EAGLE FINANCIAL SERV

EFSI
Delayed Quote. Delayed  - 01/21 12:47:45 pm
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EAGLE FINANCIAL SERVICES INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/12/2021 | 03:53pm


The purpose of this discussion is to focus on the important factors affecting
the Company's financial condition, results of operations, liquidity and capital
resources. This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements presented in Part I, Item 1, Financial Statements, of this Form 10-Q
and Item 8, Financial Statements and Supplementary Data, of the 2020 Form 10-K.


GENERAL




Eagle Financial Services, Inc. is a bank holding company which owns 100% of the
stock of Bank of Clarke County (the "Bank" and, collectively with Eagle
Financial Services, Inc.
, the "Company", "we", "us" or "our"). Accordingly, the
results of operations for the Company are dependent upon the operations of the
Bank. The Bank conducts a commercial banking business which consists of
attracting deposits from the general public and investing those funds in
commercial, consumer and real estate loans and municipal and U.S. government
agency securities. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation
to the maximum extent permitted by law. At September 30,
2021
, the Company had total assets of $1.25 billion, net loans of $914.6
million
, total deposits of $1.13 billion, and shareholders' equity of $109.8
million
. The Company's net income was $8.7 million for the nine months ended
September 30, 2021.

COVID-19 and Related Response

The COVID-19 crisis has changed our communities, both in the way we live and the
way we do business. While circumstances continue to change at a rapid pace, the
Company is steadfastly working to meet and exceed the needs of its customers,
employees and the communities in which it does business. The Company, while
considered an essential business, has implemented procedures to protect its
employees, customers and the community and still serve their banking needs.
Branch lobbies are open, but with enhanced safety features for employees and
customers. Our customers also continue to conduct their business via automated
teller machines, online banking and our call center. Approximately 45% of our
workforce is working either remotely or hybrid with the remaining essential
workers showing up every day at our branches and operations centers. In efforts
to assist local businesses during this pandemic, the Company approved 1,372
Small Business Association Paycheck Protection Program ("SBA PPP") loans,
totaling $132.1 million during the first and second rounds of the SBA PPP. The
outstanding balance of SBA PPP loans as of September 30, 2021 was $28.9 million.
The Company has also worked with local small businesses, consumers and other
commercial customers through its loan deferral program whereby customers
experiencing hardships due to COVID-19 may be granted a deferral in loan
payments for up to six months. During the year ended December 31, 2020, the
Company approved 255 deferrals of interest and/or principal payments with
respect to loan balances totaling $130.5 million at December 31, 2020 for its
customers experiencing hardships related to COVID-19. During the first quarter
of 2021, the Company approved two additional deferrals of interest and/or
principal with respect to loan balances totaling $41 thousand. No additional
deferrals have been made since the first quarter of 2021. As of September 30,
2021
, all of the loans for which the Company had approved deferrals had begun
making payments on their loans after the deferral period had passed.


MANAGEMENT'S STRATEGY




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


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OPERATING STRATEGY

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

As interest rates change, the Bank attempts to maintain its net interest margin.
This is accomplished by changing the price, terms, and mix of its financial
assets and liabilities. The Bank also earns fees on services provided through
its trust department, sales of investments through Eagle Investment Services,
secondary market mortgage activities, and deposit operations. The Bank also
incurs noninterest expenses such as compensating employees, maintaining and
acquiring fixed assets, and purchasing goods and services necessary to support
its daily operations.

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


LENDING POLICIES




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

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

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


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



One-to-Four-Family Residential Real Estate Lending




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


Commercial Real Estate Lending




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


Construction and Land Development Lending




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


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Commercial and Industrial Lending




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

Consumer Lending

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

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


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CRITICAL ACCOUNTING POLICIES

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




Allowance for Loan Losses




The allowance for loan losses is an estimate of the probable losses inherent in
the Company's loan portfolio. As required by GAAP, the allowance for loan losses
is accrued when the occurrence of losses is probable and they can be
estimated. Impairment losses are accrued based on the differences between the
loan balance and the value of its collateral, the present value of future cash
flows, or the price established in the secondary market. The Company's allowance
for loan losses has three basic components: the general allowance, the specific
allowance and the unallocated allowance. Each of these components is determined
based upon estimates that can and do change when actual events occur. The
general allowance uses historical experience and other qualitative factors to
estimate future losses and, as a result, the estimated amount of losses can
differ significantly from the actual amount of losses which would be incurred in
the future. However, the potential for significant differences is mitigated by
continuously updating the loss history of the Company. The specific allowance is
based upon the evaluation of specific impaired loans on which a loss may be
realized. Factors such as past due history, ability to pay, and collateral value
are used to identify those loans on which a loss may be realized. Each of these
loans is then evaluated to determine how much loss is estimated to be realized
on its disposition. The sum of the losses on the individual loans becomes the
Company's specific allowance. This process is inherently subjective and actual
losses may be greater than or less than the estimated specific allowance. The
unallocated allowance is due to imprecision in the model and for losses that are
not directly allocable to a specific loan type within the portfolio. As the
loans, which are affected by these events, are identified or losses are
experienced on the loans which are affected by these events, they will be
reflected within the specific or general allowances. Note 1 to the Consolidated
Financial Statements presented in Item 8, Financial Statements and Supplementary
Data, of the 2020 Form 10-K, provides additional information related to the
allowance for loan losses.


