interest rate based on the three month LIBOR from the counterparty and pays an interest rate of 1.69% to the same counterparty calculated on the notional amount for a term of five years.  The Company intends to sequentially issue a series of three month fixed rate debt as part of a planned roll-over of short term debt for five years. The forecasted funding will be provided through one of the following wholesale funding sources: a new FHLB advance, a new repurchase agreement, or a pool of brokered CDs, based on whichever market offers the most advantageous pricing at the time that pricing is first initially determined for the effective date of the swap and each reset period thereafter. Each quarter when the Company rolls over the three month debt, it will decide at that time which funding source to use for that quarterly period.

The swap wasswaps were entered into with a counterparty that met the Company’s credit standards, and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant. The Company had $390,000$770,000 and $180,000 of cash pledged as collateral as of each of December 31, 20172020 and 2016.

2019, respectively.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with FASB ASC 815,Derivatives and Hedging, the Company has designated the swap as a cash flow hedge, with the effective portions of the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. The ineffective portions of the unrealized gains or losses, if any, would be recorded in other operating expense. The Company has assessed the effectiveness of each hedging relationship by comparing the changes in cash flows on the designated hedged item. The Company’s cash flow hedge was deemed to be highly effective for the years ended 20172020 and 2016.2019. The Company recorded a fair value liability of the Company’s cash flow hedge was an unrealized gain of $177,000$631,000 and $44,000 in other liabilities at December 31, 2017,2020 and was recorded in other assets.2019, respectively.  The fair value of the Company’s cash flow hedgenet loss was an unrealized loss of $70,000 at December 31, 2016, and was recorded in other liabilities. The gain and loss were recorded as a component of other comprehensive income net of associated tax effects.

82

Note 18. Dividend Limitations on Affiliate Bank

Transfers of funds from the banking subsidiary to the parent corporation in the form of loans, advances and cash dividends are restricted by federal and state regulatory authorities.  All transfers of funds from the banking subsidiary to the parent corporation require prior approval from federal and state regulatory authorities as a result of the retained deficit at the banking subsidiary.  However, there are guidelines that exist that guide the bank as to amounts that may be transferred with appropriate prior approval.  As of December 31, 2017, 2016 and 2015, the aggregate amount of funds that could be transferred from the banking subsidiary to the parent corporation, with prior regulatory approval, totaled $13.5 million, $5.7 million and $0, respectively.

Note 19.17. Concentration of Credit Risk

At December 31, 20172020 and 2016,2019, the Company’s loan portfolio consisted of commercial, real estate and consumer (installment) loans. Real estate secured loans represented the largest concentration at 83.23%80.37% and 84.67%81.35% of the loan portfolio for 20172020 and 2016,2019, respectively.

The Company maintains a portion of its cash balances with several financial institutions located in its market area. Accounts at each institution are secured by the FDIC up to $250,000. Uninsured balances were $8.2$29.3 million and $10.8$9.5 million at December 31, 20172020 and 2016,2019, respectively.

Note 20.18. Financial Instruments With Off-Balance Sheet Risk

The Company is party to 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 and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the contract amounts of the Company’s exposure to off-balance sheet risk as of December 31, 20172020 and 2016,2019, is as follows (dollars in thousands):

    

December 31, 2020

    

December 31, 2019

Commitments with off-balance sheet risk:

 

  

 

  

Commitments to extend credit

$

245,858

$

210,086

Standby letters of credit

 

15,193

 

15,155

Total commitments with off-balance sheet risks

$

261,051

$

225,241

  December 31, 2017  December 31, 2016 
Commitments with off-balance sheet risk:        
Commitments to extend credit $163,686  $134,517 
Standby letters of credit  6,532   7,151 
Total commitments with off-balance sheet risks $170,218  $141,668 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without beingdrawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held

89

varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are generally uncollateralized and usually do not contain a specified maturity date and may be drawn upon only to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s evaluation of the counterparty. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

83

Note 21.19. Minimum Regulatory 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.

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, tier 1 and common equity tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of tier 1 capital (as defined) to adjusted average total assets (as defined). Management believes, as of December 31, 20172020 and 2016,2019, that the Company and Bank met all capital adequacy requirements to which they areit is subject.

As of December 31, 2017,2020, based on regulatory guidelines, the Company believes that the Bank is well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, tier 1 risk-based, common equity tier 1, and tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that date that management believes have changed the Bank’s category.

90

The Company’s and the Bank’s actual capital amounts and ratios are presented in the following table (dollars in thousands).

Required in Order to be

 

Required for Capital

Well Capitalized Under Prompt

 

Actual

Adequacy Purposes

Corrective Action

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

As of December 31, 2020:

 

  

 

  

 

  

 

  

 

  

 

  

Total Capital to risk weighted assets

$

178,363

 

13.61

%  

$

104,874

 

8.00

%  

$

131,093

 

10.00

Tier 1 Capital to risk weighted assets

 

166,210

 

12.68

%  

 

78,656

 

6.00

%  

 

104,874

 

8.00

%

Common Equity Tier 1 Capital to risk weighted assets

 

166,210

 

12.68

%  

 

58,992

 

4.50

%  

 

85,210

 

6.50

%

Tier 1 Capital to adjusted average total assets

 

166,210

 

10.14

%  

 

65,546

 

4.00

%  

 

81,933

 

5.00

%

As of December 31, 2019:

 

  

 

  

 

  

 

  

 

  

 

  

Total Capital to risk weighted assets

$

164,783

 

13.86

%  

$

95,137

 

8.00

%  

$

118,922

 

10.00

%

Tier 1 Capital to risk weighted assets

 

156,541

 

13.16

%  

 

71,353

 

6.00

%  

 

95,137

 

8.00

%

Common Equity Tier 1 Capital to risk weighted assets

 

