EAGLE FINANCIAL SERVICES INC 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders Eagle Financial Services, Inc. Berryville, Virginia Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Eagle Financial Services, Inc. and its subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 48 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Loan Losses – General Allowance – Qualitative Factors As described in Note 1 (Nature of Banking Activities and Significant Accounting Policies) and Note 4 (Allowance for Loan Losses) to the consolidated financial statements, the Company has established an allowance for loan losses to provide for loan losses which are estimated to have occurred as of the balance sheet date, which totaled $8.79 million at December 31, 2021. The Company’s allowance for loan losses consists of three components: the specific allowance; the general allowance; and the unallocated allowance. The general component relates to loans that are not considered impaired and is based on historical loss experience adjusted for qualitative factors and totaled $8.75 million at December 31, 2021. The qualitative portion of the general allowance is based on management’s evaluation of specific factors which are used to develop loss percentages applied to the loan portfolio, by loan pool, based on management’s assessment of shared risk characteristics within groups of similar loans. The qualitative factors assessed include: national and local economic trends and conditions; the quality of the Company’s loan review system; changes in lending policies; the experience, ability, and depth of management; concentrations of credit; trends in volume and terms of loans; levels and trends in delinquencies and nonperforming loans; changes in collateral values; and competition and regulatory requirements. Management exercised significant judgment when assessing the considerations which serve as the basis for the qualitative factors used to adjust the Company’s historical loss experience in the general component of the allowance for loan losses estimate. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates. How We Addressed the Matter in Our Audit The primary audit procedures we performed to address this critical audit matter included: • Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included: • Evaluating the completeness and accuracy of data inputs used as the basis for the qualitative factors. • Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors. • Evaluating the qualitative factors for directional consistency and for reasonableness. • Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors. /s/ Yount, Hyde & Barbour , P.C. We have served as the Company's auditor since 2015. Winchester, Virginia March 30, 2022 49 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 2021 and 2020 (dollars in thousands, except per share amounts) December 31, 2021 December 31, 2020 Assets Cash and due from banks $ 14,536 $ 12,644 Interest-bearing deposits with other institutions 49,304 67,054 Federal funds sold 228 222 Total cash and cash equivalents 64,068 79,920 Securities available for sale, at fair value 192,321 164,955 Restricted investments 1,049 1,267 Loans held for sale 876 — Loans 985,720 836,334 Allowance for loan losses ( 8,787 ) ( 7,096 ) Net Loans 976,933 829,238 Bank premises and equipment, net 18,249 18,725 Other real estate owned, net of allowance — 607 Bank owned life insurance 23,236 12,709 Other assets 26,306 22,731 Total assets $ 1,303,038 $ 1,130,152 Liabilities and Shareholders’ Equity Liabilities Deposits: Noninterest bearing demand deposits $ 470,355 $ 407,576 Savings and interest bearing demand deposits 583,296 476,864 Time deposits 123,584 128,658 Total deposits $ 1,177,235 $ 1,013,098 Other liabilities 15,523 11,980 Total liabilities $ 1,192,758 $ 1,025,078 Commitments and contingencies Shareholders’ Equity Preferred stock, $ 10 par value; 500,000 shares authorized and unissued $ — $ — Common stock, $ 2.50 par value; authorized 10,000,000 shares; issued and outstanding 2021, 3,454,128 including 31,738 unvested restricted stock; issued and outstanding 2020, 3,405,035 including 20,928 unvested restricted stock 8,556 8,460 Surplus 12,115 10,811 Retained earnings 89,764 82,524 Accumulated other comprehensive (loss) income ( 155 ) 3,279 Total shareholders’ equity $ 110,280 $ 105,074 Total liabilities and shareholders’ equity $ 1,303,038 $ 1,130,152 See Notes to Consolidated Financial Statements 50 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Income Years Ended December 31, 2021 and 2020 (dollars in thousands, except per share amounts) 2021 2020 Interest and Dividend Income Interest and fees on loans $ 39,871 $ 35,273 Interest and dividends on securities: Taxable interest income 2,272 2,858 Interest income exempt from federal income taxes 419 588 Dividends 45 76 Interest on deposits in banks 69 112 Interest on federal funds sold — 1 Total interest and dividend income $ 42,676 $ 38,908 Interest Expense Interest on deposits $ 1,677 $ 3,256 Interest on Federal Home Loan Bank advances — 25 Total interest expense $ 1,677 $ 3,281 Net interest income $ 40,999 $ 35,627 Provision For Loan Losses 1,483 1,457 Net interest income after provision for loan losses $ 39,516 $ 34,170 Noninterest Income Income from fiduciary activities $ 1,891 $ 1,398 Service charges on deposit accounts 1,087 920 Other service charges and fees 5,252 4,757 Gain on the sale and disposal of bank premises and equipment — 5 Gain on sale of securities 24 687 Gain on sale of loans 1,658 — Bank owned life insurance income 527 310 Other operating income 881 502 Total noninterest income $ 11,320 $ 8,579 Noninterest Expenses Salaries and employee benefits $ 21,854 $ 18,074 Occupancy expenses 1,803 1,592 Equipment expenses 959 988 Advertising and marketing expenses 659 707 Stationery and supplies 155 144 ATM network fees 1,135 1,009 Other real estate owned expense 41 9 Loss (gain) on other real estate owned 201 ( 143 ) FDIC assessment 606 221 Computer software expense 996 679 Bank franchise tax 781 705 Professional fees 3,760 1,120 Data processing fees 1,541 1,657 Other operating expenses 3,558 2,679 Total noninterest expenses $ 38,049 $ 29,441 Income before income taxes $ 12,787 $ 13,308 Income Tax Expense 1,766 2,136 Net income $ 11,021 $ 11,172 Earnings Per Share Net income per common share, basic $ 3.20 $ 3.27 Net income per common share, diluted $ 3.20 $ 3.27 See Notes to Consolidated Financial Statements 51 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income Years Ended December 31, 2021 and 2020 (dollars in thousands) 2021 2020 Net income $ 11,021 $ 11,172 Other comprehensive income (loss): Changes in benefit obligations and plan assets for post retirement benefit plans, net of reclassification adjustments, net of deferred income tax of $ 0 and ($ 5 ) for the years ended December 31, 2021 and 2020, respectively — ( 25 ) Unrealized gain (loss) on available for sale securities, net of reclassification adjustments, net of deferred income tax of ($ 912 ) and $ 484 for the years ended December 31, 2021 and 2020, respectively ( 3,434 ) 1,822 Total other comprehensive income (loss) ( 3,434 ) 1,797 Total comprehensive income $ 7,587 $ 12,969 See Notes to Consolidated Financial Statements 52 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders’ Equity Years Ended December 31, 2021 and 2020 (dollars in thousands, except per share amounts) Common Stock Surplus Retained Earnings Accumulated Other Comprehensive Income (Loss) Total December 31, 2019 $ 8,529 $ 11,406 $ 74,909 $ 1,482 $ 96,326 Net income 11,172 11,172 Other comprehensive income 1,797 1,797 Restricted stock awards, stock incentive plan ( 19,238 shares) 48 ( 48 ) — Stock-based compensation expense 604 604 Issuance of common stock, dividend investment plan ( 13,239 shares) 33 326 359 Issuance of common stock, employee benefit plan ( 7,204 shares) 18 209 227 Retirement of common stock ( 67,189 shares) ( 168 ) ( 1,686 ) ( 1,854 ) Dividends declared ($ 1.04 per share) ( 3,557 ) ( 3,557 ) December 31, 2020 $ 8,460 $ 10,811 $ 82,524 $ 3,279 $ 105,074 Net income 11,021 11,021 Other comprehensive (loss) ( 3,434 ) ( 3,434 ) Restricted stock awards, stock incentive plan ( 21,261 shares) 53 ( 53 ) — Stock-based compensation expense 850 850 Issuance of common stock, dividend investment plan ( 16,194 shares) 41 479 520 Issuance of common stock, employee benefit plan ( 5,577 shares) 14 165 179 Retirement of common stock ( 4,749 shares) ( 12 ) ( 137 ) ( 149 ) Dividends declared ($ 1.10 per share) ( 3,781 ) ( 3,781 ) December 31, 2021 $ 8,556 $ 12,115 $ 89,764 $ ( 155 ) $ 110,280 See Notes to Consolidated Financial Statements 53 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years Ended December 31, 2021 and 2020 (dollars in thousands) 2021 2020 Cash Flows from Operating Activities Net income $ 11,021 $ 11,172 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 996 1,028 Amortization of other assets 672 411 Provision for loan losses 1,483 1,457 Origination of loans held for sale ( 19,015 ) — Proceeds from sale of loans held for sale 18,775 — Net (gains) on sales of loans ( 1,658 ) — Loss (gain) on other real estate owned 201 ( 143 ) (Gain) on the sale and disposal of premises and equipment — ( 5 ) Loss on the sale of repossessed assets — 5 (Gain) on the sale of securities ( 24 ) ( 687 ) Stock-based compensation expense 850 604 Premium amortization on securities, net 1,239 801 Bank owned life insurance (income) ( 527 ) ( 310 ) Deferred tax (benefit) ( 1,437 ) ( 471 ) Changes in assets and liabilities: Decrease (increase) in other assets 6 ( 1,397 ) Increase (decrease) in other liabilities 1,639 ( 1,459 ) Net cash provided by operating activities $ 14,221 $ 11,006 Cash Flows from Investing Activities Proceeds from maturities, calls, and principal payments of securities available for sale $ 52,012 $ 52,360 Proceeds from the sale of securities available for sale 15,885 28,323 Purchases of securities available for sale ( 100,824 ) ( 78,443 ) Proceeds from the sale of restricted investments 222 2,125 Purchase of restricted investments ( 4 ) ( 2,195 ) Proceeds for the sale of bank premises and equipment — 5 Purchases of bank premises and equipment ( 520 ) ( 456 ) Proceeds from the sale of other real estate owned 672 160 Proceeds from the sale of repossessed assets — 58 Purchase of bank-owned life insurance ( 10,000 ) ( 12,000 ) Proceeds from sales of loans 100,176 — Net (increase) in loans ( 248,598 ) ( 191,411 ) Net cash (used in) investing activities $ ( 190,979 ) $ ( 201,474 ) Cash Flows from Financing Activities Net increase in demand deposits, money market and savings accounts $ 169,211 $ 251,094 Net (decrease) in certificates of deposit ( 5,074 ) ( 9,540 ) Issuance of common stock, employee benefit plan 179 227 Retirement of common stock ( 149 ) ( 1,854 ) Cash dividends paid ( 3,261 ) ( 3,198 ) Net cash provided by financing activities $ 160,906 $ 236,729 (Decrease) increase in cash and cash equivalents $ ( 15,852 ) $ 46,261 Cash and Cash Equivalents Beginning 79,920 33,659 Ending $ 64,068 $ 79,920 Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 1,682 $ 3,351 Income taxes $ 2,816 $ 2,618 Supplemental Schedule of Noncash Investing and Financing Activities: Unrealized (loss) gain on securities available for sale $ ( 4,346 ) $ 2,306 Minimum postretirement liability adjustment $ - $ ( 30 ) Other real estate and repossessed assets acquired in settlement of loans $ 266 $ 503 Issuance of common stock, dividend investment plan $ 520 $ 359 Lease liabilities arising from right-of-use assets $ 1,404 $ 549 See Notes to Consolidated Financial Statements 54 NOTE 1. Nature of Banking Activities and Significant Accounting Policies Eagle Financial Services, Inc. (the “Company” or “Corporation”) and the Bank grant commercial, financial, agricultural, residential and consumer loans to customers in Virginia and the Eastern Panhandle of West Virginia. The loan portfolio is well diversified and generally is collateralized by assets of the customers. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrowers. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to accepted practices within the banking industry. Principles of Consolidation The Company owns 100 % of Bank of Clarke County (the “Bank”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. Trust Assets Eagle Investment Group (“EIG”), as a division of the Bank offers both a trust department and investment services. The trust services division of EIG offers a full range of personal and retirement plan services, which include serving as agent for bill paying and custody of assets, as investment manager with full authority or advisor, as trustee or co-trustee for trusts under will or under agreement, as trustee of life insurance trusts, as guardian or committee, as agent under a power of attorney, as executor or co-executor for estates, as custodian or investment advisor for individual retirement plans, and as trustee or trust advisor for corporate retirement plans such as profit sharing and 401(k) plans. The brokerage division of EIG offers a full range of investment services, which include tax-deferred annuities, IRAs and rollovers, mutual funds, retirement plans, 529 college savings plans, life insurance, long term care insurance, fixed income investing, brokerage CDs, and full service or discount brokerage services. Securities and other property held by the Eagle Investment Group in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and interest bearing deposits. Generally, federal funds are purchased and sold for one-day periods. Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Debt securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be “other than temporary” are reflected in earnings as realized losses. In estimating “other than temporary” impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. The Bank is required to maintain an investment in the capital stock of certain correspondent banks. No readily available market exists for this stock and it has no quoted market value. The investment in these securities is recorded at cost and they are reported on the Company’s consolidated balance sheet as restricted investments. 55 Loans Held for Sale Mortgage loans originated with the intent to sell in the secondary market are classified as loans held for sale and carried at the lower of cost or fair value as determined by commitments from investors. Mortgage loans that are sold in the secondary market are sold servicing released. The Company may also classify other loans as loans held for sale as part of its ongoing portfolio management strategies. Such other loans are generally not originated with the intent to sell. Once a decision is made to sell loans not previously classified as held for sale, such loans are transferred into the held-for-sale classification and carried at the lower of cost or fair value. In 2021, the Company sold non-mortgage loans totaling approximately $ 100 million in 2021 as part of its portfolio management strategies. that were previously classified as held for investment. Gains and losses on sales of loans are recorded based on the differential between the sales proceeds and carrying value of the underlying loans. Loans The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout the Counties of Clarke, Frederick, Loudoun and Fairfax, Virginia as well as the Towns of Leesburg and Purcellville and the Cities of Winchester and Frederick, Maryland. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan fees collected and certain costs incurred related to loan originations are deferred and amortized as an adjustment to interest income over the life of the related loans. Deferred fees and costs are recorded as an adjustment to interest income using a method that approximates a constant yield. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 120 and 90 days delinquent, respectively, unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal and interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Troubled Debt Restructurings (TDR) In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a TDR. TDRs are considered impaired loans. Upon designation as a TDR, the Company evaluates the borrower’s payment history, past due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on non-accrual status at the time of the TDR, the loan will remain on non-accrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above. Risks by Loan Portfolio Segments One-to-Four-Family Residential Real Estate Lending Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. As part of the application process, information is gathered concerning income, employment and credit history of the applicant. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Directors Loan Committee. 56 Commercial Real Estate Lending Commercial real estate lending entails significant additional risk as compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or the economy, in general. Construction and Land Development Lending There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80 % of the estimated appraised value of the finished home. Commercial and Industrial Lending Commercial business loans generally have more risk than residential mortgage loans,but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of the borrower. Commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as accounts receivable, equipment, inventory and boats. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate. Consumer Lending Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. A portion of the Company’s consumer loans are also secured by boats. 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. Marine Lending The Bank’s marine lending unit, which includes originated retail loans, which are classified as commercial and industrial loans or consumer loans depending on borrower, and dealer floorplan loans, which are classified as commercial and industrial loans. The Company’s relationships are limited to well established dealers of global premium brand manufacturers. The Company’s top three manufacturer customers have been in business between 30 and 100 years. The Company primarily has secured agreements with premium manufacturers to support dealer floor plan loans which reduces the Company’s credit exposure to the dealer, despite its underwriting of each respective dealer. The Company has developed incentive retail pricing programs with the dealers to drive retail dealer flow. In addition to the repurchase agreements associated with floor plan lending, manufacturers will often support secondary resale values which can have the effect of reducing losses from non-performing retail marine loans. Retail borrowers generally have very high credit scores, substantial down payments, substantial net worth, personal liquidity, and excess cash flow. 57 Paycheck Protection Program Loans In both 2021 and 2020, the Company participated in the Paycheck Protection Program (PPP). The PPP commenced subsequent to the passage of the Coronavirus Aid, Relief and Economic Security("CARES") Act in March 2020 and was later expanded and extended by other legislation. The PPP was designed to provide U.S. small businesses with cash-flow assistance during the COVID-19 pandemic through loans that are fully guaranteed by the Small Business Administration (SBA) which may be forgiven upon satisfaction of certain criteria. As of December 31, 2021, the Company had 152 PPP loans with outstanding balances totaling $ 15.9 . million. As of December 31, 2020, the Company had 911 PPP loans with outstanding balances totaling $ 81.3 million. As compensation for originating the loans, the Company received lender processing fees from the SBA, which were deferred, along with the related loan origination costs. These net fees are being accreted to interest income over the remaining contractual lives of the loans. Upon forgiveness of a PPP loan and repayment by the SBA, which may be prior to the loan's maturity, the remainder of any unrecognized net fees are recognized in interest income. Our outstanding PPP loans were included in the commercial and industrial segment at December 31, 2021 and 2020, and their underlying guarantees were considered in the determination of the allowance for loan losses as discussed below. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for (recovery of) loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are impaired. An allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors considered in the general component include the levels and trends in delinquencies and nonperforming loans, trends in volume and terms of loans, the effects of any changes in lending policies, the experience, ability, and depth of management, national and local economic trends and conditions, changes in collateral values, concentrations of credit, the quality of the Company’s loan review system, competition and regulatory requirements. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair market value less estimated liquidation costs of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement or are in a nonaccrual status. Bank Premises and Equipment Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range from 10 to 39 years for buildings and 3 to 10 years for furniture and equipment. Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation balances are cleared the differential between the proceeds, if any, and the carrying value is recorded as a gain or loss in the Company's results of operations. 