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FORWARD LOOKING STATEMENTS

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


• the effects of the COVID-19 pandemic, including on the Company's credit



quality and business operations, as well as its impact on general economic



and financial market conditions;



• the ability to successfully manage growth or implement growth strategies if



the Bank is unable to identify attractive markets, locations or
opportunities to expand in the future or if the Bank is unable to
successfully integrate new branches, business lines or other growth
opportunities into its existing operations;



• competition with other banks and financial institutions, and companies



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


• the successful management of interest rate risk;



• risks inherent in making loans such as repayment risks and fluctuating



collateral values;



• changes in general economic and business conditions in the Bank's market



area;



• reliance on the Bank's management team, including the ability to attract and



retain key personnel;


• changes in interest rates and interest rate policies;


• maintaining capital levels adequate to support growth;



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



acquired;


• demand, development and acceptance of new products and services;


• problems with technology utilized by the Bank;


• changing trends in customer profiles and behavior;



• changes in banking, tax and other laws and regulations and interpretations



or guidance thereunder; and



• other factors described in Item 1A., "Risk Factors," in the Company's 2020



Form10-K.



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





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RESULTS OF OPERATIONS

Net Income

Net income for the nine months ended September 30, 2021 was $8.7 million, an
increase of 0.83% or $72 thousand when compared to the same period in 2020. Net
income for the three months ended September 30, 2021 was $2.9 million, a
decrease of 15.65% or $533 thousand when compared to the same period in 2020.
Earnings per share, basic and diluted were $2.54 and $2.53 for the nine months
ended September 30, 2021 and 2020, respectively. Earnings per share, basic and
diluted were $0.83 and $0.99 for the three months ended September 30, 2021 and
2020, respectively.

Return on average assets ("ROA") measures how efficiently the Company uses its
assets to produce net income. Some issues reflected within this efficiency
include the Company's asset mix, funding sources, pricing, fee generation, and
cost control. The ROA of the Company, on an annualized basis, for the nine
months ended September 30, 2021 and 2020 was 0.98% and 1.18%, respectively.

Return on average equity ("ROE") measures the utilization of shareholders'
equity in generating net income. This measurement is affected by the same
factors as ROA with consideration to how much of the Company's assets are funded
by shareholders. The ROE of the Company, on an annualized basis, for the nine
months ended September 30, 2021 and 2020 was 11.05% and 11.54%, respectively.


Net Interest Income




Net interest income is our primary source of revenue, representing the
difference between interest and fees earned on interest-earning assets and the
interest paid on deposits and other interest-bearing liabilities. The level of
net interest income is impacted primarily by variations in the volume and mix of
these assets and liabilities, as well as changes in interest rates. Net interest
income was $29.9 million and $26.2 million for the nine months ended
September 30, 2021 and 2020, respectively, which represents an increase of $3.7
million
or 14.0%. Net interest income was $10.4 million and $9.5 million for the
three months ended September 30, 2021 and 2020, respectively, which represents
an increase of $932 thousand or 9.8%. Despite the decline in the interest rate
environment, net interest income increased primarily due to the increase in the
average balance of the loan portfolio and the decrease in interest expense on
deposits. Average interest earning assets increased $195.1 million when
comparing the nine months ended September 30, 2020 to the nine months ended
September 30, 2021 while the average yield on earning assets decreased by 45
basis points over that same period. This decrease in yield can be mostly
attributed to the current interest rate environment as we all the production of
SBA PPP loans. Between March 31, 2020 and September 30, 2021, the Company
originated $132.1 million in these loans at an interest rate of 1.00%. This
decrease in yield was partially offset by fee income on these loans. Fees are
recognized through the net interest margin over the life of the loans and as
loans are forgiven or repaid.

Total interest income was $31.2 million and $28.9 million for the nine months
ended September 30, 2021 and 2020, respectively, which represents an increase of
$2.3 million or 7.9%. Total interest income was $10.8 million and $10.2 million
for the three months ended September 30, 2021 and 2020, respectively, which
represents an increase of $632 thousand or 6.2%. The increase in interest income
was driven by an increase in the average balance of the loan portfolio partially
offset by the overall decrease in the interest rate environment during the
reported time periods. As stated in the paragraph above, SBA PPP loans
originated at a lower yield than the existing portfolio have contributed to this
decrease in yield. Total interest expense was $1.3 million and $2.7 million for
the nine months ended September 30, 2021 and 2020, respectively, which
represents a decrease of $1.4 million or 51.5%. Total interest expense was $383
thousand
and $683 thousand for the three months ended September 30, 2021 and
2020, respectively, which represents a decrease of $300 thousand or 43.9%. The
decrease in interest expense resulted from the reduction in interest rates paid
on deposit accounts.

The net interest margin was 3.58% and 3.81% for the nine months ended
September 30, 2021 and 2020, respectively. The net interest margin was 3.56% and
3.86% for the three months ended September 30, 2021 and 2020, respectively.
Tax-equivalent net interest income is calculated by adding the tax benefit on
certain securities and loans, whose interest is tax-exempt, to total interest
income then subtracting total interest expense. The tax rate used to calculate
the tax benefit was 21% for 2021 and 2020.

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Given the expectation of continued low interest rates and a flat yield curve,
net interest income and net interest margin could experience continued pressure.