156,541

 

13.16

%  

 

53,515

 

4.50

%  

 

77,299

 

6.50

%

Tier 1 Capital to adjusted average total assets

 

156,541

 

11.03

%  

 

56,750

 

4.00

%  

 

70,937

 

5.00

%

          Required in Order to  be 
  Actual  Required for  Capital
Adequacy Purposes
  Well Capitalized Under Prompt
Corrective Action
 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
As of December 31, 2017:                        
Total Capital to risk weighted assets                        
Company $136,910   12.70% $86,232   8.00%  NA   NA 
Bank  134,972   12.52%  86,217   8.00%  107,771   10.00%
Tier 1 Capital to risk weighted assets                        
Company  128,084   11.88%  64,674   6.00%  NA   NA 
Bank  126,146   11.71%  64,663   6.00%  86,217   8.00%
Common Equity Tier 1 Capital to risk weighted assets                        
Company  123,960   11.50%  48,506   4.50%  NA   NA 
Bank  126,146   11.71%  48,497   4.50%  70,051   6.50%
Tier 1 Capital to adjusted average total assets                        
Company  128,084   9.74%  52,619   4.00%  NA   NA 
Bank  126,146   9.59%  52,613   4.00%  65,767   5.00%
As of December 31, 2016:                        
Total Capital to risk weighted assets                        
Company $128,877   13.16% $78,369   8.00%  NA   NA 
Bank  127,606   13.03%  78,355   8.00%  97,943   10.00%
Tier 1 Capital to risk weighted assets                        
Company  119,527   12.20%  58,777   6.00%  NA   NA 
Bank  118,256   12.07%  58,766   6.00%  78,354   8.00%
Common Equity Tier 1 Capital to risk weighted assets                        
Company  115,403   11.78%  44,083   4.50%  NA   NA 
Bank  118,256   12.07%  44,074   4.50%  63,663   6.50%
Tier 1 Capital to adjusted average total assets                        
Company  119,527   9.60%  49,823   4.00%  NA   NA 
Bank  118,256   9.50%  49,815   4.00%  62,269   5.00%

Under the Basel III regulatory capital framework, a capital conservation buffer of 2.5% above the minimum risk-based capital thresholds was established. Dividend and executive compensation restrictions begin if the CompanyBank does not maintain the full amount of the buffer. The capital conservation buffer will be phased in between January 1, 2016 and January 1, 2019. The CompanyBank had a capital conservation buffer of 4.70%5.61% and 5.16%5.86% at December 31, 20172020 and 2016,2019, respectively, above the required buffer of 1.25%2.5% for each of 2020 and 0.625%2019.

In 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act developed a Community Bank Leverage Ratio (the ratio of a bank’s tangible equity capital to average total consolidated assets) for 2017banking organizations with assets of less than $10 billion, such as the Bank. In 2019, the federal banking agencies issued a final rule that implements the Community Bank Leverage Ratio Framework (the “CBLRF”).  To qualify for the CBLRF, a bank must have less than $10 billion in total consolidated assets, limited amounts of off-balance sheet exposures and 2016, respectively.trading assets and liabilities, and a leverage ratio greater than 9 percent. A bank that elects the CBLRF and has a leverage ratio greater than 9 percent will be considered to be in compliance with Basel III capital requirements and exempt from the complex Basel III calculations and will also be deemed “well capitalized” under Prompt Corrective Action regulations.  A bank that falls out of compliance with the CBLRF will have a two-quarter grace period to come back into full compliance, provided its leverage ratio remains above 8 percent (a bank will be deemed “well capitalized” during the grace period).  The CBLRF was available for banking organizations to use as of March 31, 2020 (with the flexibility for banking organizations to subsequently opt into or out of the CBLRF, as applicable).  The Bank has chosen to opt out of the CBLRF as of December 31, 2020.

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Note 22.20. Fair Values of Assets and Liabilities

FASB ASC 820,Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that prioritizes the valuation inputs into three broad levels. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1Valuation is based upon quoted prices for identical instruments traded in active markets.

91

• Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.

• Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full termTable of the assets or liabilities.Contents

• Level 3—Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

Level 2Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Companys own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

FASB ASC 825,Financial Instruments, allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any material FASB ASC 825 elections as of December 31, 2017.

2020.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The Company utilizes fair value measurements to record adjustments to certain assets to determine fair value disclosures. Securities available for sale and loans held for salethe cash flow hedge are recorded at fair value on a recurring basis. The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

December 31, 2020

    

Total

    

Level 1

    

Level 2

    

Level 3

Investment securities available for sale

 

  

 

  

 

  

 

  

U.S. Treasury securities

$

23,499

$

23,499

$

$

U.S. Government agencies

 

25,853

 

4,034

 

21,819

 

State, county and municipal

 

125,720

 

5,945

 

119,775

 

Mortgage backed securities

 

32,189

 

5,534

 

26,655

 

Asset backed securities

 

37,488

 

9,784

 

27,754

 

Corporate bonds

 

26,598

 

500

 

26,098

 

Total investment securities available for sale

 

271,347

 

49,296

 

222,101

 

Total assets at fair value

$

271,347

$

49,296

$

222,101

$

Cash flow hedge liability

$

631

 

$

631

 

Total liabilities at fair value

$

631

$

$

631

$

  December 31, 2017 
  Total  Level 1  Level 2  Level 3 
Investment securities available for sale                
U.S. Treasury issue and other U.S. Gov’t agencies $40,256  $-  $40,256  $- 
U.S. Gov’t sponsored agencies  9,278   -   9,278   - 
State, county and municipal  125,760   332   125,428   - 
Corporate and other bonds  7,460   -   7,460   - 
Mortgage backed – U.S. Gov’t agencies  5,442   -   5,442   - 
Mortgage backed – U.S. Gov’t sponsored agencies  16,638   -   16,638   - 
Total investment securities available for sale  204,834   332   204,502   - 
Cash flow hedge  177   -   177   - 
Total assets at fair value $205,011  $332  $204,679  $- 
Total liabilities at fair value $-  $-  $-  $- 

