Item 1A. Risk Factors
The Company is subject to many risks that could adversely affect its future financial condition and performance and, therefore, the market value of its securities. The risk factors applicable to the Company include, but are not limited to the following:
Credit Risks
The Company’s concentration in loans secured by real estate may increase its credit losses, which would negatively affect our financial results.
At December 31, 2025, loans secured by real estate totaled $1.1 billion and represented 77.4% of the Company’s loan portfolio, net of net deferred loan costs and premiums. If we experience adverse changes in the local real estate market or in the local or national economy, borrowers’ ability to pay these loans may be impaired, which could impact the Company’s financial performance. The Company attempts to limit its exposure to this risk by applying good underwriting practices at origination, evaluating the appraisals used to establish property values, and routinely monitoring the financial condition of borrowers. If the value of real estate serving as collateral for the loan portfolio were to decline materially, a significant part of the loan portfolio could become under-collateralized. If the loans that are secured by real estate become troubled when real estate market conditions are declining or have declined, in the event of foreclosure, the Company may not be able to realize the amount of collateral that was anticipated at the time of originating the loan. In that event, the Company might have to increase the provision for credit losses, which could have a material adverse effect on its operating results and financial condition.
An inadequate allowance for credit losses would reduce our earnings.
Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. We maintain an allowance for credit losses on loans based upon many factors, including the following:
•
actual loan loss history;
•
nature, terms, and volume of the loan portfolio;
•
the amount and trends of problems loans and non-performing loans;
•
the effect of changes in the local real estate market on collateral values;
•
the legal and regulatory environment;
•
lending policies and procedures;
•
credit administrations and lending staff;
•
concentrations of credit;
•
the loan review function;
•
the effect of current economic conditions on a borrower’s ability to pay; and
•
other factors deemed relevant by management.
These determinations are based upon estimates that are inherently subjective, and their accuracy depends on the outcome of future events; therefore, realized losses may differ from current estimates. Changes in economic, operating, and other conditions, including changes in interest rates, which are generally beyond our control, could increase actual loan losses significantly. As a result, actual losses could exceed our current allowance estimate. We cannot provide assurance that our allowance for credit losses is sufficient to cover actual loan losses should such losses differ significantly from the current estimates.
Technology Risks
The Company’s operations may be adversely affected by cybersecurity risks.
In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees in systems and on networks of the Company and its customers and third-party service providers. The secure processing, maintenance, and use of this information is critical to the Company's operations and business strategy. In addition, the Company relies heavily on communications and information systems to conduct its business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in the Company's customer relationship management, general ledger, deposit, loan, and other systems. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect its networks, computers, and data from damage or unauthorized access. To date, the Company has not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, but the Company’s systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company
12
could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers. The continued evolution and increased usage of artificial intelligence technologies may further increase these risks. The Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged, or disclosed. A breach in security or other failure could result in legal claims, regulatory penalties, disruption in operations, increased expenses, loss of customers and business partners, and damage to the Company’s reputation, which could adversely affect its business and financial condition. Furthermore, as cyber threats continue to evolve and increase, the Company may be required to expend significant additional financial and operational resources to modify or enhance its protective measures, or to investigate and remediate any identified information security vulnerabilities.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services, including artificial intelligence. The effective use of technology increases efficiency and enables financial institutions and other firms to better serve customers and to reduce costs. The pace of these technological changes has increased in the “Fintech” environment, in which industry changing products and services are often introduced and adopted, including innovative ways that customers can make payments, access products, and manage accounts. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services, which could entail significant time, resources and additional risk to develop or adopt, or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
Liquidity and Interest Rate Risks
The Company’s success depends upon its ability to manage interest rate risk.
The profitability of the Company depends significantly on its net interest income, which is the difference between the interest earned on loans, securities and other interest-earning assets, and the interest paid on deposits and borrowings. Changes in interest rates will affect the rates earned on securities and loans and rates paid on deposits and other borrowings. These factors include competition, federal economic, monetary and fiscal policies, and general economic conditions.