The following table shows interest income on earning assets and related average
yields as well as interest expense on interest-bearing liabilities and related
average rates paid for the three months ended September 30, 2021 and 2020
(dollars in thousands):



September 30, 2021 September 30, 2020
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Assets: Balance Expense Rate (3) Balance Expense Rate (3)
Securities:
Taxable $ 164,203 $ 611 1.47 % $ 122,761 $ 688 2.23 %
Tax-Exempt (1) 15,338 122 3.14 % 21,374 180 3.35 %
Total Securities $ 179,541 $ 733 1.62 % $ 144,135 $ 868 2.40 %
Loans:
Taxable $ 893,781 $ 10,006 4.44 % $ 784,302 $ 9,226 4.68 %
Non-accrual 3,834 - - % 4,229 - - %
Tax-Exempt (1) 5,191 54 4.13 % 9,873 109 4.40 %
Total Loans $ 902,806 $ 10,060 4.42 % $ 798,404 $ 9,335 4.65 %
Federal funds sold 232 - 0.12 % 254 - 0.07 %
Interest-bearing
deposits in other banks 83,133 26 0.12 % 42,740 8 0.07 %
Total earning assets
(2) $ 1,161,878 $ 10,819 3.69 % $ 981,304 $ 10,211 4.14 %
Allowance for loan
losses (8,195 ) (6,520 )
Total non-earning
assets 86,862 71,375
Total assets $ 1,240,545 $ 1,046,159

Liabilities and
Shareholders' Equity:
Interest-bearing
deposits:
NOW accounts $ 151,624 $ 79 0.21 % $ 112,267 $ 78 0.28 %
Money market accounts 229,864 137 0.24 % 189,033 191 0.40 %
Savings accounts 161,192 24 0.06 % 128,009 23 0.07 %
Time deposits:
$250,000 and more 67,325 79 0.47 % 76,072 249 1.30 %
Less than $250,000 58,261 64 0.43 % 60,096 142 0.94 %
Total interest-bearing
deposits $ 668,266 $ 383 0.23 % $ 565,477 $ 683 0.48 %
Total interest-bearing
liabilities $ 668,266 $ 383 0.23 % $ 565,477 $ 683 0.48 %
Noninterest-bearing
liabilities:
Demand deposits 452,122 364,473
Other Liabilities 11,392 13,664
Total liabilities $ 1,131,780 $ 943,614
Shareholders' equity 108,765 102,545
Total liabilities and
shareholders' equity $ 1,240,545 $ 1,046,159
Net interest income $ 10,436 $ 9,528

Net interest spread 3.46 % 3.66 %
Interest expense as a
percent of
average earning assets 0.13 % 0.28 %
Net interest margin 3.56 % 3.86 %







(1) Income and yields are reported on a tax-equivalent basis using a federal tax



rate of 21%.



(2) Non-accrual loans are not included in this total since they are not



considered earning assets.





(3) Annualized.




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The following table shows interest income on earning assets and related average
yields as well as interest expense on interest-bearing liabilities and related
average rates paid for the nine months ended September 30, 2021 and 2020
(dollars in thousands):



September 30, 2021 September 30, 2020
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Assets: Balance Expense Rate (3) Balance Expense Rate (3)
Securities:
Taxable $ 155,949 $ 1,631 1.40 % $ 130,745 $ 2,332 2.38 %
Tax-Exempt (1) 16,481 406 3.29 % 22,660 584 3.44 %
Total Securities $ 172,430 $ 2,037 1.58 % $ 153,405 $ 2,916 2.54 %
Loans:
Taxable 865,568 28,999 4.48 % 722,316 25,760 4.76 %
Non-accrual 4,229 - - % 3,184 - - %
Tax-Exempt (1) 8,059 262 4.35 % 10,094 334 4.42 %
Total Loans $ 877,856 $ 29,261 4.45 % $ 735,594 $ 26,094 4.74 %
Federal funds sold 225 - 0.09 % 401 1 0.28 %
Interest-bearing
deposits in other
banks 75,741 53 0.09 % 40,747 100 0.33 %
Total earning assets
(2) $ 1,122,023 $ 31,351 3.74 % $ 926,963 $ 29,111 4.19 %
Allowance for loan
losses (7,775 ) (5,828 )
Total non-earning
assets 79,688 64,529
Total assets $ 1,193,936 $ 985,664

Liabilities and
Shareholders' Equity:
Interest-bearing
deposits:
NOW accounts $ 137,921 $ 233 0.22 % $ 105,179 $ 278 0.35 %
Money market accounts 211,590 440 0.27 % 176,283 752 0.57 %
Savings accounts 149,792 67 0.06 % 118,757 102 0.11 %
Time deposits:
$250,000 and more 68,090 345 0.68 % 77,778 992 1.70 %
Less than $250,000 59,016 219 0.50 % 60,674 540 1.19 %
Total interest-bearing
deposits $ 626,409 $ 1,304 0.27 % $ 538,671 $ 2,664 0.66 %
Federal Home Loan Bank
advances - - - % 10,219 25 0.33 %
Total interest-bearing
liabilities $ 626,409 $ 1,304 0.27 % $ 548,890 $ 2,689 0.65 %
Noninterest-bearing
liabilities:
Demand deposits 425,701 324,435
Other Liabilities 12,203 11,984
Total liabilities $ 1,064,313 $ 885,309
Shareholders' equity 105,713 100,355
Total liabilities and
shareholders' equity $ 1,170,026 $ 985,664

Net interest income $ 30,047 $ 26,422
Net interest spread 3.47 % 3.54 %
Interest expense as a
percent of
average earning assets 0.16 % 0.39 %
Net interest margin 3.58 % 3.81 %





(1) Income and yields are reported on a tax-equivalent basis using a federal tax



rate of 21%.



(2) Non-accrual loans are not included in this total since they are not



considered earning assets.





(3) Annualized.


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The following table reconciles tax-equivalent net interest income, which is not
a measurement under GAAP, to net interest income.






Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
GAAP Financial Measurements:
Interest Income - Loans $ 10,049 $ 9,312 $ 29,206 $ 26,024
Interest Income - Securities
and Other Interest-Earnings
Assets 733 838 2,005 2,894
Interest Expense - Deposits 383 683 1,304 2,664
Interest Expense - Other
Borrowings - - - 25
Total Net Interest Income $ 10,399 $ 9,467 $ 29,907 $ 26,229
Non-GAAP Financial
Measurements:
Add: Tax Benefit on Tax-Exempt
Interest Income - Loans (1) $ 11 $ 23 $ 55 $ 70
Add: Tax Benefit on Tax-Exempt
Interest Income - Securities
(1) 26 38 85 123
Total Tax Benefit on Tax-Exempt
Interest Income $ 37 $ 61 $ 140 $ 193
Tax-Equivalent Net Interest
Income $ 10,436 $ 9,528 $ 30,047 $ 26,422





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





The tax-equivalent yield on earning assets decreased from 4.19% to 3.74% for the
nine months ended September 30, 2020 and 2021, respectively. For those same time
periods, the tax-equivalent yield on securities decreased 96 basis points. The
tax equivalent yield on loans decreased 29 basis points from 4.74% for the nine
months ended September 30, 2020 to 4.45% for the same time period in 2021. The
decrease in the tax-equivalent yield on earning assets for the nine months ended
September 30, 2021 resulted mostly from the decrease in the tax-equivalent yield
on loans. The decrease in the yield on loans as compared to the corresponding
period in the prior year was primarily due to SBA PPP loans originating at a
lower yield than the existing portfolio as well as rate decreases during early
2020. Additionally, as securities are maturing and being called or sold, they
are being replaced with securities at lower rates.

The average rate on interest bearing liabilities decreased 38 basis points from
0.65% for the nine months ended September 30, 2020 to 0.27% for the same time
period in 2021. Federal Reserve Bank interest rate decreases during early 2020
drove a reduction in interest rates paid on deposit accounts, which resulted in
a lower rate paid on interest bearing liabilities.




Provision for Loan Losses




The provision for loan losses is based upon management's estimate of the amount
required to maintain an adequate allowance for loan losses as discussed within
the Critical Accounting Policies section above. The allowance represents an
amount that, in management's judgment, will be adequate to absorb probable
losses inherent in the loan portfolio. Management's judgment in determining the
level of the allowance is based on evaluations of the collectability of loans
while taking into consideration such factors as trends in delinquencies and
charge-offs, changes in the nature and volume of the loan portfolio, current
economic conditions that may affect a borrower's ability to repay and the value
of collateral, overall portfolio quality and review of specific potential
losses. This evaluation is inherently subjective because it requires estimates
that are susceptible to significant revision as more information becomes
available. The amount of provision for loan losses is affected by several
factors including the growth rate of loans, net charge-offs (recoveries), and
the estimated amount of inherent losses within the loan portfolio. The provision
for loan losses for the nine months ended September 30, 2021 and 2020 was $1.2
million
and $755 thousand, respectively. The provision for loan losses for the
three months ended September 30, 2021 and 2020 was $300 thousand and $100
thousand
, respectively. The provision for the three and nine months ended
September 30, 2021 resulted mostly from loan growth, which was concentrated
mainly in the first and third quarters of 2021. The provision during the three
and nine months ended September 30, 2020 resulted mostly from decline in the
state of the economy, thereby increasing the qualitative factors within our
allowance for loan losses, primarily associated with the COVID-19 pandemic.

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Noninterest Income




Total noninterest income for the nine months ended September 30, 2021 and 2020
was $8.0 million and $6.3 million, respectively. Total noninterest income for
the three months ended September 30, 2021 and 2020 was $2.9 million and $2.2
million
, respectively. Management reviews the activities which generate
noninterest income on an ongoing basis. The following table provides the
components of noninterest income for the three and nine months ended
September 30, 2021 and 2020, which are included within the respective
Consolidated Statements of Income headings. Variances that the Company believes
require explanation are discussed below the table.



Three Months Ended Nine Months Ended
September 30, September 30,



(dollars in thousands) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Income from fiduciary
activities $ 503 $ 381 $ 122 32 % $ 1,243 $ 1,081 $ 162 15 %
Service charges on
deposit accounts 301 220 81 37 % 759 674 85 13 %
Other service charges
and fees 1,374 1,251 123 10 % 4,037 3,502 535 15 %
Gain on sale of
securities - 158 (158 ) NM 24 687 (663 ) NM
Gain on sale of loans
held for sale 486 - 486 NM 845 - 845 NM
Bank owned life
insurance income 145 74 71 96 % 368 217 151 70 %
Other operating income 72 132 (60 ) (45 )% 682 167 515 308 %
Total noninterest
income $ 2,881 $ 2,216 $ 665 30 % $ 7,958 $ 6,328 $ 1,630 26 %




NM - Not Meaningful

Income from fiduciary activities increased from 2020 to 2021. The amount of
income from fiduciary activities is determined by the number of active accounts
and total assets under management. With the addition of several new employees,
total assets under management have seen an increase during the three and nine
months ended September 30, 2021.

Services charges on deposit accounts increased during the three and nine months
ended September 30, 2021 when compared to the same periods in 2020. This
increase is mainly due to increases in overdraft charges. Overdraft charges can
fluctuate based on changes in customer activity.

The amount of other services charges and fees is comprised primarily of
commissions from the sale of non-deposit investment products, fees received from
the Bank's credit card program, fees generated from the Bank's ATM/debit card
programs, and fees generated from procuring applications for secondary market
loans. Other service charges and fees increased during the three and nine months
ended September 30, 2021 when compared to the same periods in 2020. This
increase can be attributed to an increase in ATM fees, which fluctuates due to
ATM usage.