December 31, 2019

    

Total

    

Level 1

    

Level 2

    

Level 3

Investment securities available for sale

U.S. Government agencies

$

21,936

$

$

21,936

$

State, county and municipal

 

98,592

 

10,072

 

88,520

 

Mortgage backed securities

 

48,740

 

1,181

 

47,559

 

Asset backed securities

 

11,604

 

 

11,604

 

Corporate bonds

 

6,097

 

 

6,097

 

Total investment securities available for sale

 

186,969

 

11,253

 

175,716

 

Total assets at fair value

$

186,969

$

11,253

$

175,716

$

Cash flow hedge liability

44

 

$

44

 

Total liabilities at fair value

$

44

$

$

44

$

  December 31, 2016 
  Total  Level 1  Level 2  Level 3 
Investment securities available for sale                
U.S. Treasury issue and other U.S. Gov’t agencies $57,976  $11,055  $46,921  $- 
U.S. Gov’t sponsored agencies  3,336   952   2,384   - 
State, county and municipal  122,773   2,345   120,428   - 
Corporate and other bonds  15,503   -   15,503   - 
Mortgage backed – U.S. Gov’t agencies  3,495   -   3,495   - 
Mortgage backed – U.S. Gov’t sponsored agencies  13,038   -   13,038   - 
Total investment securities available for sale  216,121   14,352   201,769   - 
Total assets at fair value $216,121  $14,352  $201,769  $- 
Cash flow hedge $(70) $-  $(70) $- 
Total liabilities at fair value $(70) $-  $(70) $- 

85

Investment securities available for sale

Investment securities available for sale are recorded at fair value each reporting period. Fair value measurement is based upon quoted prices, if available (Level 1). Quoted prices are available within the same month as the settlement date of the related security transaction. As a result, investment securities held at December 31, 2016 priced as level 1 that were still held at December 31, 2017 were priced as level 2 securities. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows,

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adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions (Level 2).

The Company utilizes a third party vendor to provide fair value data for purposes of determining the fair value of its available for sale securities portfolio. The third party vendor uses a reputable pricing companycompanies for security market data. The third party vendor has controls in place for month-to-month market checks and zero pricing, and a Statement on Standards for Attestation Engagements No. 1618 report is obtained from the third party vendor on an annual basis. The Company makes no adjustments to the pricing service data received for its securities available for sale.

Cash flow hedge

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company is also required to measure and recognize certain other financial assets at fair value on a nonrecurring basis on the consolidated balance sheet. The following tables present assets measured at fair value on a nonrecurring basis for the years ended December 31, 20172020 and 20162019 (dollars in thousands):

December 31, 2020

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans

$

3,449

$

$

$

3,449

Loans held for sale

 

 

 

Bank premises and equipment held for sale

 

1,507

 

 

 

1,507

Other real estate owned

 

4,361

 

 

 

4,361

Total assets at fair value

$

9,317

$

$

$

9,317

Total liabilities at fair value

$

$

$

$

 December 31, 2017 
 Total  Level 1  Level 2  Level 3 

December 31, 2019

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans $7,915  $  $1,306  $6,609 

$

3,020

$

$

$

3,020

Loans held for sale

501

501

Bank premises and equipment held for sale

1,589

1,589

Other real estate owned  2,791      1,203   1,588 

 

4,527

 

 

 

4,527

Total assets at fair value $10,706  $  $2,509  $8,197 

$

9,637

$

$

501

$

9,136

Total liabilities at fair value $  $  $  $ 

$

$

$

$

  December 31, 2016 
  Total  Level 1  Level 2  Level 3 
Impaired loans $9,536  $  $2,168  $7,368 
Other real estate owned  4,427      3,408   1,019 
Total assets at fair value $13,963  $  $5,576  $8,387 
Total liabilities at fair value $  $  $  $ 

Impaired loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures the impairment in accordance with FASB ASC 310,Receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. At December 31, 20172020 and December 31, 2016,2019, a majority of total impaired loans were evaluated based on the fair value of the collateral. The Company frequently obtains appraisals prepared by external professional appraisers for classified loans greater than $250,000 when the most recent appraisal is greater than 18 months old and /or deemed to be stale or invalid. The Company may also utilize internally prepared estimates that generally result from current market data and actual sales data related to the Company’s collateral. WhenThe Company makes adjustments for selling costs estimated at 10%, market deterioration, and any known liens against the collateral.  Therefore, the Company

93

records impaired loans as nonrecurring Level 3.  For the years ended December 31, 2020 and December 31, 2019, weighted average adjustments, calculated based on relative fair value, of the collateral is based on an observable market price or a current appraised value, the Company records therelated to impaired loan within Level 2.

86

loans were 12.3% and 12.8%, respectively.

The Company may also identify collateral deterioration based on current market sales data, including price and absorption, as well as input from real estate sales professionals and developers, county or city tax assessments, market data and on-site inspections by Company personnel. When management determines that the fair value of the collateral is further impaired below the appraised value, due to such things as absorption rates and market conditions, and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. In instances where an appraisal received subsequent to an internally prepared estimate reflects a higher collateral value, management does not revise the carrying amount. Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Reviews of classified loans are performed by management on a quarterly basis.

Loans held for sale

The carrying amounts of loans held for sale approximate fair value (Level 2).

Bank premises and equipment held for sale

The fair value of bank premises and equipment held for sale was determined using the adjusted appraisal methodology described in the other real estate owned (OREO) asset section below.