58 Leases The Company accounts for its leasing arrangements in accordance with ASC 842 "Leases". Refer to Note 13 for further discussion of the Company's accounting for its leasing arrangements. Other Real Estate Owned Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs at the date of foreclosure. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less estimated cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in the (gain) loss on other real estate owned line item in the consolidated statements of income. Bank Owned Life Insurance The Company has purchased life insurance on certain key individuals. Bank owned life insurance is recorded at the amount that may be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement. Transfers of Financial Assets Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Loan Swaps The Company enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Company simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Company receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest income and sum to zero because of the offsetting terms of swaps with borrowers and swaps with dealer counterparties. Retirement Plans The Company sponsors a 401(k) savings plan under which eligible employees may defer a portion of their compensation on a pretax basis. The Company also provides a match to participants in this plan, as described more fully in Note 11. Stock-Based Compensation Plan During 2014, the Company’s shareholders approved a stock incentive plan which allows key employees and directors to increase their personal financial interest in the Company. This plan permits the issuance of incentive stock options and non-qualified stock options and the award of stock appreciation rights, common stock, restricted stock, and phantom stock. The plan, as adopted, authorized the issuance of up to 500,000 shares of common stock. This plan is discussed more fully in Note 10. Income Taxes Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws. 59 When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the applicable taxing authority, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, the Company believes it is “more likely than not” that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the “more likely than not” recognition threshold are measured as the largest amount of tax benefit that is more than fifty percent ( 50 %) likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheet along with any associated interest and penalties that would be payable to the applicable taxing authority upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income. The Company has no uncertain tax positions. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. Reclassifications Certain reclassifications have been made to the 2020 financial statements to conform to reporting for 2021. The results of the reclassifications are not considered material and had no effect on prior years' net income or shareholders' equity. Earnings Per Common Share Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Nonvested restricted shares are included in the weighted average number of common shares used to compute basic earnings per share because of dividend participation and voting rights. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The number of potential common shares is determined using the treasury method. The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock. Twelve Months Ended December 31, 2021 2020 Average number of common shares outstanding 3,440,080 3,417,543 Effect of dilutive common stock — — Average number of common shares outstanding used to calculate diluted earnings per share 3,440,080 3,417,543 There were no potentially dilutive securities outstanding in 2021 or 2020. Comprehensive Income Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, net of income taxes, are reported within the balance sheet as a separate component of shareholders’ equity. These changes, along with net income, are components of comprehensive income and are reported in the statement of comprehensive income. In addition to net income, the Company’s comprehensive income includes changes in the benefit obligations and plan assets for postretirement benefit plans and unrealized gains or losses on available for sale securities. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. 60 COVID-19 Pandemic Since March 2020, COVID-19 has impacted the Company's communities, customers, and operations. The ultimate extent of the pandemic's impact on our business is inherently uncertain and dependent on future developments. Accordingly, estimates used in the preparation of the Company's financial statements may be subject to adjustment in future periods based on the ultimate course of the pandemic, which may be exacerbated by additional variants and a resurgence of its severity. Stock Repurchase Program On June 16, 2021, the Corporation renewed the stock repurchase program to repurchase up to 150,000 shares of its common stock prior to June 30, 2022. During 2021, the Company purchased 4,749 shares of its Common Stock under its stock repurchase program at an average price of $ 31.26 . During 2020, the Company purchased 67,189 shares of its Common Stock under its stock repurchase program at an average price of $ 27.60 . The maximum number of shares that may yet be purchased under the June 2021 plan as of December 31, 2021 are 148,825 . Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. The Company formed a CECL committee during 2016 which continues to meet weekly to address the compliance requirements. Historic loan data has been gathered and reviewed for completeness and accuracy. In addition, the committee has selected a third-party that is assisting in calculating the financial impact of ASU 2016-13 and anticipates running parallel allowance models under the current and new standard in advance of the required implementation date. Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology. In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is working to identify loans that are directly or indirectly influenced by LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loans . 61 NOTE 2. Securities Amortized costs and fair values of securities available for sale at December 31, 2021 and 2020 were as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value December 31, 2021 (in thousands) Obligations of U.S. government corporations and agencies $ 14,541 $ 417 $ ( 37 ) $ 14,921 U.S. treasury notes 2,003 — — 2,003 Mortgage-backed securities 152,391 753 ( 2,132 ) 151,012 Obligations of states and political subdivisions 21,104 773 — 21,877 Subordinated debt 2,500 11 ( 3 ) 2,508 $ 192,539 $ 1,954 $ ( 2,172 ) $ 192,321 December 31, 2020 (in thousands) Obligations of U.S. government corporations and agencies $ 16,576 $ 907 $ — $ 17,483 Mortgage-backed securities 117,161 1,894 ( 46 ) 119,009 Obligations of states and political subdivisions 25,840 1,373 — 27,213 Subordinated debt 1,250 — — 1,250 $ 160,827 $ 4,174 $ ( 46 ) $ 164,955 Carrying amounts of restricted securities at December 31, 2021 and 2020 were as follows: December 31, 2021 December 31, 2020 (in thousands) Federal Reserve Bank Stock $ 344 $ 344 Federal Home Loan Bank Stock 565 783 Community Bankers’ Bank Stock 140 140 $ 1,049 $ 1,267 The amortized cost and fair value of securities available for sale at December 31, 2021, by contractual maturity, are shown below. Maturities may differ from contractual maturities primarily (others could be called) in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Amortized Cost Fair Value (in thousands) Due in one year or less $ 3,819 $ 3,842 Due after one year through five years 9,079 9,236 Due after five years through ten years 38,138 38,958 Due after ten years 141,503 140,285 $ 192,539 $ 192,321 During the twelve months ended December 31, 2021, the Company sold $ 15.9 million in available for sale securities with gross gains of $ 143 thousand and gross losses of $ 119 . During the twelve months ended December 31, 2020, the Company sold $ 28.3 million in available for sale securities with gross gains of $ 687 thousand and no gross losses . 62 The fair value and gross unrealized losses for securities available for sale, totaled by the length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2021 and 2020 were as follows: Less than 12 months 12 months or more Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses December 31, 2021 (in thousands) Obligations of U.S. government corporations and agencies $ 2,616 $ 37 $ — $ — $ 2,616 $ 37 Mortgage-backed securities 101,080 1,214 29,555 918 130,635 2,132 Subordinated debt 247 3 — — 247 3 $ 103,943 $ 1,254 $ 29,555 $ 918 $ 133,498 $ 2,172 Less than 12 months 12 months or more Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses December 31, 2020 (in thousands) Mortgage-backed securities $ 12,014 $ 46 $ — $ — $ 12,014 $ 46 $ 12,014 $ 46 $ — $ — $ 12,014 $ 46 Gross unrealized losses on available for sale securities included forty one (41) and three (3) debt securities at December 31, 2021 and December 31, 2020, respectively. The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company’s mortgage-backed securities are issued by U.S. government agencies, which guarantee payments to investors regardless of the status of the underlying mortgages. Consideration is given to the length of time and the amount of an unrealized loss, the financial condition of the issuer, and the intent and ability of the Company to retain its investment in the issuer long enough to allow for an anticipated recovery in fair value. The fair value of a security reflects its liquidity as compared to similar instruments, current market rates on similar instruments, and the creditworthiness of the issuer. Absent any change in the liquidity of a security or the creditworthiness of the issuer, prices will decline as market rates rise and vice-versa. The primary cause of the unrealized losses at December 31, 2021 and December 31, 2020 was changes in market interest rates. Since the losses can be primarily attributed to changes in market interest rates and not expected cash flows or an issuer’s financial condition, the unrealized losses are deemed to be temporary and management does not intend to sell and it is unlikely that management will be required to sell the securities prior to their anticipated recovery. The Company monitors the financial condition of these issuers continuously and will record other-than-temporary impairment if the recovery of value is unlikely. Securities having a carrying value of $ 8.5 million at December 31, 2021 were pledged as security for trust accounts. 