During the second and third quarters of 2021, the Company has sold $11.3 million
in mortgage loans on the secondary market and $41.1 million of loans from the
commercial and consumer loan portfolios. These loan sales resulted in gains of
$486 thousand and $845 thousand during the three and nine months ended
September 30, 2021, respectively.

BOLI income was $368 thousand and $217 thousand for the nine months ended
September 30, 2021 and 2020, respectively. During the first quarter of 2020, the
Company purchased $12 million of BOLI. The Company made an additional investment
of $10 million in June of 2021.

Other operating income increased during the nine months ended September 30, 2021
when compared to the same periods in 2020. This increase can be attributed to
adjustments to the investment in Banker's Insurance as well as cash
distributions received from investments in Small Business Investment Companies
(SBICs).

39



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Noninterest Expenses




Total noninterest expenses increased $4.8 million or 22.5% for the nine months
ended September 30, 2021 compared to the same period in 2020. Total noninterest
expenses increased $2.1 million and 27.6% for the three months ended
September 30, 2021 compared to the same period in 2020. The following table
presents the components of noninterest expense for the three and nine months
ended September 30, 2021 and 2020, which are included within the respective
Consolidated Statements of Income headings. Variances that the Company believes
require explanation are discussed below the table.



Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 $ Change % Change 2021 2020 $ Change % Change
Salaries and employee
benefits $ 5,947 $ 4,739 $ 1,208 25 % $ 15,973 $ 13,200 $ 2,773 21 %
Occupancy expenses 450 414 36 9 % 1,319 1,212 107 9 %
Equipment expenses 246 282 (36 ) (13 )% 708 766 (58 ) (8 )%
Advertising and marketing
expenses 168 152 16 11 % 474 509 (35 ) (7 )%
Stationary and supplies 27 28 (1 ) (4 )% 125 94 31 33 %
ATM network fees 285 252 33 13 % 847 737 110 15 %
Other real estate owned
expense 32 (3 ) 35 NM 37 (4 ) 41 NM
Loss (gain) on other real
estate owned 26 - 26 NM 128 (132 ) 260 NM
FDIC assessment 169 75 94 125 % 409 116 293 253 %
Computer software expense 282 200 82 41 % 752 481 271 56 %
Bank franchise tax 199 178 21 12 % 583 528 55 10 %
Professional fees 289 188 101 54 % 1,118 859 259 30 %
Data processing fees 418 301 117 39 % 1,193 1,164 29 2 %
Other operating expenses 985 659 326 49 % 2,500 1,824 676 37 %
Total noninterest expenses $ 9,523 $ 7,465 $ 2,058 28 % $ 26,166 $ 21,354 $ 4,812 23 %




NM - Not Meaningful

The Company's growth has had an impact on noninterest expenses. Total assets
have grown by $122.6 million or 10.9% from December 31, 2020 to September 30,
2021
. This growth has required investments to be made in the Company's
infrastructure, causing increases in salaries and employee benefits, occupancy
expenses, stationary and supplies, computer software expense and professional
fees. In addition, increases in asset size and capital levels have impacted both
the FDIC assessment and bank franchise tax amounts.

In addition to the Company's growth, the COVID-19 pandemic has had and continues
to have an impact on noninterest expenses. Decreases in year-to-date expenses
compared to the prior year were noted in advertising and marketing expenses. The
decrease was due to adjustments in the timing of marketing promotions. Increases
in computer software expenses in comparison to the prior year were largely due
to software purchases to allow for remote work during the COVID-19 pandemic.

Salaries and employee benefits increased during the three and nine months ended
September 30, 2021 over 2020. Annual pay increases, newly hired employees,
increasing insurance costs and enhanced employee incentive plans have attributed
to these increases. The number of full-time equivalent employees (FTEs) has
increased from 191 at September 30, 2020 to 215 at September 30, 2021.

Occupancy expenses increased year over year due mostly to an increase in office
locations (loan-productions offices) as well as $27 thousand of snow removal
costs incurred during the nine months ended September 30, 2021 that were not
incurred during the same period in 2020.

ATM network fees increased during the three and nine months ended September 30,
2021
over 2020 due to increased ATM usage. During the height of the COVID-19
pandemic in 2020, customer activity and usage decreased. During 2021, increases
in customer activity have been observed.


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Professional fees increased during the three and nine months ended September 30,
2021
over 2020 due mainly to the increase in recruiting fees paid during the
2021 periods.


Other operating expenses increased during the three and nine months ended
September 30, 2021 over 2020. This increase is due primarily to increased loan
related expenses due to a higher volume in the three and nine months ended
September 30, 2021 over 2020.




The efficiency ratio of the Company was 68.56% and 67.01% for the nine months
ended September 30, 2021 and 2020, respectively. The efficiency ratio of the
Company was 71.31% and 64.43% for the three months ended September 30, 2021 and
2020, respectively. The efficiency ratio is not a measurement under accounting
principles generally accepted in the United States. It is calculated by dividing
noninterest expense by the sum of tax equivalent net interest income and
noninterest income excluding gains and losses on the investment portfolio and
other gains/losses from OREO, repossessed vehicles, disposals of bank premises
and equipment, etc. The tax rate utilized is 21%. The Company calculates and
reviews this ratio as a means of evaluating operational efficiency.