Other real estate owned

OREO assets are adjusted to fair value less estimated disposal costs upon transfer of the related loans to OREO, property establishing a new cost basis. Initial fair value is based on appraised values of the collateral less estimated disposal costs. Subsequent to the transfer, valuations are periodically performed by management based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and the Company’s ability and intent with regard to continued ownership of the properties. The assets are carried at the lower of carrying value or fair value less estimated disposal costs. Fair value is based upon independent market prices, appraised valuesThe Company may incur additional write-downs of the collateral or management’s estimation of the value of the collateral. When theOREO assets to fair value of the collateral is based on an observableless estimated costs to sell if valuations indicate a further deterioration in market price or a current appraised value,conditions. As such, the Company records the foreclosed asset within Level 2. When an appraised value is not available or management determines that theOREO as a nonrecurring fair value of the collateral is further impaired below the appraised value due to such thingsmeasurement classified as absorption rates and market conditions, the Company records the foreclosed asset within Level 3 of the fair value hierarchy.3.

Fair Value of Financial Instruments

FASB ASC 825,Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or nonrecurring basis. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with FASB ASU 2016-01, which the Company adopted on January 1, 2018 on a prospective basis, the Company uses the exit price notion, rather than the entry price notion, in calculating fair values of financial instruments not measured at fair value on a recurring basis.

94

The following reflects the fair value of financial instruments, whether or not recognized on the consolidated balance sheet, at fair valuemeasures by level of valuation assumptions used for those assets. These tables exclude financial instruments for which the carrying value approximates fair value (dollars in thousands):

December 31, 2020

    

    

Estimated Fair

    

    

    

Carrying Value

Value

Level 1

Level 2

Level 3

Financial assets:

Securities held to maturity

$

21,176

$

22,257

$

$

22,257

$

Loans, net of allowance

 

1,170,022

 

1,178,764

 

 

 

1,178,764

PCI loans, net of allowance

 

23,884

 

32,657

 

 

 

32,657

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Interest bearing deposits

 

1,099,800

 

1,103,112

 

 

1,103,112

 

Borrowings

 

61,957

 

62,852

 

 

62,852

 

 December 31, 2017 
 Carrying Value  Estimated Fair
Value
  Level 1  Level 2  Level 3 

December 31, 2019

    

    

Estimated Fair

    

    

    

Carrying Value

Value

Level 1

Level 2

Level 3

Financial assets:                    

Securities held to maturity $46,146  $46,888  $  $46,888  $ 

$

35,733

$

36,633

$

$

36,633

$

Loans, net of allowance  933,049   933,938      927,329   6,609 

 

1,049,894

 

1,041,671

 

 

 

1,041,671

PCI loans, net of allowance  44,133   48,655         48,655 

 

32,372

 

38,982

 

 

 

38,982

                    

Financial liabilities:                    

 

  

 

  

 

  

 

  

 

  

Interest bearing deposits  942,736   943,037      943,037    

 

984,864

 

985,853

 

 

985,853

 

Borrowings  105,553   105,363      105,363    

 

72,624

 

72,457

 

 

72,457

 

  December 31, 2016 
  Carrying Value  Estimated Fair
Value
  Level 1  Level 2  Level 3 
Financial assets:                    
Securities held to maturity $46,608  $46,858  $1,093  $45,765  $ 
Loans, net of allowance  826,806   829,349      821,981   7,368 
PCI loans, net of allowance  51,764   57,100         57,100 
                     
Financial liabilities:                    
Interest bearing deposits  908,407   909,627      909,627    
Borrowings  87,681   87,611      87,611    

87

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value as of December 31, 2017 and 2016. The Company applied the provisions of FASB ASC 820 to the fair value measurements of financial instruments not recognized on the consolidated balance sheet at fair value. The provisions requiring the Company to maximize the use of observable inputs and to measure fair value using a notion of exit price were factored into the Company’s selection of inputs into its established valuation techniques.

Financial Assets

Cash and cash equivalents

The carrying amounts of cash and due from banks, interest bearing bank deposits, and federal funds sold approximate fair value (Level 1).

Securities held for investment

For securities held for investment, fair values are based on quoted market prices or dealer quotes (Level 1 and 2).

Restricted securities

The carrying value of restricted securities approximates their fair value based on the redemption provisions of the respective issuer (Level 2).

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans is consistent with the methodology used for the FASB ASC 820 disclosure for assets recorded at fair value on a nonrecurring basis presented above.

PCI loans

Fair values for PCI loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, term of loan and whether or not the loans are amortizing. Loans were pooled together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on the rates used at acquisition (which were based on market rates for new originations of comparable loans) adjusted for any material changes in interest rates since acquisition. Increases in cash flow expectations since acquisition resulted in estimated fair value being higher than carrying value. The increase in cash flows is also reflected in a transfer from unaccretable yield to accretable yield as disclosed in Note 4.

Accrued interest receivable

The carrying amounts of accrued interest receivable approximate fair value (Level 2).

Financial Liabilities

Noninterest bearing deposits

The carrying amount of noninterest bearing deposits approximates fair value (Level 2).

Interest bearing deposits

The fair value of NOW accounts, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

88

Federal funds purchased

The carrying amount of federal funds purchased approximates fair value (Level 2).

Borrowings

The fair values of the Company’s FHLB borrowings and long-term debt, are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued interest payable

The carrying amounts of accrued interest payable approximate fair value (Level 2).

Off-balance sheet financial instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The Company’s off-balance sheet commitments are funded at current market rates at the date they are drawn upon. It is management’s opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.  