63 NOTE 3. Loans The composition of loans at December 31, 2021 and 2020 was as follows: December 31, 2021 2020 (in thousands) Mortgage loans on real estate: Construction and land development $ 71,191 $ 42,544 Secured by farmland 13,710 15,846 Secured by 1-4 family residential properties 263,723 248,246 Multifamily 29,093 21,496 Commercial 377,051 334,661 Commercial and industrial loans 143,378 140,762 Consumer installment loans 67,281 21,321 All other loans 16,798 10,773 Total loans $ 982,225 $ 835,649 Net deferred loan costs and premiums 3,495 685 Allowance for loan losses ( 8,787 ) ( 7,096 ) $ 976,933 $ 829,238 NOTE 4. Allowance for Loan Losses Changes in the allowance for loan losses for the years ended December 31, 2021 and 2020 were as follows: December 31, 2021 2020 (in thousands) Balance, beginning $ 7,096 $ 4,973 Provision charged to operating expense 1,483 1,457 Recoveries added to the allowance 318 1,131 Loan losses charged to the allowance ( 110 ) ( 465 ) Balance, ending $ 8,787 $ 7,096 64 Nonaccrual and past due loans by class at December 31, 2021 and December 31, 2020 were as follows: December 31, 2021 (in thousands) 30 - 59 Days Past Due 60 - 89 Days Past Due 90 or More Days Past Due Total Past Due Current Total Loans 90 or More Days Past Due Still Accruing Nonaccrual Loans Commercial - Non Real Estate: Commercial & Industrial $ 8 $ 7 $ — $ 15 $ 143,363 $ 143,378 $ — $ — Commercial Real Estate: Owner Occupied — — — — 188,839 188,839 — 124 Non-owner occupied 146 — 130 276 187,936 188,212 — 1,547 Construction and Farmland: Residential — — — — 10,077 10,077 — — Commercial — 126 108 234 74,590 74,824 — 234 Consumer: Installment 6 — — 6 67,275 67,281 — 3 Residential: Equity Lines 13 — — 13 35,849 35,862 — 29 Single family 409 238 434 1,081 226,780 227,861 43 786 Multifamily — — — — 29,093 29,093 — — All Other Loans — — — — 16,798 16,798 — — Total $ 582 $ 371 $ 672 $ 1,625 $ 980,600 $ 982,225 $ 43 $ 2,723 December 31, 2020 (in thousands) 30 - 59 Days Past Due 60 - 89 Days Past Due 90 or More Days Past Due Total Past Due Current Total Loans 90 or More Past Due Still Accruing Nonaccrual Loans Commercial - Non Real Estate: Commercial & Industrial $ 43 $ — $ — $ 43 $ 140,719 $ 140,762 $ — $ — Commercial Real Estate: Owner Occupied — — 157 157 165,764 165,921 — 1,227 Non-owner occupied 500 — 122 622 168,118 168,740 — 2,405 Construction and Farmland: Residential — — — — 10,644 10,644 — — Commercial — — 69 69 47,677 47,746 — 69 Consumer: Installment 5 — — 5 21,316 21,321 — 5 Residential: Equity Lines 13 — — 13 31,239 31,252 — 42 Single family 249 123 581 953 216,041 216,994 — 1,006 Multifamily — — — — 21,496 21,496 — — All Other Loans — — — — 10,773 10,773 — — Total $ 810 $ 123 $ 929 $ 1,862 $ 833,787 $ 835,649 $ — $ 4,754 65 Allowance for loan losses by segment as of and for the years ended December 31, 2021 and December 31, 2020 were as follows: December 31, 2021 (in thousands) Construction and Farmland Residential Real Estate Commercial Real Estate Commercial Consumer All Other Loans Unallocated Total Allowance for credit losses: Beginning Balance $ 1,604 $ 1,929 $ 1,645 $ 1,374 $ 198 $ 346 $ — $ 7,096 Charge-Offs — ( 13 ) — ( 10 ) ( 19 ) ( 68 ) — ( 110 ) Recoveries 12 240 7 18 29 12 — 318 Provision 1,178 ( 406 ) ( 2 ) 274 438 1 — 1,483 Ending balance $ 2,794 $ 1,750 $ 1,650 $ 1,656 $ 646 $ 291 $ — $ 8,787 Ending balance: Individually evaluated for impairment $ — $ 39 $ — $ — $ — $ — $ — $ 39 Ending balance: collectively evaluated for impairment $ 2,794 $ 1,711 $ 1,650 $ 1,656 $ 646 $ 291 $ — $ 8,748 Loans: Ending balance $ 84,901 $ 292,816 $ 377,051 $ 143,378 $ 67,281 $ 16,798 $ — $ 982,225 Ending balance individually evaluated for impairment $ 257 $ 2,778 $ 2,295 $ 108 $ 16 $ — $ — $ 5,454 Ending balance collectively evaluated for impairment $ 84,644 $ 290,038 $ 374,756 $ 143,270 $ 67,265 $ 16,798 $ — $ 976,771 December 31, 2020 (in thousands) Construction and Farmland Residential Real Estate Commercial Real Estate Commercial Consumer All Other Loans Unallocated Total Allowance for credit losses: Beginning Balance $ 446 $ 1,601 $ 1,991 $ 565 $ 54 $ 120 $ 196 $ 4,973 Charge-Offs ( 119 ) ( 20 ) ( 155 ) ( 49 ) ( 83 ) ( 39 ) — ( 465 ) Recoveries 7 275 302 498 41 8 — 1,131 Provision 1,270 73 ( 493 ) 360 186 257 ( 196 ) 1,457 Ending balance $ 1,604 $ 1,929 $ 1,645 $ 1,374 $ 198 $ 346 $ — $ 7,096 Ending balance: Individually evaluated for impairment $ — $ 72 $ — $ — $ — $ — $ — $ 72 Ending balance: collectively evaluated for impairment $ 1,604 $ 1,857 $ 1,645 $ 1,374 $ 198 $ 346 $ — $ 7,024 Loans: Ending balance $ 58,390 $ 269,742 $ 334,661 $ 140,762 $ 21,321 $ 10,773 $ — $ 835,649 Ending balance individually evaluated for impairment $ 105 $ 3,869 $ 3,632 $ 147 $ 15 $ — $ — $ 7,768 Ending balance collectively evaluated for impairment $ 58,285 $ 265,873 $ 331,029 $ 140,615 $ 21,306 $ 10,773 $ — $ 827,881 66 Impaired loans by class at December 31, 2021 and December 31, 2020 were as follows: As of December 31, 2021 (in thousands) Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance: Commercial - Non Real Estate: Commercial & Industrial $ 143 $ 109 $ — $ 166 $ 11 Commercial Real Estate: Owner Occupied 148 124 — 142 — Non-owner occupied 2,539 2,177 — 2,186 — Construction and Farmland: Residential — — — — — Commercial 271 257 — 267 9 Consumer: Installment 17 16 — 19 1 Residential Equity lines 35 29 — 32 — Single family 2,088 1,974 — 2,012 62 Multifamily — — — — — Other Loans — — — — — $ 5,241 $ 4,686 $ — $ 4,824 $ 83 With an allowance recorded: Commercial - Non Real Estate: Commercial & Industrial $ — $ — $ — $ — $ — Commercial Real Estate: Owner Occupied — — — — — Non-owner occupied — — — — — Construction and Farmland: Residential — — — — — Commercial — — — — — Consumer: Installment — — — — — Residential Equity lines — — — — — Single family 811 787 39 802 30 Multifamily — — — — — Other Loans — — — — — $ 811 $ 787 $ 39 $ 802 $ 30 Total: Commercial $ 143 $ 109 $ — $ 166 $ 11 Commercial Real Estate 2,687 2,301 — 2,328 — Construction and Farmland 271 257 — 267 9 Consumer 17 16 — 19 1 Residential 2,934 2,790 39 2,846 92 Other — — — — — Total $ 6,052 $ 5,473 $ 39 $ 5,626 $ 113 (1) Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, and any partial charge-offs. 67 As of December 31, 2020 (in thousands) Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance: Commercial - Non Real Estate: Commercial & Industrial $ 246 $ 147 $ — $ 186 $ 16 Commercial Real Estate: Owner Occupied 1,282 1,227 — 1,258 18 Non-owner occupied 2,682 2,405 — 2,444 34 Construction and Farmland: Residential — — — — — Commercial 233 105 — 109 3 Consumer: Installment 16 15 — 22 1 Residential: Equity lines 272 42 — 44 — Single family 2,655 2,413 — 2,514 76 Multifamily — — — — — Other Loans — — — — — $ 7,386 $ 6,354 $ — $ 6,577 $ 148 With an allowance recorded: Commercial - Non Real Estate: Commercial & Industrial $ — $ — $ — $ — $ — Commercial Real Estate: Owner Occupied — — — — — Non-owner occupied — — — — — Construction and Farmland: Residential — — — — — Commercial — — — — — Consumer: Installment — — — — — Residential: Equity lines — — — — — Single family 1,449 1,431 72 1,448 38 Multifamily — — — — — Other Loans — — — — — $ 1,449 $ 1,431 $ 72 $ 1,448 $ 38 Total: Commercial $ 246 $ 147 $ — $ 186 $ 16 Commercial Real Estate 3,964 3,632 — 3,702 52 Construction and Farmland 233 105 — 109 3 Consumer 16 15 — 22 1 Residential 4,376 3,886 72 4,006 114 Other — — — — — Total $ 8,835 $ 7,785 $ 72 $ 8,025 $ 186 (1) Recorded investment is defined as the summation of the outstanding principal balance, accrued interest, and any partial charge-offs. 68 When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in nonaccrual loans is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method. The Company uses a rating system for evaluating the risks associated with non-consumer loans. Consumer loans are not evaluated for risk unless the characteristics of the loan fall within classified categories. Descriptions of these ratings are as follows: Pass Pass loans exhibit acceptable history of profits, cash flow ability and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner. Special mention Special mention loans exhibit negative trends and potential weakness that, if left uncorrected, may negatively affect the borrower’s ability to repay its obligations. The risk of default is not imminent and the borrower still demonstrates sufficient financial strength to service debt. Substandard Substandard loans exhibit well defined weaknesses resulting in a higher probability of default. The borrowers exhibit adverse financial trends and a diminishing ability or willingness to service debt. Doubtful Doubtful loans exhibit all of the characteristics inherent in substandard loans; however given the severity of weaknesses, the collection of 100% of the principal is unlikely under current conditions. Loss Loss loans are considered uncollectible over a reasonable period of time and of such little value that its continuance as a bankable asset is not warranted. 69 Credit quality information by class at December 31, 2021 and December 31, 2020 was as follows: As of December 31, 2021 (in thousands) INTERNAL RISK RATING GRADES Pass Special Mention Substandard Doubtful Loss Total Commercial - Non Real Estate: Commercial & Industrial $ 143,197 $ 176 $ 5 $ — $ — $ 143,378 Commercial Real Estate: Owner Occupied 185,978 2,703 158 — — 188,839 Non-owner occupied 180,830 4,819 2,563 — — 188,212 Construction and Farmland: Residential 10,077 — — — — 10,077 Commercial 59,318 15,198 308 — — 74,824 Residential: Equity Lines 35,832 — 30 — — 35,862 Single family 224,510 1,601 1,633 117 — 227,861 Multifamily 26,952 2,141 — — — 29,093 All other loans 16,798 — — — — 16,798 Total $ 883,492 $ 26,638 $ 4,697 $ 117 $ — $ 914,944 Performing Nonperforming Consumer Credit Exposure by Payment Activity $ 67,275 $ 6 As of December 31, 2020 (in thousands) INTERNAL RISK RATING GRADES Pass Special Mention Substandard Doubtful Loss Total Commercial - Non Real Estate: Commercial & Industrial $ 140,316 $ 439 $ 7 $ — $ — $ 140,762 Commercial Real Estate: Owner Occupied 158,766 5,929 1,226 — — 165,921 Non-owner occupied 143,364 22,555 2,821 — — 168,740 Construction and Farm land: Residential 10,644 — — — — 10,644 Commercial 44,581 3,004 161 — — 47,746 Residential: Equity Lines 31,211 — 36 5 — 31,252 Single family 210,218 3,594 3,053 129 — 216,994 Multifamily 19,623 1,873 — — — 21,496 All other loans 8,438 2,335 — — — 10,773 Total $ 767,161 $ 39,729 $ 7,304 $ 134 $ — $ 814,328 Performing Nonperforming Consumer Credit Exposure by Payment Activity $ 21,316 $ 5 70 NOTE 5. Troubled Debt Restructurings All loans deemed a troubled debt restructuring, or “TDR”, are considered impaired, and are evaluated for collateral and cash-flow sufficiency. A loan is considered a TDR when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. All of the following factors are indicators that the Bank has granted a concession (one or multiple items may be present): • The borrower receives a reduction of the stated interest rate to a rate less than the institution is willing to accept at the time of the restructure for a new loan with comparable risk. • The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics. • The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement. • The borrower receives a deferral of required payments (principal and/or interest). • The borrower receives a reduction of the accrued interest. There were seventeen ( 17 ) troubled debt restructured loans totaling $ 2.7 million at December 31, 2021. At December 31, 2020, there were seventeen ( 17 ) troubled debt restructured loans totaling $ 3.3 million. Two loans, totaling $ 149 thousand, were in nonaccrual status at December 31, 2021. Three loans, totaling $ 796 thousand, were in nonaccrual status at December 31, 2020. There were no outstanding commitments to lend additional amounts to troubled debt restructured borrowers at December 31, 2021 or December 31, 2020. During the year ended December 31, 2020, the Company approved 255 deferrals of interest and/or principal payments with respect to loan balances totaling approximately $ 130.5 million at December 31, 2020 for its customers experiencing hardships related to COVID-19. 