The calculation of the efficiency ratio for the three and nine months ended
September 30, 2021 and 2020 are as follows:






Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Summary of Operating Results:
Noninterest expenses $ 9,523 $ 7,465 $ 26,166 $ 21,354
Less: Loss (gain) on other real
estate owned 26 - 128 (132 )
Adjusted noninterest expenses $ 9,497 $ 7,465 $ 26,038 $ 21,486
Net interest income 10,399 9,467 29,907 26,229
Noninterest income 2,881 2,216 7,958 6,328
Less: Gain on sales of
securities - 158 24 687
Less: (Loss) on sale of
repossessed assets - (1 ) - (3 )
Adjusted noninterest income $ 2,881 $ 2,059 $ 7,934 $ 5,644
Tax equivalent adjustment (1) 37 61 140 193
Total net interest income and
noninterest income, adjusted $ 13,317 $ 11,587 $ 37,981 $ 32,066
Efficiency ratio 71.31 % 64.43 % 68.56 % 67.01 %





(1) Includes tax-equivalent adjustments on loans and securities using the federal



statutory tax rate of 21%.




Income Taxes

Income tax expense was $1.8 million during the nine months ended September 30,
2021
and 2020. Income tax expense was $584 thousand and $712 thousand during the
three months ended September 30, 2021 and 2020, respectively. The effective tax
rate was 16.91% and 17.06% for the nine months ended September 30, 2021 and
2020, respectively. The effective tax rate was 16.89% and 17.29% for the three
months ended September 30, 2021 and 2020, respectively. The effective tax rate
is below the statutory rate of 21% due to tax-exempt income on investment
securities and loans. The effective tax rate is also impacted by BOLI as well as
income tax credits on qualified affordable housing project investments as
discussed in Note 12 to the Consolidated Financial Statements as well as
qualified rehabilitation credits.


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FINANCIAL CONDITION

Securities

Total securities available for sale were $201.4 million at September 30, 2021,
compared to $165.0 million at December 31, 2020. This represents an increase of
$36.4 million or 22.1%. The Company purchased $97.8 million of securities during
the nine months ended September 30, 2021. The Company had total maturities,
calls, and principal repayments of $41.7 million and $15.9 million of sales
during the nine months ended September 30, 2021. The Company did not have any
securities from a single issuer, other than U.S. government agencies, whose
amount exceeded 10% of shareholders' equity at September 30, 2021. Note 4 to the
Consolidated Financial Statements provides additional details about the
Company's securities portfolio at September 30, 2021 and December 31, 2020. The
Company had a net unrealized gain on available for sale securities of $1.4
million
at September 30, 2021 as compared to a net unrealized gain of $4.1
million
at December 31, 2020. Unrealized gains or losses on available for sale
securities are reported within shareholders' equity, net of the related deferred
tax effect, as accumulated other comprehensive income.


Loan Portfolio




The Company's primary use of funds is supporting lending activities from which
it derives the greatest amount of interest income. Gross loans were $923.1
million
and $836.3 million at September 30, 2021 and December 31, 2020,
respectively. This represents an increase of $86.8 million or 10.4% during the
nine months ended September 30, 2021. The ratio of gross loans to deposits
decreased very slightly during the nine months ended September 30, 2021 from
81.85% at December 31, 2020 to 81.64% at September 30, 2021. Loan growth
excluding changes in SBA PPP loans during the nine months ended September 30,
2021
was $139.1 million or 18.4%. SBA PPP loans were originated during 2020 and
2021 and as of September 30, 2021 $28.9 million remained outstanding, down $52.4
million
or 64.5% from December 31, 2020 due to forgiveness of the PPP loan
balances.

The loan portfolio consists primarily of loans for owner-occupied single-family
dwellings and loans secured by commercial real estate. Note 5 to the
Consolidated Financial Statements provides the composition of the loan portfolio
at September 30, 2021 and December 31, 2020.

Residential real estate loans were $282.0 million or 30.55% and $269.7 million
or 32.25% of total loans at September 30, 2021 and December 31, 2020,
respectively. Commercial real estate loans were $367.2 million or 39.78% and
$334.7 million or 40.02% of total loans at September 30, 2021 and December 31,
2020
, respectively. Construction, land development, and farmland loans were
$75.0 million or 8.12% and $58.4 million or 6.98% of total loans at
September 30, 2021 and December 31, 2020, respectively. Consumer installment
loans were $53.2 million or 5.76% and $21.3 million or 2.55% of total loans at
September 30, 2021 and December 31, 2020, respectively, representing an increase
of $31.9 million or 149.3% during the nine months ended September 30, 2021.
Commercial and industrial loans were $129.2 million or 13.99% and $140.8 million
or 16.83% of total loans at September 30, 2021 and December 31, 2020,
respectively, representing a decrease of $11.6 million or 8.3% during the nine
months ended September 30, 2021. During the nine months ended September 30,
2021
, loan growth was mainly concentrated in growth of our marine lending
portfolio which falls into both the consumer installment loan and commercial and
industrial loan portfolios. Despite this strong marine lending growth,
commercial and industrial loans experienced a decrease during the nine months
ended September 30, 2021 due largely to the forgiveness of SBA PPP loans of
approximately $52.4 million. The commercial real estate portfolio also
experienced solid growth.


42



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Allowance for Loan Losses

The purpose of, and the methods for, measuring the allowance for loan losses are
discussed in the Critical Accounting Policies section above. Note 5 to the
Consolidated Financial Statements shows the activity within the allowance for
loan losses during the nine months ended September 30, 2021 and 2020 and the
year ended December 31, 2020. Charged-off loans were $69 thousand and $164
thousand
for the nine months ended September 30, 2021 and 2020, respectively.
Recoveries were $238 thousand and $1.1 million for the nine months ended
September 30, 2021 and 2020, respectively. This resulted in net recoveries of
$169 thousand and $933 thousand for the nine months ended September 30, 2021 and
2020, respectively. The Company collected a $459 thousand recovery during the
first quarter of 2020 related to an $850 thousand commercial and industrial loan
charge-off in 2019. The allowance for loan losses as a percentage of loans was
0.91% at September 30, 2021 and 0.85% at December 31, 2020. Excluding
outstanding PPP loans, the allowance for loan losses as a percentage of total
loans was 0.95% and 0.94% as of September 30, 2021 and December 31, 2020,
respectively. The allowance for loan losses was 239.18% of nonperforming loans
at September 30, 2021 and 146.85% of nonperforming loans at December 31, 2020.
Refer to the Nonperforming Assets and Other Assets section on the following page
for further discussion on nonperforming loans.