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates 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 terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 23.21. Trust Preferred Capital Notes

On December 12, 2003, BOE Statutory Trust I, a wholly-owned unconsolidated subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities. On December 12, 2003, $4.124 million of trust preferred securities were issued through a direct placement. The securities have a LIBOR-indexed floating rate of interest. The average interest rate at December 31, 2017, 20162020 and 20152019 was 4.20%, 3.68%3.98% and 3.28%5.45%, respectively. The securities have a mandatory redemption date of December 12, 2033 and are subject to varying call provisions which began December 12, 2008. The principal asset of the Trust is $4.124 million of the Company’s junior subordinated debt securities with the like maturities and like interest rates to the capital securities.

The trust preferred notes may be included in tier 1 capital for regulatory capital adequacy determination purposes up to 25% of tier 1 capital after its inclusion. The portion of the trust preferred not considered as tier 1 capital may be included in tier 2 capital. At December 31, 2017 and 2016, all trust preferred notes were included in tier 1 capital.

The obligations of the Company with respect to the issuance of the capital securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the capital securities.

Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related capital securities. The Company is current in its obligations under the trust preferred notes.

Note 22. Revenue Recognition

89

The Company recognizes income in accordance with FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and all subsequent ASUs that modified Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of this guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related fees, interchange fees, merchant income, and brokerage fees and commissions. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

95

Service charges and fees on deposit accounts

Note 24. Lease CommitmentsThe Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Interchange and ATM fees

The Company earns interchange and ATM fees from debit/credit cardholder transactions conducted through the Visa and ATM payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Because the Company acts as an agent and does not control the services rendered to the customers, related costs are netted against the fee income. These costs were included in other operating expenses prior to the adoption of Topic 606.

Brokerage fees and commissions

Brokerage fees and commissions consist of other recurring revenue streams such as commissions from sales of mutual funds and other investments to customers by a third-party service provider and investment advisor fees. The Company receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period.

The following table represents a summarypresents noninterest income, segregated by revenue streams in-scope and out-of-scope of non-cancelable operating leases for bank premises that have initial or remaining terms in excess of one year, some with renewal options, as of December 31, 2017 (dollars in thousands):

2018 $1,349 
2019  1,324 
2020  1,302 
2021  986 
2022  478 
Thereafter  6,766 
Total of future payments(1) $12,205 

(1) Future payments have not been reduced by minimum sublease rentals of $1.3 million due in the future under a non-cancelable sublease.

Rent expenseTopic 606, for the years ended December 31, 2017, 20162020 and 20152019 (dollars in thousands):

Year ended

December 31, 2020

December 31, 2019

Noninterest income

In-scope of Topic 606:

Service charges on deposit accounts

$

1,411

$

1,833

Interchange and ATM fees

 

1,183

 

999

Brokerage fees and commissions

 

314

 

399

Noninterest income (in-scope of Topic 606)

 

2,908

 

3,231

Noninterest income (out-of-scope of Topic 606)

 

3,040

 

2,123

Total noninterest income

$

5,948

$

5,354

Note 23. Leases

On January 1, 2019, the Company adopted FASB ASU 2016-02, Leases (Topic 842), as it relates to its non-cancellable operating leases and subleases of bank premises.  The guidance was implemented using the modified retrospective transition approach at the date of adoption with no cumulative effect adjustment to opening retained earnings and no material impact on the measurement of operating lease costs.  Prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historical accounting policies, resulting in a balance sheet presentation that is not comparable to the prior period in the first year of adoption.   The Company elected the practical expedient package, which allowed it to not reassess (1) whether expired or existing contracts are or contain a lease, (2) the lease classification of expired or existing leases, and (3) the initial direct costs for any existing leases.  The Company also elected the practical expedient to use hindsight in determining the lease term for existing leases, thereby including renewal options that the Company is reasonably certain will be exercised in the lease term.  The adoption of this ASU resulted in the recognition of operating lease assets of $7.4 million and lease liabilities of $7.6 million at January 1, 2019. 

96

The Company's leases have lease terms between five years and 20 years, with the longest lease term having an expiration date in 2038. Most of these leases include one or more renewal options for five years or less. At lease commencement, the Company assesses whether it is reasonably certain to exercise a renewal option by considering various economic factors. Options that are reasonably certain of being exercised are factored into the determination of the lease term, and related payments are included in the calculation of the right-of-use asset and lease liability.  The Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest rate implicit in a lease is not disclosed.  None of the Company’s current leases contain variable lease payment terms.  The Company accounts for associated non-lease components separately.

The following table presents operating lease liabilities at December 31, 2020 and December 31, 2019 (dollars in thousands):

December 31, 2020

December 31, 2019

 

  

  

Gross lease liability

$

8,047

$

9,278

Less: imputed interest

 

(2,260)

 

(2,541)

Present value of lease liability

$

5,787

$

6,737

The weighted average remaining lease term and weighted average discount rate for operating leases for the years ended December 31, 2020 and 2019 were 12.0 years and 4.78% and 12.0 years and 4.63%, respectively. Maturities of the gross operating lease liability at December 31, 2020 are as follows (dollars in thousands):

2021

    

$

1,190

2022

 

600

2023

 

630

2024

 

573

2025

 

552

Thereafter

 

4,502

Total of future payments

$

8,047

Operating lease costs and sublease rental income for the years ended December 31, 2020 and 2019 were $1.3 million $1.1and $119,000 and $1.5 million and $790,000, respectively.$191,000, respectively, and were included in occupancy expense.  

Note 25.24. Other Operating Expense

Expenses

Other noninterest expenseoperating expenses totals are presented in the following tables. Components of these expenses exceeding 1.0% of the aggregate of total net interest income and total noninterest income for any of the past threetwo years are stated separately (dollars in thousands).