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. These deferrals were no more than six months in duration and were for loans not more than 30 days past due as of December 31, 2019. As such, they were not considered troubled debt restructurings based on the relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act (extended by the Consolidated Appropriations Act) and interagency regulatory guidance. As of December 31, 2021, all of the loans for which the Company had approved deferrals had begun making payments on their loans after the deferral date had passed. The following tables set forth information on the Company’s troubled debt restructurings by class of loans occurring during the years ended December 31, 2021 and 2020: Twelve Months Ended December 31, 2021 (in thousands) Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Consumer: Installment 2 $ 15 $ 15 Residential Single family 1 98 98 Total 3 $ 113 $ 113 71 Twelve Months Ended December 31, 2020 (in thousands) Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Commercial - Non Real Estate: Non-owner occupied 1 $ 685 $ 685 Consumer: Installment 1 13 13 Residential Single family 3 931 935 Total 5 $ 1,629 $ 1,633 During the twelve months ended December 31, 2021, the Company restructured three loans by granting a concession to the borrowers experiencing financial difficulty. The Company restructured two consumer installment loans and one residential single-family loan. The Company restructured one single-family residential loan by granting a lower interest rate and extending the loan term. The Company restructured two consumer installment loans by granting a refinance to extended the term of the loans, where one consumer installment loan was granted a lower interest rate. During the twelve months ended December 31, 2020, the Company restructured five loans by granting a concession to the borrower experiencing financial difficulty. The Company restructured one consumer installment loan and one residential single-family loan by granting three 90-day payment deferment periods. The Company restructured one single-family residential loan by reducing the payments due for a period of time and restructured another single-family residential loan by allowing a loan policy exception for a high loan-to-value. The Company also restructured one commercial real estate loan by granting interest-only payments. There were no TDRs occurring within the previous 12 months for which there was a payment default during the twelve months ended December 31, 2021 and 2020. Management defines default as over 30 days contractually past due under the modified terms, the foreclosure and/or repossession of the collateral, or the charge-off of the loan. NOTE 6. Bank Premises and Equipment, Net The major classes of bank premises and equipment and the total accumulated depreciation at December 31, 2021 and 2020 were as follows: December 31, 2021 2020 (in thousands) Land $ 6,644 $ 6,644 Buildings and improvements 18,561 18,498 Furniture and equipment 8,815 8,358 $ 34,020 $ 33,500 Less accumulated depreciation 15,771 14,775 Bank premises and equipment, net $ 18,249 $ 18,725 Depreciation expense on buildings and improvements was $ 482 thousand and $ 500 thousand for the years ended 2021 and 2020, respectively. Depreciation expense on furniture and equipment was $ 514 thousand and $ 527 thousand for the years ended 2021 and 2020, respectively. 72 NOTE 7. Deposits The composition of deposits at December 31, 2021 and December 31, 2020 was as follows: December 31, 2021 December 31, 2020 (in thousands) Noninterest bearing demand deposits $ 470,355 $ 407,576 Savings and interest bearing demand deposits: NOW accounts $ 162,690 $ 132,249 Money market accounts 251,862 207,837 Regular savings accounts 168,744 136,778 $ 583,296 $ 476,864 Time deposits: Balances of less than $250,000 $ 58,427 $ 59,621 Balances of $250,000 or greater 65,157 69,037 $ 123,584 $ 128,658 $ 1,177,235 $ 1,013,098 Money market accounts include $ 42.2 million and $ 34.6 million in reciprocal deposits at December 31, 2021 and 2020, respectively. The outstanding balance of time deposits at December 31, 2021 was due as follows: December 31, 2021 (in thousands) 2022 $ 107,507 2023 6,307 2024 2,449 2025 1,534 2026 5,780 Thereafter 7 $ 123,584 Deposit overdrafts reclassified as loans totaled $ 231 thousand and $ 70 thousand at December 31, 2021 and 2020, respectively. 73 NOTE 8. Borrowings The Company, through its subsidiary bank, borrows funds in the form of federal funds purchased and Federal Home Loan Bank advances. Federal fund lines of credit are extended to the Bank by nonaffiliated banks with which a correspondent banking relationship exists. The line of credit amount is determined by the creditworthiness of the Bank and, in particular, its regulatory capital ratios, which are discussed in Note 15. Federal funds purchased generally mature each business day. The following table summarizes information related to federal funds purchased for the years ended December 31, 2021 and 2020: December 31, 2021 2020 (dollars in thousands) Balance at year-end — — Average balance during the year 1 1 Average interest rate during the year 0.66 % 0.61 % Maximum month-end balance during the year $ — $ — Gross lines of credit at year-end 78,000 28,000 Unused lines of credit at year-end 78,000 28,000 As of December 31, 2021, Company had remaining credit availability in the amount of $ 244.3 million with the Federal Home Loan Bank of Atlanta. This line may be utilized for short and/or long-term borrowing. Advances on the line are secured by all of the Company’s eligible first lien residential real estate loans on one-to-four-unit, single-family dwellings; multi-family dwellings; home equity lines of credit; and commercial real estate loans. The amount of the available credit is limited to a percentage of the estimated market value of the loans as determined periodically by the FHLB of Atlanta. The amount of the available credit is also limited to 20 % of total Bank assets. The Company had no outstanding borrowings with the FHLB at December 31, 2021 or December 31, 2020. The Company had a $ 60.0 million irrevocable letter of credit at December 31, 2021 with the FHLB to secure public deposits. NOTE 9. Income Taxes The Company files income tax returns with the United States of America, the Commonwealth of Virginia and West Virginia. With few exceptions, the Company is no longer subject to federal, state, or local income tax examinations for years prior to 2018. 74 The net deferred tax asset at December 31, 2021 and 2020 consisted of the following components: December 31, 2021 2020 (in thousands) Deferred tax assets: Allowance for loan losses $ 1,845 $ 1,490 Share-based compensation 136 95 Accrued postretirement benefits 21 21 Home equity origination costs 67 50 Nonaccrual interest 65 76 Lease liabilities 1,110 864 Credit carryforward 973 — Securities available for sale 46 — Other 27 29 $ 4,290 $ 2,625 Deferred tax liabilities: Property and equipment $ 659 $ 713 Right-of-use assets 1,079 843 Securities available for sale — 867 $ 1,738 $ 2,423 Net deferred tax asset $ 2,552 $ 202 The Company has not recorded a valuation allowance for deferred tax assets because management believes that it is more likely than not that they will be ultimately realized. Income tax expense for the years ended December 31, 2021 and 2020 consisted of the following components: December 31, 2021 2020 (in thousands) Current tax expense $ 3,203 $ 2,607 Deferred tax (benefit) ( 1,437 ) ( 471 ) $ 1,766 $ 2,136 The following table reconciles income tax expense to the statutory federal corporate income tax amount, which was calculated by applying the federal corporate income tax rate to pre-tax income for the years ended December 31, 2021 and 2020. December 31, 2021 2020 (in thousands) Statutory federal corporate tax amount $ 2,685 $ 2,795 Tax-exempt interest (income) ( 135 ) ( 193 ) Officer insurance (income) ( 102 ) ( 57 ) Net tax credits ( 686 ) ( 439 ) Other, net 4 30 $ 1,766 $ 2,136 The effective tax rates were 13.81 % and 16.05 % for years ended December 31, 2021 and 2020, respectively. The effective tax rate is impacted by tax credits on qualified affordable housing project investments as discussed in Note 25 to the Consolidated Financial Statements as well as qualified rehabilitation credits. 