The efficiency ratio, that is the cost of producing each dollar of revenue, is determined by
dividing noninterest expense by the sum of net interest income plus noninterest income. Financials efficiency ratio decreased from 74.99% in 2017 to 74.14% in 2018. Our efficiency ratio decreased because an increase in net interest income and
non-interest
income was greater than the increases in the above
non-interest
expenses.
Income Tax Expense
For
the year ended December 31, 2017, Financial had federal income tax expense of $2,438,000, as compared to a federal income tax expense of $1,329,000 in 2018, which equates to effective tax rates of 45.49% and 20.04%, respectively. Our effective
rate was higher than the statutory corporate tax rate in 2017 due to the $871,000 write-down of deferred tax assets which flowed through income tax expense as a result of the decrease in the corporate tax rate from 34% to 21% as mandated by the Tax
and Jobs Act of 2017. Our effective tax rate was lower than the statutory corporate tax rate in 2018 because of federal income tax benefits resulting from the tax treatment of earnings on bank owned life insurance, and certain tax free municipal
securities. Note 12 of the consolidated financial statements provides additional information with respect to our 2017 and 2018 federal income tax expense and the deferred tax accounts.
ANALYSIS OF FINANCIAL CONDITION
As of
December 31, 2018 and December 31, 2017
General
Our total assets were $674,897,000 at December 31, 2018, an increase of $48,556,000 or 7.75% from $626,341,000 at December 31, 2017,
primarily due to an increase in loans and an increase in cash and cash equivalents. These increases were offset in part by decreases in securities
held-to-maturity
and
securities
available-for-sale.
As explained in more detail below, deposits increased from $567,493,000 on December 31, 2017 to $612,043,000 on December 31,
2018. Loans, net of unearned income and the allowance, increased to $530,016,000 on December 31, 2018 from $491,022,000 on December 31, 2017.
Loans
Our loan portfolio
is the largest and most profitable component of our earning assets. The Bank has comprehensive policies and procedures which cover both commercial and consumer loan origination and management of credit risk. Loans are underwritten in a manner that
focuses on the borrowers ability to repay. Managements goal is not to avoid risk, but to manage it and to include credit risk as part of the pricing decision for each product.
The Banks loan portfolio consists of commercial short-term lines of credit, term loans, mortgage financing and construction loans that
are used by the borrower to build or develop real estate properties, and consumer loans. The consumer portfolio includes residential real estate mortgages, home equity lines and installment loans.
Loans, net of unearned income and the allowance, increased to $530,016,000 on December 31, 2018 from $491,022,000 on December 31,
2017. Total loans, including loans held for sale increased to $536,267,000 on December 31, 2018 from $498,400,000 on December 31, 2017. The increase in total loans was partially due to enhanced marketing efforts and increased penetration
into the Charlottesville, Harrisonburg, and Roanoke markets. We anticipate that these offices will continue to add to our loan balances. The increase is also attributed to increased calling and sales efforts by our lenders. Despite these factors,
competition for qualified borrowers remains strong.
As of December 31, 2018, the Bank had $2,939,000, or 0.55% of its total loans,
in
non-accrual
status compared with $4,309,000, or 0.87% of its total loans, at December 31, 2017. Management is continuing its efforts to reduce
non-performing
assets through enhanced collection efforts and the liquidation of underlying collateral. The Bank attempts to work with borrowers on a
case-by-case
basis to attempt to
protect the Banks interests. However, despite our commitment, a reduction of
non-accrual
loans can be dependent on a number of factors, including improvements in employment, housing, and overall economic
conditions at the local, regional and national levels. See Asset Quality below.
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