Year Ended December 31

    

2020

    

2019

Bank franchise tax

$

948

$

880

Stationery, printing and supplies

 

660

 

625

Credit expense

 

525

 

617

Outside vendor fees

 

750

 

673

Other expenses

 

2,922

 

3,231

Total other operating expenses

$

5,805

$

6,026

  Year Ended 
  2017  2016  2015 
Bank franchise tax $632  $587  $574 
Telephone and internet line  676   647   714 
Stationery, printing and supplies  674   562   446 
Marketing expense  656   499   651 
Credit expense  584   442   745 
Outside vendor fees  562   536   532 
Other expenses  2,786   2,750   2,805 
Total other operating expenses $6,570  $6,023  $6,467 

90

97

Note 26.25. Parent Corporation Only Financial Statements

PARENT COMPANY

CONDENSED BALANCE SHEETS

AS OF DECEMBER 31, 20172020 and 20162019

(dollars in thousands)

 2017  2016 

    

2020

    

2019

Assets        

Cash $1,707  $2,521 

$

1,226

$

811

Other assets  322   443 

 

280

 

286

Investments in subsidiaries  126,189   117,389 

 

172,402

 

158,506

Total assets $128,218  $120,353 

$

173,908

$

159,603

        

Liabilities        

 

  

 

  

Other liabilities $91  $23 

$

130

$

Balances due to non-bank subsidiary  4,124   4,124 

 

4,124

 

4,124

Long term debt     1,670 
Total liabilities  4,215   5,817 

 

4,254

 

4,124

        

Shareholders’ Equity        

 

  

 

  

Common stock (200,000,000 shares authorized $0.01 par value; 22,072,523 and 21,959,648 shares issued and outstanding, respectively)  221   220 

Common stock (200,000,000 shares authorized, $0.01 par value; 22,200,929 and 22,422,621 shares issued and outstanding, respectively)

 

222

 

224

Additional paid in capital  147,671   146,667 

 

149,822

 

150,728

Retained deficit  (23,932)  (31,128)
Accumulated other comprehensive income (loss)  43   (1,223)
        

Retained earnings

 

13,419

 

2,562

Accumulated other comprehensive income

 

6,191

 

1,965

Total shareholders’ equity  124,003   114,536 

$

169,654

$

155,479

        

Total liabilities and shareholders’ equity $128,218  $120,353 

$

173,908

$

159,603

PARENT COMPANY

CONDENSED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 and 20152020 AND 2019

(dollars in thousands)

  2017  2016  2015 
Income:            
Dividends received from subsidiaries $  $2,500  $ 
Other operating income  4   5   4 
Total income  4   2,505   4 
             
Expenses:            
Interest expense  187   366   461 
Management fee paid to subsidiaries  177   179   175 
Stock option expense  25   19   13 
Professional and legal expenses  56   62   61 
Other operating expenses  81   76   80 
Total expenses  526   702   790 
             
Equity in undistributed income (loss) of subsidiaries  7,541   7,887   (1,975)
Net income (loss) before income taxes  7,019   9,690   (2,761)
Income tax benefit  184   232   264 
Net income (loss) $7,203  $9,922  $(2,497)
             
Comprehensive income (loss) $8,462  $9,288  $(3,750)

91

    

2020

    

2019

Income:

Dividends received from subsidiaries

$

6,436

$

Other operating income

 

5

 

7

Total income

 

6,441

 

7

Expenses:

 

  

 

  

Interest expense

 

167

 

228

Management fee paid to subsidiaries

 

283

 

242

Stock compensation expense

 

47

 

90

Professional and legal expenses

 

112

 

79

Other operating expenses

 

94

 

55

Total expenses

 

703

 

694

Equity in undistributed income of subsidiaries

 

9,670

 

16,252

Net income before income taxes

 

15,408

 

15,565

Income tax benefit

 

140

 

140

Net income

$

15,548

$

15,705

Comprehensive income

$

19,774

$

18,949

98

PARENT COMPANY

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 and 20152020 AND 2019

(dollars in thousands)

  2017  2016  2015 
Operating activities:            
Net income (loss) $7,203  $9,922  $(2,497)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:            
Stock-based compensation expense  745   566   467 
Tax benefit of exercised stock options  (15)  (4)   
Undistributed equity in income (loss) of subsidiary  (7,541)  (7,887)  1,975 
Decrease (increase) in other assets  136   139   (231)
(Decrease) increase in other liabilities, net  68   (23)  (25)
             
Net cash and cash equivalents provided by (used in) operating activities  596   2,713   (311)
             
Financing activities:            
Proceeds from long term debt         
Payment on long term debt  (1,670)  (4,005)  (4,005)
Redemption of preferred stock and related warrants         
Cash dividends paid         
Proceeds from issuance of common stock  260   133   86 
             
Net cash and cash equivalents used in financing activities  (1,410)  (3,872)  (3,919)
             
Decrease in cash and cash equivalents  (814)  (1,159)  (4,230)
Cash and cash equivalents at beginning of the period  2,521   3,680   7,910 
Cash and cash equivalents at end of the period $1,707  $2,521  $3,680 

    

2020

    

2019

Operating activities:

Net income

$

15,548

$

15,705

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Stock compensation expense

 

1,134

 

1,075

Undistributed equity in income of subsidiary

 

(9,670)

 

(16,252)

Decrease (increase) in other assets

 

6

 

(34)

Increase (decrease) in other liabilities

 

16

 

(1)

Net cash and cash equivalents provided by operating activities

 

7,034

 

493

Financing activities:

 

  

 

  

Proceeds from issuance of common stock

 

73

 

893

Advances from subsidiary

114

Repurchase of common stock

(2,115)

Cash dividends paid

 

(4,691)

 

(2,899)

Net cash and cash equivalents used in financing activities

 

(6,619)

 

(2,006)

Increase (decrease) in cash and cash equivalents

 

415

 

(1,513)

Cash and cash equivalents at beginning of the period

 

811

 

2,324

Cash and cash equivalents at end of the period

$

1,226

$

811

Note 27. Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued noting no items to be disclosed.