In addition, changes in interest rates may negatively affect both the returns on and market value of the Company’s investment securities. Interest rate changes can reduce unrealized gains or increase unrealized losses in its portfolio and thereby negatively impact its accumulated other comprehensive income and equity levels. Further, such losses could be realized into earnings should liquidity and/or business strategy necessitate the sales of securities in a loss position. Additionally, actual investment income and cash flows from investment securities that carry prepayment risk, such as mortgage-backed securities and callable securities, may materially differ from those anticipated at the time of investment or subsequently as a result of changes in interest rates and market conditions. These occurrences could have a material adverse effect on the Company’s net interest income or our results of operations.
Inflation can have an adverse impact on our business and on our customers.
The future rate of inflation and other economic factors remain uncertain, and the Federal Reserve may decrease or increase interest rates slower or faster than anticipated. If inflation increases and interest rates rise, the value of our investment securities, particularly those with longer maturities, will decrease, although this effect is less pronounced for floating rate instruments. Prolonged periods of inflation also may impact our profitability by negatively impacting our costs and expenses, including elevated funding costs and expenses related to talent acquisition and retention, and negatively impacting the demand for our products and services. Moreover, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans.
13
The Company relies substantially on deposits obtained from customers in its target markets to provide liquidity and support growth.
The Company requires sufficient liquidity to fund asset growth, meet customer loan requests, customer deposit maturities and withdrawals, make payments on its debt obligations as they come due and other cash commitments. The Company’s business strategy is based primarily on access to funding from local customer deposits. Deposit levels may be affected by a number of factors, including interest rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, changes in the liquidity needs of our depositors and general economic conditions that affect savings levels and the amount of liquidity in the economy, including government stimulus efforts in response to economic crises. If market interest rates rise or our competitors raise the rates they pay on deposits, the Company’s funding costs may increase, either because we raise our rates to avoid losing deposits or because we lose deposits and must rely on more expensive sources of funding. Either of these factors could reduce the Company’s net interest margin and net interest income and could have a material adverse effect on the Company’s business, financial condition, results of operations, liquidity and cash flows from operations.
Further, if local customer deposits are not sufficient to fund the Company’s normal operations and growth, we may rely on secondary sources of liquidity, such as borrowings from the Federal Home Loan Bank of Atlanta ("FHLB"), and federal funds lines of credit with larger institutions; however, there can be no assurance that these arrangements will be available to us when needed on favorable terms, or at all, or that they will be sufficient to meet future liquidity needs. For example, the Company’s ability to access borrowings from the FHLB will be dependent upon whether and the extent to which we can provide collateral to secure FHLB borrowings. In addition, the availability of these funding sources is highly dependent upon the perception of the liquidity and creditworthiness of the financial institution, and such perception can change quickly in response to market conditions or circumstances unique to a particular company. The Company also may need to raise funds through the issuance of shares of our debt or equity securities, or the sale of investment securities or loans, as additional sources of liquidity. If the Company is unable to access funding sufficient to support our business operations and growth strategies or are unable to access such funding on attractive terms, the Company may not be able to implement our business strategies or satisfy our obligations.
The Company depends on the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted, which could impact the Company’s ability to satisfy its obligations.
The Company is a bank holding company with no material activities other than activities incidental to holding the common stock of the Bank. The Company’s principal source of funds to pay distributions on its common stock and service any of its obligations, other than further issuances of securities, is dividends received from the Bank. The holding company, Eagle Financial Services, Inc., is a legal entity separate and distinct from the Bank. Furthermore, the Bank is not obligated to pay dividends to the Company, and any dividends paid to the Company would depend on the earnings or financial condition of the Bank, various business considerations, and applicable law and regulation. As is generally the case for banking institutions, the profitability of the Bank is subject to the fluctuating cost and availability of money, changes in interest rates, and economic conditions in general. In addition, various federal statutes and regulations limit the amount of dividends that the Bank may pay to the Company without regulatory approval.
Market Risks
The Company’s success depends upon its ability to compete effectively in the banking industry.