75 NOTE 10. Stock-Based Compensation Restricted Stock provides grantees with rights to shares of common stock upon completion of a service period or achievement of Company performance measures. During the restriction period, all shares are considered outstanding and dividends are paid to the grantee. Outside directors are periodically granted restricted shares which vest over a period of less than nine months. During 2021, executive officers were granted restricted shares which vest over a three year service period and restricted shares which vest based on meeting performance measures over a one year period. Beginning in 2018, certain non-executive officers also were granted restricted shares which vest over a three year service period. Vesting schedules were unchanged from the two prior years. The following table presents the activity for Restricted Stock for the years ended December 31, 2021 and 2020: Twelve Months Ended December 31, 2021 2020 Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Nonvested, beginning of period 20,928 $ 29.98 18,488 $ 30.39 Granted 32,496 31.16 22,128 28.82 Vested ( 21,261 ) 30.70 ( 19,238 ) 29.01 Forfeited ( 425 ) 31.05 ( 450 ) 31.03 Nonvested, end of period 31,738 $ 30.70 20,928 $ 29.98 The Company recognizes compensation expense over the vesting period based on the fair value of the Company's stock on the grant date. Compensation expense was $ 850 thousand and $ 604 thousand during December 31, 2021 and 2020, respectively. The total grant date fair value of Restricted Stock which vested was $ 653 thousand and $ 558 thousand for the years ended December 31, 2021 and 2020, respectively. The total vest date fair value of Restricted Stock which vested was $ 690 thousand and $ 561 thousand for the years ended December 31, 2021 and 2020, respectively. Unrecognized compensation cost related to unvested Restricted Stock was $ 336 thousand at December 31, 2021. This amount is expected to be recognized over a weighted average period of two years . The Company's policy is to recognize forfeitures as they occur. NOTE 11. Employee Benefits The Company has an Employee Stock Ownership Plan (ESOP) to provide additional retirement benefits to substantially all employees. Contributions can be made to the Bank of Clarke County Employee Retirement Trust to be used to purchase the Company’s common stock. There were no contributions in 2021 and 2020. The Company sponsors a 401(k) savings plan under which eligible employees may defer a portion of salary on a pretax basis, subject to certain IRS limits. The Company matches 50 percent of employee contributions, on a maximum of six percent of salary deferred, with Company common stock or cash, as elected by each employee. The shares for this purpose are provided principally by newly issued shares. The 401(k) plan includes a non-elective safe-harbor employer contribution and an age-weighted employer contribution. Each year, qualifying employees will receive a non-elective safe-harbor contribution equal to three percent of their salary for that year. Qualifying employees will receive an additional contribution based on their age and years of service. The percentage of salary for the age-weighted contribution increases on both factors, age and years of service, with a minimum of one percent of salary and a maximum of ten percent of salary. Contributions under the plan amounted to $ 1.5 million in 2021 and $ 1.5 million in 2020. The Company has established an Executive Supplemental Income Plan for certain key employees. Benefits are to be paid in monthly installments following retirement or death. The agreement provides that if employment is terminated for reasons other than death or disability prior to age 65, the amount of benefits could be reduced or forfeited. The executive supplemental income benefit liability was $ 15 thousand and $ 23 thousand at December 31, 2021 and 2020, respectively. The executive supplemental income benefit expense, based on the present value of the retirement benefits, was $ 29 thousand in 2021 and $ 29 thousand in 2020. The plan is unfunded; however, life insurance has been acquired on the lives of these employees in amounts sufficient to discharge the plan’s obligations. 76 NOTE 12. Commitments and Contingencies In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. These commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit. The Company does not anticipate any material losses as a result of these commitments. During the normal course of business, various legal claims arise from time to time which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements. As a member of the Federal Reserve System, the Bank may be required to maintain certain average reserve balances. These reserve balances include usable vault cash and amounts on deposit with the Federal Reserve Bank. In March 2020, the Federal Reserve announced a reduction of the reserve requirement to zero percent across all deposit tiers in response to the COVID-19 pandemic. This adjustment to the reserve requirements remained in effect through December 31, 2021. In addition, the Bank was required to maintain a total compensating balance on deposit with two correspondent banks in the amount of $ 250 thousand at December 31, 2021 and 2020. See Note 18 with respect to financial instruments with off-balance-sheet risk. NOTE 13. Leases The Company leases certain office properties and equipment used in its operations in the normal course of business. Leases greater than 12 months in duration are recorded in the consolidated balance sheets at the lease commencement date and are classified as either operating or finance leases based on the Company's assessment of the underlying agreement. During the last quarter of 2021, the Company entered into a long-term lease agreement for a branch office in Warrenton, Virginia. The commencement of this lease resulted in the initial recognition of a right-of-use asset and lease liability of $ 1.3 million. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. The Company’s four long-term lease agreements for office properties are all classified as operating leases. These leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liability to the extent the options are reasonably certain of being exercised. These lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. Right-of-use assets and leases liabilities are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets. The following tables present information about the Company’s leases: (dollars in thousands) December 31, 2021 December 31, 2020 Lease liability $ 5,289 $ 4,113 Right-of-use asset $ 5,139 $ 4,014 Weighted average remaining lease term 15 years 17 years Weighted average discount term 2.99 % 3.34 % Twelve Months Ended Lease Cost December 31, 2021 December 31, 2020 Operating lease cost $ 376 $ 287 Variable lease cost — — Short-term lease cost 19 16 Total lease cost $ 395 $ 303 Cash paid for amounts included in the measurement of lease liabilities $ 314 $ 239 77 A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities is as follows: As of Lease payments due December 31, 2021 Twelve months ending December 31, 2022 $ 455 Twelve months ending December 31, 2023 473 Twelve months ending December 31, 2024 480 Twelve months ending December 31, 2025 504 Twelve months ending December 31, 2026 397 Thereafter 4,540 Total undiscounted cash flows $ 6,849 Discount ( 1,560 ) Lease liability $ 5,289 NOTE 14. Transactions with Directors and Officers The Bank grants loans to and accepts deposits from its directors, principal officers and related parties of such persons during the ordinary course of business. The aggregate balance of loans to directors, principal officers and their related parties was $ 5.4 million and $ 5.1 million at December 31, 2021 and 2020, respectively. These balances reflect total principal additions of $ 1.3 million and total principal payments of $ 963 thousand, during 2021. The reduction in the prior year balance was due to a change in composition of related parties. The aggregate balance of deposits from directors, principal officers and their related parties was $ 13.9 million and $ 16.6 million at December 31, 2021 and 2020, respectively. NOTE 15. Capital Requirements The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital, and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). In conjunction with the minimum capital requirements, the Bank is required to maintain a capital conservation buffer which is intended to absorb losses during periods of financial and economic stress. Failure to maintain the minimum ratios, inclusive of the buffer, will result in restrictions on capital distributions and other payments. This buffer was 2.5 % for all periods presented and is applicable for all ratios with the exception of the tier 1 leverage ratio. The Bank's institution specific capital conservation buffer at December 31, 2021 was 3.30 %. Management believes the Bank met all capital adequacy requirements to which it was subject at December 31, 2021 and 2020. At December 31, 2021, the most recent notification from the Federal Reserve categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and common equity Tier 1 ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. 78 The following table presents the Bank’s actual capital amounts and ratios at December 31, 2021 and 2020: Actual Minimum Capital Requirement Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) December 31, 2021 Common Equity Tier 1 Capital to Risk Weighted Assets $ 107,570 10.44 % $ 46,362 4.50 % $ 66,967 6.50 % Total Capital to Risk Weighted Assets 116,420 11.30 % 82,421 8.00 % 103,026 10.00 % Tier 1 Capital to Risk Weighted Assets 107,570 10.44 % 61,816 6.00 % 82,421 8.00 % Tier 1 Capital to Average Assets 107,570 8.84 % 48,654 4.00 % 60,817 5.00 % December 31, 2020 Common Equity Tier 1 Capital to Risk Weighted Assets $ 97,825 12.39 % $ 35,540 4.50 % $ 51,335 6.50 % Total Capital to Risk Weighted Assets 104,957 13.29 % 63,182 8.00 % 78,977 10.00 % Tier 1 Capital to Risk Weighted Assets 97,825 12.39 % 47,386 6.00 % 63,182 8.00 % Tier 1 Capital to Average Assets 97,825 9.06 % 43,213 4.00 % 54,016 5.00 % NOTE 16. Restrictions On Dividends, Loans and Advances Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be paid at any date is generally limited to the lesser of the Bank’s retained earnings or the three preceding years’ undistributed net income of the Bank. Loans or advances are limited to 10% of the Bank’s capital stock and surplus on a secured basis. Capital stock and surplus is defined as tier 1 and tier 2 capital under the risk-based capital guidelines. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. At December 31, 2021, the Bank’s retained earnings available for the payment of dividends to the Company was $ 21.8 million. Accordingly, $ 85.6 million of the Company’s equity in the net assets of the Bank was restricted at December 31, 2021. Funds available for loans or advances by the Bank to the Company amounted to $ 11.6 million at December 31, 2021. NOTE 17. Dividend Investment Plan The Company has a Dividend Investment Plan, which allows participants’ dividends to purchase additional shares of common stock at its fair market value on each dividend record date. In 2016, the Company amended the Plan to provide that shares of common stock purchased through the Plan would be purchased at a price equal to the market price of the shares. Prior to this date, the Plan allowed participants' dividends to purchase additional shares of common stock at 95 % of its fair market value. Our board of directors determined to eliminate the discount for purchases of shares in order to reflect current best practices and market standards for dividend reinvestment plans generally and among our peers. No other changes have been made to the operation of the dividend reinvestment features of the Plan, and current participants will remain enrolled in the Plan under their current methods of participation unless they choose to alter their enrollment. NOTE 18. Financial Instruments with Off-Balance-Sheet Risk The Company, through its subsidiary bank, is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unfunded commitments under lines of credit, and commercial and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. 