Note 28. Quarterly Data (unaudited)

  2017  2016 
(dollars in thousands) First  Second  Third  Fourth  First  Second  Third  Fourth 
Interest and dividend income $12,948  $13,220  $13,389  $13,758  $12,038  $12,133  $12,407  $12,717 
Interest expense  2,081   2,246   2,363   2,509   1,925   1,900   1,904   2,091 
                                 
Net interest income  10,867   10,974   11,026   11,249   10,113   10,233   10,503   10,626 
Provision for loan losses        150   400      200   250   (284)
                                 
Net interest income after provision for loan losses  10,867   10,974   10,876   10,849   10,113   10,033   10,253   10,910 
Noninterest income  1,153   1,188   1,165   1,191   1,321   1,395   1,345   1,118 
Noninterest expense  8,451   8,536   8,706   8,464   8,031   8,229   8,278   8,212 
                                 
Income before income taxes  3,569   3,626   3,335   3,576   3,403   3,199   3,320   3,816 
Income tax expense  1,076   692   919   4,216   983   881   862   1,090 
                                 
Net income (loss) $2,493  $2,934  $2,416  $(640) $2,420  $2,318  $2,458  $2,726 
                                 
                                 
Net income (loss) per common share, basic $0.11  $0.13  $0.11  $(0.03) $0.11  $0.11  $0.11  $0.12 
Net income (loss) per common share, diluted $0.11  $0.13  $0.11  $(0.03) $0.11  $0.11  $0.11  $0.12 

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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.CONTROLS AND PROCEDURES

ITEM 9A.       CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-K, the Company’s management, with the participation of the Company’s chief executive officer and chief financial officer (the “Certifying Officers”), conducted evaluations of the Company’s disclosure controls and procedures. As defined under Section 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

Based on this evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated thereunder.

Management’s Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Certifying Officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles.

As of December 31, 2017,2020, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control — Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. This assessment included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act.

Based on its assessment, management concluded that, as of December 31, 2017,2020, the Company’s internal control over financial reporting was effective based on the criteria set forth by COSO in its “Internal Control — Integrated Framework.”

BDO USA, LLP,The Company’s annual report does not include an attestation report of the Company’s independent registered public accounting firm, that audited the consolidated financial statements of the Company for the year ended December 31, 2017, has issued an attestation report on the effectiveness of the Company’sYount, Hyde, & Barbour. P.C. (YHB), regarding internal control over financial reporting asreporting. Management’s report was not subject to attestation by YHB pursuant to rules of December 31, 2017. Thethe Securities and Exchange Commission that permit the Company to provide only management’s report is included in Item 8, “Financial Statements and Supplementary Data”, above under the heading “Report of Independent Registered Public Accounting Firm.”its annual report.

Changes in Internal Control over Financial Reporting

There was no change in the Company's internal control over financial reporting identified in connection with the evaluation of internal controls that occurred during the fourth quarter of 20172020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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ITEM 9B.
OTHER INFORMATION

ITEM 9B.       OTHER INFORMATION

Not applicable.

PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 10.       DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference to the Company’s definitive Proxy Statement for the 20182021 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K covers.

ITEM 11.EXECUTIVE COMPENSATION

ITEM 11.       EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the Company’s definitive Proxy Statement for the 20182021 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K covers.

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K covers.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to the Company’s definitive Proxy Statement for the 20182021 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K covers.

ITEM 14.       PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference to the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K covers.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

101

The information required by this item is incorporated by reference to the Company’s definitive Proxy Statement for the 2018 Annual MeetingTable of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K covers.Contents

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference to the Company’s definitive Proxy Statement for the 2018 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year that this Form 10-K covers.

PART IV

ITEM 15.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)The following documents are filed as part of this Form 10-K:

1. Consolidated Financial Statements. Reference is made to the Consolidated Financial Statements, the report thereon and the notes thereto, with respect to the Company, commencing at page 4853 of this Form 10-K.

2. Financial Statement Schedules. All supplemental schedules are omitted as inapplicable or because the required information is included in the Consolidated Financial Statements or notes thereto.

3. Exhibits

No.

Description

No.

Description

2.1

Purchase and Assumption Agreement, dated as of January 30, 2009, by and among the Federal Deposit Insurance Corporation, Receiver of Suburban Federal Savings Bank, Crofton, Maryland, Bank of Essex and the Federal Deposit Insurance Corporation, incorporated by reference to the Company’s Current Report on Form 8-K filed on February 5, 2009 (File No. 001-32590)

3.1

94

3.1Amended and Restated Articles of Incorporation of Community Bankers Trust Corporation, a Virginia corporation (formerly known as CBTC Virginia Corporation), incorporated by reference to the Company’s Current Report on Form 8-K filed on January 7, 2014 (File No. 001-32590)

3.2

Certificate of Designations for Fixed Rate Cumulative Perpetual Preferred Stock, Series A of Community Bankers Trust Corporation, a Virginia corporation (formerly known as CBTC Virginia Corporation), incorporated by reference to the Company’s Current Report on Form 8-K filed on January 7, 2014 (File No. 001-32590)

3.3

Amended and Restated Bylaws of Community Bankers Trust Corporation, a Virginia corporation, (formerly known as CBTC Virginia Corporation), incorporated

by reference to the Company’s Current Report on Form 8-K filed on January 7, 2014May 1, 2020 (File No. 001-32590)001-

32590)

4.1

Specimen Common Stock Certificate, incorporated by reference to the Company’s Registration Statement on Form S-1 or amendments thereto (File No. 333-124240)