All nonaccrual and other impaired loans were evaluated for impairment and any
specific allocations were provided for as necessary. Based on management's
evaluation and update of the Company's historical loss experience adjusted for
qualitative factors assessed, the general reserve as a percentage of
non-impaired loans increased from 0.85% at December 31, 2020 to 0.91% at
September 30, 2021. Management believes that the allowance for loan losses is
currently adequate to absorb probable losses inherent in the loan portfolio.
Management will continue to evaluate the adequacy of the allowance for loan
losses as more economic data becomes available and as changes within the
Company's portfolio are known. The long-term effects of the pandemic may require
the Company to fund increases in the allowance for loan losses in future
periods.


Nonperforming Assets and Other Assets




Nonperforming assets consist of nonaccrual loans, repossessed assets, OREO
(foreclosed properties), and loans past due 90 days or more and still accruing.
Nonperforming assets decreased by $1.6 million during the nine months ended
September 30, 2021. Nonaccrual loans were $3.5 million and $4.8 million at
September 30, 2021 and December 31, 2020. OREO was $193 thousand and $607
thousand
at September 30, 2021 and December 31, 2020, respectively. The Company
held one property in OREO at September 30, 2021. The Company held three
properties in OREO with an average balance of $202 thousand at December 31,
2020
. The percentage of nonperforming assets to loans and OREO was 0.40% at
September 30, 2021 and 0.64% at December 31, 2020, respectively. There were no
loans past due 90 days or more and still accruing interest at September 30, 2021
and December 31, 2020, respectively.


Total past due loans, as disclosed in note 5 to the Consolidated Financial
Statements, decreased to $1.5 million at September 30, 2021 compared to $1.9
million
at December 31, 2020.




During the nine months ended September 30, 2021, the Bank placed five loans with
an outstanding balance of $589 thousand on nonaccrual status. During the same
period, ten loans with an outstanding balance of $775 thousand were paid off.
Management evaluates the financial condition of borrowers and the value of any
collateral on nonaccrual loans. The results of these evaluations are used to
estimate the amount of losses which may be realized on the disposition of these
nonaccrual loans and are reflected in the allowance for loan losses.

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


43



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For real estate loans, upon foreclosure, the balance of the loan is transferred
to OREO and carried at the fair value of the property based on current
appraisals and other current market trends, less estimated selling costs. If a
write down of the OREO property is necessary at the time of foreclosure, the
amount is charged-off to the allowance for loan losses. A review of the recorded
property value is performed in conjunction with normal loan reviews, and if
market conditions indicate that the recorded value exceeds the fair value,
additional write downs of the property value are charged directly to operations.

In addition, the Company may, under certain circumstances, restructure loans in
troubled debt restructurings as a concession to a borrower when the borrower is
experiencing financial distress. Formal, standardized loan restructuring
programs are not utilized by the Company. Each loan considered for restructuring
is evaluated based on customer circumstances and may include modifications to
one or more loan provisions. Such restructured loans are included in impaired
loans. However, restructured loans are not necessarily considered nonperforming
assets. At September 30, 2021, the Company had $2.7 million in restructured
loans with specific allowances totaling $43 thousand. At December 31, 2020, the
Company had $3.3 million in restructured loans with specific allowances totaling
$72 thousand. At September 30, 2021 and December 31, 2020, total restructured
loans performing under the restructured terms and accruing interest were $1.9
million
and $2.6 million, respectively. Three loans, totaling $791 thousand,
were in nonaccrual status at September 30, 2021. Three loans, totaling $796
thousand
, were in nonaccrual status at December 31, 2020. As noted in Note 6 to
the consolidated financial statements the Bank modified a significant number of
loans during 2020 to allow for short-term payment deferrals. These loans were
not considered TDRs based on the provisions of the CARES Act and interagency
guidance issued.

Deposits

Total deposits were $1.13 billion and $1.01 billion at September 30, 2021 and
December 31, 2020, respectively. This represents an increase of $117.6 million
or 11.6% during the nine months ended September 30, 2021. Note 7 to the
Consolidated Financial Statements provides the composition of total deposits at
September 30, 2021 and December 31, 2020. The growth in deposits was mainly
organic growth as we expand and grow into newer market areas.

Noninterest-bearing demand deposits, which are comprised of checking accounts,
increased $40.6 million or 10.0% from $407.6 million at December 31, 2020 to
$448.2 million at September 30, 2021. Savings and interest-bearing demand
deposits, which include NOW accounts, money market accounts and regular savings
accounts increased $80.9 million or 17.0% from $476.9 million at December 31,
2020
to $557.8 million at September 30, 2021. Savings and interest-bearing
demand deposits included $40.7 million and $34.6 million in reciprocal ICS
deposits at September 30, 2021 and December 31, 2020, respectively. Time
deposits decreased $4.1 million or 3.1% from $128.7 million at December 31, 2020
to $124.6 million at September 30, 2021.


CAPITAL RESOURCES




The Bank continues to be a well capitalized financial institution. Total
shareholders' equity at September 30, 2021 was $109.8 million, reflecting a
percentage of total assets of 8.76%, as compared to $105.1 million and 9.08% at
December 31, 2020. During the nine months ended September 30, 2021 and 2020, the
Company declared dividends of $0.82 and $0.78 per share, respectively. The
Company has a Dividend Investment Plan that allows shareholders to reinvest
dividends in Company stock.