79 At December 31, 2021 and 2020, the following financial instruments were outstanding whose contract amounts represent credit risk: December 31, 2021 December 31, 2020 (dollars in thousands) Commitments to extend credit $ 21,886 $ 27,558 Unfunded commitments under lines of credit 171,406 146,202 Commercial and standby letters of credit 10,397 8,139 Commitments to extend credit are agreements to lend to a customer as long as the terms offered are acceptable and certain other conditions are met. Commitments generally have fixed expiration dates or other termination clauses. Since these commitments may expire or terminate, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, with regards to these commitments, is based on management’s credit evaluation of the customer. Unfunded commitments under lines of credit are contracts for possible future extensions of credit to existing customers. Unfunded commitments under lines of credit include, but are not limited to, home equity lines of credit, overdraft protection lines of credit, credit cards, and unsecured and secured commercial lines of credit. The terms and conditions of these commitments vary depending on the line of credit’s purpose, collateral, and maturity. The amount disclosed above represents total unused lines of credit for which a contract with the Bank has been established. Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in granting loans to customers. The Bank holds collateral supporting these commitments if it is deemed necessary. At December 31, 2021, $ 10.2 million of the outstanding letters of credit were collateralized. The Bank has cash accounts in other commercial banks. The amount on deposit in these banks at December 31, 2021 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $ 7.6 million. NOTE 19. Revenue Recognition Substantially all of the Company's revenue from contracts with customers that is within the scope of ASC 606, "Revenue from Contracts with Customers" is reported within noninterest income. A limited amount of other in-scope items such as gains and losses on other real estate owned are recorded in noninterest expense. The recognition of interest income and certain sources of noninterest income (e.g. gains on securities transactions, bank owned life insurance income, etc.) are governed by other areas of U.S. GAAP. Significant revenue streams that are within the scope of ASC 606 and included in noninterest income are discussed in the following paragraphs. Income from Fiduciary Activities Trust asset management fee income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Service Charges on Deposit Accounts Service charges on deposit accounts are principally comprised of overdrawn account fees and account maintenance charges. The Company’s performance obligations on revenue generated from deposit accounts are generally satisfied immediately, when the transaction occurs, or by month-end. Typically, the duration of a contract does not extend beyond the services performed. Due to the short duration of most customer contracts which generate these sources of noninterest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized. 80 Other Service Charges and Fees The majority of the Company’s noninterest income is derived from short term contracts associated with services provided for other ancillary services such as ATM fees, brokerage commissions, secondary market fees and wire transfer fees. The Company’s performance obligations on revenue generated from these ancillary services are generally satisfied immediately, when the transaction occurs, or by month-end. Typically, the duration of a contract does not extend beyond the services performed. Due to the short duration of most customer contracts which generate these sources of noninterest income, no significant judgments must be made in the determination of the amount and timing of revenue recognized. The Company earns interchange fees from credit cardholder transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized no less than monthly. Noninterest income disaggregated by major source, for the years ended December 31, 2021 and 2020 consisted of the following: December 31, 2021 December 31, 2020 (dollar in thousands) Noninterest income: Income from fiduciary activities(1): Trust asset management fees $ 1,891 $ 1,398 Service charges on deposit accounts(1): Overdrawn account fees 853 695 Monthly and other service charges 234 225 Other service charges and fees: Interchange fees (1) 227 372 ATM fees (1) 3,014 2,578 Brokerage commissions (1) 1,164 916 Secondary market fees 236 431 Other charges and fees (2) 611 460 Gain (loss) on the sale and disposal of bank premises and equipment (1) — 5 Gain (loss) on sale of securities 24 687 Gain on sale of loans 1,658 — Bank owned life insurance income 527 310 Other operating income (3) 881 502 Total noninterest income $ 11,320 $ 8,579 (1) Income within the scope of Topic 606. (2) Includes income within the scope of Topic 606 of $485 thousand and $390 thousand for the years ended December 31, 2021 and 2020, respectively. The remaining balance is outside the scope of Topic 606. (3) Includes income within the scope of Topic 606 of $834 thousand and $505 thousand for the years ended December 31, 2021 and 2020, respectively. The remaining balance is outside the scope of Topic 606. Contract Balances The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2021 and December 31, 2020, the Company did not have any significant contract balances. 81 NOTE 20. Quarterly Condensed Statements of Income - Unaudited The Company’s quarterly net income, net income per common share and dividends per common share during 2021 and 2020 are summarized as follows: 2021 March 31 June 30 September 30 December 31 (in thousands, except per share amounts) Total interest and dividend income $ 10,016 $ 10,413 $ 10,782 $ 11,465 Net interest income after provision for loan losses 8,930 9,695 10,099 10,792 Noninterest income 2,427 2,650 2,881 3,362 Noninterest expenses 7,916 8,727 9,523 11,883 Income before income taxes 3,441 3,618 3,457 2,271 Net income 2,862 3,003 2,873 2,283 Net income per common share, basic 0.84 0.87 0.83 0.66 Net income per common share, diluted 0.84 0.87 0.83 0.66 Dividends per common share 0.27 0.27 0.28 0.28 2020 March 31 June 30 September 30 December 31 (in thousands, except per share amounts) Total interest and dividend income $ 9,107 $ 9,661 $ 10,150 $ 9,990 Net interest income after provision for loan losses 8,102 8,005 9,367 8,696 Noninterest income 1,690 2,422 2,216 2,251 Noninterest expenses 6,875 7,014 7,465 8,087 Income before income taxes 2,917 3,413 4,118 2,860 Net income 2,441 2,819 3,406 2,506 Net income per common share, basic 0.71 0.83 0.99 0.74 Net income per common share, diluted 0.71 0.83 0.99 0.74 Dividends per common share 0.26 0.26 0.26 0.26 82 NOTE 21. Fair Value Measurements GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants as of the measurement date. “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: • Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. • Level 2 Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. • Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy: Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Derivative instruments are recorded at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third-party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities. The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at December 31, 2021 and December 31, 2020: 83 Fair Value Measurements at December 31, 2021 Using Balance as of Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2021 (Level 1) (Level 2) (Level 3) (in thousands) Assets: Securities available for sale Obligations of U.S. government corporations and agencies $ 14,921 $ — $ 14,921 $ — U.S. treasury notes 2,003 2,003 Mortgage-backed securities 151,012 — 151,012 — Obligations of states and political subdivisions 21,877 — 21,877 — Subordinated debt 2,508 — 2,508 — Derivative: Interest rate swaps on loans 58 — 58 — Total assets at fair value $ 192,379 $ — $ 192,379 $ — Liabilities: Interest rate swaps on loans 58 58 $ — Total liabilities at fair value $ 58 $ — $ 58 $ — Fair Value Measurements at December 31, 2020 Using Balance as of Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2020 (Level 1) (Level 2) (Level 3) (in thousands) Assets: Securities available for sale Obligations of U.S. government corporations and agencies $ 17,483 $ — $ 17,483 $ — Mortgage-backed securities 119,009 — 119,009 — Obligations of states and political subdivisions 27,213 — 27,213 — Subordinated debt 1,250 1,250 Total assets at fair value $ 164,955 $ — $ 164,955 $ — Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write downs of individual assets. 84 The following describes the valuation techniques used by the Company to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements: Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on the present value of its expected future cash flows discounted at the loan's coupon rate, or at the loans' observable market price or the fair value of the collateral securing the loans, if they are collateral dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data within the last twelve months (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparables or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. The fair value measurement of real estate held in other real estate owned is assessed in the same manner as impaired loans described above. We believe that the fair value component in its valuation follows the provisions of GAAP. The Company held no other real estate owned at December 31, 2021. Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value. These loans consisted of one-to-four family residential loans originated for sale in the secondary market at December 31, 2021. Fair value is based on prices the secondary markets are currently offering for similar loans using observable market data or specific loan level investor commitments. The Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 2021 and December 31, 2020. The following table displays quantitative information about Level 3 Fair Value Measurements for certain financial assets measured at fair value on a nonrecurring basis for December 31, 2021 and December 31, 2020: Quantitative information about Level 3 Fair Value Measurements December 31, 2021 Valuation Technique(s) Unobservable Input Range Weighted Average (1) Assets: Impaired loans Discounted appraised value Selling cost 12 % 12 % Impaired loans Present value of cash flows Discount rate 4% - 6% 5 % December 31, 2020 Valuation Technique(s) Unobservable Input Range Weighted Average Assets: Impaired loans Present value of cash flows Discount rate 4% - 6% 4 % Other real estate owned Discounted appraised value Discount for current market conditions and selling costs 6 % 6 % (1) - Weighted based on the relative fair values of the specific items measured at fair value. 85 The following table summarizes the Company’s financial and nonfinancial assets that were measured at fair value on a nonrecurring basis at December 31, 2021 and December 31, 2020: Carrying value at December 31, 2021 Balance as of Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2021 (Level 1) (Level 2) (Level 3) (in thousands) Financial Assets: Impaired loans $ 746 $ — $ — $ 746 Carrying value at December 31, 2020 Balance as of Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs December 31, 2020 (Level 1) (Level 2) (Level 3) (in thousands) Financial Assets: Impaired loans $ 1,355 $ — $ — $ 1,355 Nonfinancial Assets: Other real estate owned 607 — 165 442 86 The carrying amount and fair value of the Company’s financial instruments at December 31, 2021 and 2020 were as follows: Fair Value Measurements at December 31, 2021 Using Carrying Value as of Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Fair Value as of December 31, 2021 (Level 1) (Level 2) (Level 3) December 31, 2021 (in thousands) Financial Assets: Cash and short-term investments $ 64,068 $ 64,068 $ — $ — $ 64,068 Securities 192,321 — 192,321 — 192,321 Restricted Investments 1,049 — 1,049 — 1,049 Loans held for sale 876 876 876 Loans, net 976,933 — — 969,612 969,612 Bank owned life insurance 23,236 — 23,236 — 23,236 Accrued interest receivable 2,634 — 2,634 — 2,634 Interest rate swap 58 — 58 — 58 Financial Liabilities: Deposits $ 1,177,235 $ — $ 1,177,582 $ — $ 1,177,582 Accrued interest payable 67 — 67 — 67 Interest rate swap 58 — 58 — 58 Fair Value Measurements at December 31, 2020 Using Carrying Value as of Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Fair Value as of December 31, 2020 (Level 1) (Level 2) (Level 3) December 31, 2020 (in thousands) Financial assets: Cash and short-term investments $ 79,920 $ 79,920 $ — $ — $ 79,920 Securities 164,955 — 164,955 — 164,955 Restricted Investments 1,267 — 1,267 — 1,267 Loans, net 829,238 — — 819,691 819,691 Bank owned life insurance 12,709 — 12,709 — 12,709 Accrued interest receivable 3,441 — 3,441 — 3,441 Financial liabilities: Deposits $ 1,013,098 $ — $ 1,013,600 $ — $ 1,013,600 Accrued interest payable 72 — 72 — 72 87 The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations. As a result, the fair value of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities in order to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay their principal balance in a rising rate environment and more likely to do so in a falling rate environment. Conversely, depositors who are receiving fixed rate interest payments are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting the terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk. NOTE 22. Change in Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) includes unrealized gains and losses on available for sale securities and changes in benefit obligations and plan assets for the post retirement benefit plan. Changes to accumulated other comprehensive income (loss) are presented net of tax as a component of equity. Reclassifications out of accumulated other comprehensive income (loss) are recorded in the Consolidated Statements of Income either as a gain or loss. Changes to accumulated other comprehensive income (loss) by components are shown in the following tables for the years ended December 31, 2021 and 2020: Twelve Months Ended December 31, 2021 2020 Unrealized Gains and Losses on Available for Sale Securities Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan Total Unrealized Gains and Losses on Available for Sale Securities Change in Benefit Obligations and Plan Assets for the Post Retirement Benefit Plan Total (dollars in thousands) (dollars in thousands) January 1 $ 3,260 $ 19 $ 3,279 $ 1,438 $ 44 $ 1,482 Other comprehensive (loss) income before reclassifications ( 4,322 ) — ( 4,322 ) 2,993 ( 33 ) 2,960 Reclassifications from other comprehensive income (loss) ( 24 ) — ( 24 ) ( 687 ) 3 ( 684 ) Tax effect of current period changes 912 — 912 ( 484 ) 5 ( 479 ) Current period changes net of taxes ( 3,434 ) — ( 3,434 ) 1,822 ( 25 ) 1,797 December 31 $ ( 174 ) $ 19 $ ( 155 ) $ 3,260 $ 19 $ 3,279 For the years ended December 31, 2021 and 2020, $ 24 thousand and $ 687 thousand, respectively, was reclassified out of accumulated other comprehensive (loss) income and appeared as Gain on sale of securities in the Consolidated Statement of Income. The tax expense related to these reclassifications was $ 5 thousand and $ 144 thousand for the years ended December 31, 2021 and 2020, respectively. The tax is included in Income Tax Expense in the Consolidated Statements of Income. For the year ended December 31, 2020, $( 3 ) thousand was reclassified out of accumulated other comprehensive (loss) income related to the Company's postretirement benefit plan. This reclassification is a component of net periodic benefit cost and was reflected in Other noninterest expense in the Consolidated Statements of Income. Tax related to this reclassification was less than $ 1 thousand and was included in Income Tax Expense in the Consolidated Statements of Income. 88 NOTE 23. Condensed Financial Information – Parent Company Only EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Balance Sheets December 31, 2021 and 2020 (dollars in thousands) 2021 2020 Assets Cash held in subsidiary bank $ 2,739 $ 902 Loans, net of allowance — 2,932 Investment in subsidiary 107,416 101,104 Other assets 125 136 Total assets $ 110,280 $ 105,074 Liabilities and Shareholders’ Equity Total liabilities $ — $ — Shareholders’ Equity Preferred stock $ — $ — Common stock 8,556 8,460 Surplus 12,115 10,811 Retained earnings 89,764 82,524 Accumulated other comprehensive (loss) income ( 155 ) 3,279 Total shareholders’ equity $ 110,280 $ 105,074 Total liabilities and shareholders’ equity $ 110,280 $ 105,074 89 EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Statements of Income Years Ended December 31, 2021 and 2020 (dollars in thousands) 2021 2020 Income Dividends from subsidiary bank $ 1,500 $ 4,250 Interest and fees on loans 64 133 Total income $ 1,564 $ 4,383 Expenses Other operating expenses $ 319 $ 295 Total expenses $ 319 $ 295 Income before income tax (benefit) and equity in undistributed earnings of subsidiary bank $ 1,245 $ 4,088 Income Tax (Benefit) ( 31 ) ( 34 ) Income before equity in undistributed earnings of subsidiary bank $ 1,276 $ 4,122 Equity in Undistributed Net Income of Subsidiary Bank 9,745 7,050 Net income $ 11,021 $ 11,172 Comprehensive income $ 7,587 $ 12,969 90 EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Statements of Cash Flows Years Ended December 31, 2021 and 2020 (dollars in thousands) 2021 2020 Cash Flows from Operating Activities Net Income $ 11,021 $ 11,172 Adjustments to reconcile net income to net cash provided by operating activities Stock-based compensation expense 850 604 Provision for loan losses ( 21 ) — Undistributed earnings of subsidiary bank ( 9,745 ) ( 7,050 ) Changes in assets and liabilities: Decrease in other assets 10 5 Net cash provided by operating activities $ 2,115 $ 4,731 Cash Flows from Investing Activities Net decrease in loans $ 2,953 $ 7 Net cash provided by investing activities $ 2,953 $ 7 Cash Flows from Financing Activities Cash dividends paid ( 3,261 ) ( 3,198 ) Issuance of common stock, employee benefit plan 179 227 Retirement of common stock ( 149 ) ( 1,854 ) Net cash (used in) financing activities $ ( 3,231 ) $ ( 4,825 ) Increase (decrease) in cash $ 1,837 $ ( 87 ) Cash Beginning $ 902 $ 989 Ending $ 2,739 $ 902 91 NOTE 24. Other Real Estate Owned The following table is a summary of other real estate owned (OREO) activity for the twelve months ended December 31, 2021 and 2020: Year Ended Year Ended December 31, December 31, 2021 2020 Balance, beginning $ 607 $ 183 Net loans transferred to OREO 266 441 Gain on foreclosure — 166 Sales ( 781 ) ( 183 ) Valuation adjustments ( 92 ) — Balance, ending $ — $ 607 The major classifications of other real estate owned in the consolidated balance sheets at December 31, 2021 and 2020 were as follows: As of December 31, 2021 December 31, 2020 (in thousands) Construction and Farmland $ — $ — Residential Real Estate — 165 Commercial Real Estate — 442 Subtotal $ — $ 607 Less valuation allowance — — Total $ — $ 607 There were no other real estate owned loans in the process of foreclosure at December 31, 2021. There was one consumer mortgage loan totaling $ 68 thousand collateralized by residential real estate in the process of foreclosure at December 31, 2020. NOTE 25. Qualified Affordable Housing Project Investments The Company invests in qualified affordable housing projects. The general purpose of these investments is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, provide tax credits and other tax benefits to investors, and to preserve and protect project assets. At December 31, 2021 and 2020, the balance of the investment for qualified affordable housing projects was $ 2.6 million and $ 2.8 million, respectively. These balances are reflected in Other assets on the Consolidated Balance Sheets. Total unfunded commitments related to the investments in qualified affordable housing projects totaled $ 11 thousand and $ 446 thousand at December 31, 2021 and 2020. These balances are reflected in Other liabilities on the Consolidated Balance Sheets. The Company expects to fulfill these commitments by December 31, 2023, in accordance with the terms of the individual agreements. During the twelve months ended December 31, 2021 and 2020, the Company recognized amortization expense of $ 229 thousand. The amortization expense was included in Other operating expenses on the Consolidated Statements of Income. Total estimated credits to be received during 2021 are $ 349 thousand based on the most recent quarterly estimates received from the funds. Total tax credits and other tax benefits recognized during 2021 and 2020 were $ 385 thousand and $ 384 thousand, respectively. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 92