10.1Termination Agreement among Federal Deposit Insurance Corporation, as ReceiverDescription of Suburban Federal Savings Bank, Crofton, Maryland, Federal Deposit Insurance Corporation and Essex Bank (formerly known as Bank of Essex), Richmond, Virginia, dated as of September 10, 2015, incorporated by reference to the Company’s Current Report on Form 8-K filed on September 16, 2015 (File No. 001-32590)
10.2Term Loan Agreement, dated as of April 22, 2014, among Community Bankers Trust Corporation as Borrower, the Lenders from Time to Time Party Hereto and SunTrust Bank as Administrative Agent, incorporated by reference to the Company’s Current Report on Form 8-K filed on April 28, 2014 (File No. 001-32590)
10.3Letter Amendment to Term Loan Agreement, dated December 28, 2015, between Community Bankers Trust Corporation as Borrower and SunTrust Bank as Lender and Administrative Agent,Securities, incorporated by reference to the Company’s Annual Report on Form 10-K filed on

March 16, 201713, 2020 (File No. 001-32590)

10.4

10.1

Employment Agreement between Community Bankers Acquisition Corp. and Bruce E. Thomas, incorporated by reference to the Company’s Current Report on Form 8-K/A filed on July 28, 2008 (File No. 001-32590)

10.5Community Bankers Trust Corporation 2009 Stock Incentive Plan, incorporated by reference to the Company’s Current Report on Form 8-K filed on June 24, 2009 (File No. 001-32590)

10.6

10.2

Form of Non-Qualified Stock Option Agreement for Community Bankers Trust Corporation 2009 Stock Incentive Plan, incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 30, 2012 (File No. 001-32590)

10.7

10.3

Community Bankers Trust Corporation 2019 Stock Incentive Plan, incorporated by reference to the Company’s Registration Statement on Form S-8 filed on September 3, 2019 (File No. 333-233606)

10.4

Form of Non-Qualified Stock Option Agreement for Community Bankers Trust Corporation 2019 Stock Incentive Plan, incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 13,

2020 (File No. 001-32590)

10.5

Form of Performance Driven Retirement Agreement (Rex L. Smith, III, Bruce E. Thomas, Jeff R. Cantrell, John M. Oakey, III and Patricia M. Davis), incorporated by reference to the Company’s Current Report on Form 8-K filed on July 7, 2016 (File No. 001-32590)

10.8

10.6

Form of Change in Control Employment Agreement (Rex L. Smith, III, Bruce E. Thomas, Jeff R. Cantrell, John M. Oakey, III and Patricia M. Davis), incorporated by reference to the Company’s Current Report on Form 8-K filed on October 25,20, 2016 (File No. 001-32590)

102

14.1

14.1

Code of Business Conduct and Ethics (amended as of November 18, 2016), incorporated by reference to the Company’s Current Report on Form 8-K filed on November 25, 2016 (File No. 001-32590)

21.1

Subsidiaries of Community Bankers Trust Corporation*

23.1

Consent of Independent Registered Public Accounting Firm (BDO USA, LLP)(Yount, Hyde & Barbour, P.C.)*

31.1

Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer*

31.2

Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer*

32.1

Section 1350 Certifications*

95

101

Interactive

Inline Data File with respect to the following materials from the Company’s Annual Report on Form 10-K for the period ended December 31, 2017,2020, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (Loss), (iii) the Consolidated Statement of Comprehensive Income, (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements*

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Filed herewith.

(b)Exhibits. See Item 15(a)3. above
(c)Financial Statement Schedules. See Item 15(a)2. above

ITEM 16.FORM 10-K SUMMARY

ITEM 16.       FORM 10-K SUMMARY

Not applicable.

96

103

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.

COMMUNITY BANKERS TRUST CORPORATION

By:

/s/ Rex L. Smith, III

Rex L. Smith, III

President and Chief Executive Officer

Date: March 15, 20182021

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 and on the dates indicated.

Signature

Title

Date

/s/ Rex L. Smith, III

Rex L. Smith, III

President and Chief Executive Officer and Director (principal executive officer)

March 15, 20182021

Rex L. Smith, IIIand Director
(principal executive officer)

/s/ Bruce E. Thomas

Bruce E. Thomas

Executive Vice President and

March 15, 2018
Bruce E. ThomasChief Financial Officer (principal financial officer)

March 15, 2021

(principal financial officer)

/s/ Laureen D. Trice

Laureen D. Trice

Senior Vice President and Controller (principal accounting officer)

March 15, 20182021

Laureen D. Triceand Controller
(principal accounting officer)

/s/ John C. Watkins

John C. Watkins

Chairman of the Board

March 15, 20182021

John C. Watkins

/s/ Gerald F. Barber

DirectorMarch 15, 2018

Gerald F. Barber

Director

March 15, 2021

/s/ Hugh M. Fain, III

Hugh M. Fain, III

Director

March 15, 2021

/s/ Richard F. BozardDirectorMarch 15, 2018
Richard F. Bozard

/s/ William E. Hardy

DirectorMarch 15, 2018

William E. Hardy

Director

March 15, 2021

/s/ Ira C. Harris

Director

March 15, 2021

Ira C. Harris

/s/ P. Emerson Hughes, Jr.Gail L. Letts

Gail L. Letts

Director

Director

March 15, 20182021

P. Emerson Hughes, Jr.
/s/ Troy A. Peery, Jr.DirectorMarch 15, 2018
Troy A. Peery, Jr.

/s/ Eugene S. Putnam, Jr.

DirectorMarch 15, 2018

Eugene S. Putnam, Jr.

Director

March 15, 2021

/s/ S. Waite Rawls III

DirectorMarch 15, 2018

S. Waite Rawls III

Director

March 15, 2021

/s/ Oliver L. Way

Oliver L. Way

Director

March 15, 2021

/s/ Robin Traywick Williams

DirectorMarch 15, 2018

Robin Traywick Williams

Director

March 15, 2021

97

104