At September 30, 2021, the Bank met all capital adequacy requirements and had
regulatory capital ratios in excess of the levels established for
well-capitalized institutions. The Bank monitors these ratios on a quarterly
basis and has several strategies, including without limitation the issuance of
common stock, to ensure that these ratios remain above regulatory minimums.
Federal regulatory risk-based capital guidelines require percentages to be
applied to various assets, including off-balance sheet assets, based on their
perceived risk in order to calculate risk-weighted assets. Tier 1 capital
consists of total shareholders' equity less net unrealized gains and losses on
available for sale securities and changes in the benefit obligations and plan
assets for the post retirement benefit plan. Total capital is comprised of Tier
1 capital plus the allowable portion of the allowance for loan losses.


44

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For capital adequacy purposes financial institutions must maintain a Tier 1
common equity risk-based capital ratio of 4.50%, a Tier 1 risk-based capital
ratio of at least 6.00%, a Total risk-based capital ratio of at least 8.00% and
a minimum Tier 1 leverage ratio of 4.00%. The rules require the Bank to maintain
(i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least
4.5%, plus a 2.5% "capital conservation buffer", (ii) a minimum ratio of Tier 1
capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital
conservation buffer, (iii) a minimum ratio of total capital to risk-weighted
assets of at least 8.0%, plus the 2.5% capital conservation buffer, and (iv) a
minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to
average assets. The Bank's institution specific capital conservation buffer at
September 30, 2021 and December 31, 2020 was 3.84% and 5.29%, respectively. The
capital conservation buffer is designed to absorb losses during periods of
economic stress. Banking institutions with any ratio (excluding the leverage
ratio) above the minimum but below the conservation buffer will face constraints
on dividends, equity repurchases, and compensation based on the amount of the
shortfall.

The Bank's Tier 1 common risk-based capital ratio was 10.96% at September 30,
2021
as compared to 12.39% at December 31, 2020. The Bank's Tier 1 risk-based
capital ratio was 10.96% at September 30, 2021 as compared to 12.39% at
December 31, 2020. The Bank's total risk-based capital ratio was 11.84% at
September 30, 2021 as compared to 13.29% at December 31, 2020. The Bank's Tier 1
capital to average total assets ratio was 8.51% at September 30, 2021 as
compared to 9.06% at December 31, 2020. Through October 31, 2021, the Bank's
capital ratios continued to exceed the regulatory minimums for well-capitalized
institutions. We are closely monitoring our capital position and are taking
appropriate steps to ensure our level of capital remains strong. Our capital,
while significant, may fluctuate in future periods due to the effects of the
pandemic and limit our ability to pay dividends.

On September 17, 2019, the Federal Deposit Insurance Corporation finalized a
rule that introduces an optional simplified measure of capital adequacy for
qualifying community banking organizations (i.e., the community bank leverage
ratio or "CBLR" framework), as required by the Economic Growth, Regulatory
Relief and Consumer Protection Act. The CBLR framework is designed to reduce
burden by removing the requirements for calculating and reporting risk-based
capital ratios for qualifying community banking organizations that opt into the
framework. In order to qualify for the CBLR framework, a community banking
organization must have a tier 1 leverage ratio of greater than 9 percent, less
than $10 billion in total consolidated assets, and limited amounts of
off-balance-sheet exposures and trading assets and liabilities. On April 6,
2020
, in a joint statement, the FDIC, Federal Reserve and the Office of
Comptroller of the Currency
("OCC"), issued two interim final rules regarding
temporary changes to the CBLR framework to implement provisions of the CARES
Act. Under the interim final rules, the community bank leverage ratio was
reduced to 8 percent beginning in the second quarter and for the remainder of
calendar year 2020, 8.5 percent for calendar year 2021, and 9 percent
thereafter. A qualifying community banking organization that opts into the CBLR
framework and meets all requirements under the framework will be considered to
have met the well-capitalized ratio requirements under the Prompt Corrective
Action regulations and will not be required to report or calculate risk-based
capital. The CBLR framework was first available for banks to use beginning in
their March 31, 2020, Call Report. The Bank did not opt into the CBLR framework
as of September 30, 2021.




45



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LIQUIDITY

Liquidity management involves meeting the present and future financial
obligations of the Company with the sale or maturity of assets or with the
occurrence of additional liabilities. Liquidity needs are met with cash on hand,
deposits in banks, federal funds sold, securities classified as available for
sale and loans maturing within one year. At September 30, 2021, liquid assets
totaled $375.3 million as compared to $320.4 million at December 31, 2020. These
amounts represent 32.84% and 31.26% of total liabilities at September 30, 2021
and December 31, 2020, respectively. The Company minimizes liquidity demand by
utilizing core deposits to fund asset growth. Securities provide a constant
source of liquidity through paydowns and maturities. Also, the Company maintains
short-term borrowing arrangements, namely federal funds lines of credit, with
larger financial institutions as an additional source of liquidity. The Bank's
membership with the Federal Home Loan Bank of Atlanta provides a source of
borrowings with numerous rate and term structures. The Company's senior
management monitors the liquidity position regularly and attempts to maintain a
position which utilizes available funds most efficiently. Our liquidity, while
significant, may fluctuate in future periods due to the effects of the pandemic,
funding of SBA PPP loans and deferral of loan payments.


OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS



There have been no material changes in off-balance sheet arrangements and
contractual obligations as reported in the 2020 Form 10-K.








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