The Company’s banking subsidiary faces competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area. Certain divisions within the banking subsidiary face competition from wealth management and investment brokerage firms. A number of these banks and other financial institutions are significantly larger and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. In addition, the Company faces competition from market place lenders and other financial technology firms, which may provide competitive services quickly and in innovative ways and may have fewer regulatory constraints and lower cost structures. The financial services industry continues to undergo rapid technological change with introductions of new technologies and services, including new ways that customers can make payments or manage their accounts, including through use of stablecoins and other forms of cryptocurrency, tokens, and other digital assets or alternative payment systems.This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.
14
The Company could be adversely affected by economic conditions in its market area.
The Company’s branches are located in the counties of Clarke, Frederick, Fauquier, Loudoun, and Fairfax the towns of Purcellville, Leesburg and Ashburn, and the City of Winchester. The Company also operates loan production offices in the counties of Fairfax (Virginia) and Frederick (Maryland). Because our lending is concentrated in these markets, we will be affected by the general economic conditions in these areas. Changes in the economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing. Over the past several years, the growth in economic activity and in the demand for goods and services, coupled with labor shortages, supply chain disruptions and other factors, has contributed to rising inflationary pressures, the Federal Reserve’s responsive interest rate hikes, and the risk of recession. A decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact the demand for banking products and services generally, which could negatively affect our financial condition and performance.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. If such events were to occur again in the future and result in the receivership of financial institutions, there is no guarantee that the systemic risk exception would be invoked to allow the FDIC to complete its resolution of such financial institutions in a manner that fully protects depositors or counterparties. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.
Operational Risks
Our exposure to operational risk may adversely affect our business.
We are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.
Reputational risk, or the risk to our earnings and capital from negative public opinion, could result from our actual alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance or the occurrence of any of the events or instances mentioned below, or from actions taken by government regulators or community organizations in response to that conduct. Negative public opinion could also result from adverse news or publicity that impairs the reputation of the financial services industry generally.
Further, if any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be adversely affected. We depend on internal systems and outsourced technology to support these data storage and processing operations. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. We could be adversely affected if one of our employees causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. We are also at risk of the impact of natural disasters, terrorism and international hostilities on our systems or for the effects of outages or other failures involving power or communications systems operated by others.
If any of the foregoing risks materialize, it could have a material adverse affect on our business, financial condition and results of operations.
The Company may not be able to successfully manage its growth or implement its growth strategy, which may adversely affect results of operations and financial condition.
A key component of the Company’s business strategy is to continue to grow and expand. The Company’s ability to grow and expand depends upon its ability to open new branch locations, attract new deposits to the existing and new branch locations, and identify attractive loan and investment opportunities. The Company may not be able to implement its growth
15
strategy if it is unable to identify attractive markets or branch locations. Once identified, successfully managing growth will depend on integrating the new branch locations while maintaining adequate capital, cost controls and asset quality. As this growth strategy is implemented, the Company will incur construction costs and increased personnel, occupancy and other operating expenses. Because these costs are incurred before new deposits and loans are generated, adding new branch locations will initially decrease earnings, despite efficient execution of this strategy. In addition, the Company could experience difficulties expanding into new markets or product lines. The Company’s lack of history and familiarity with those markets, clients and lines of business may lead to unexpected challenges or difficulties that inhibit its success and adversely affect the Company’s results of operations.
Severe weather, natural disasters, acts of war or terrorism, geopolitical instability, public health issues, and other external events could significantly impact the Company's business.
Severe weather, natural disasters, acts of war or terrorism, geopolitical instability, public health issues, and other adverse external events could have a significant impact on the Company's ability to conduct business. In addition, such events could affect the stability of the Company’s deposit base, cause economic or market uncertainty, negatively impact consumer confidence, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause the Company to incur additional expenses. The Company is also at risk of the impact of natural disasters, terrorism, and international hostilities on its systems and from the effects of cyberattacks, outages or other failures involving power or communications systems operated by others, which may give rise to disruption of service to customers and to financial loss or liability. The occurrence of any such events in the future and the economic impact from such events could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on its financial condition and results of operations.
The Company relies heavily on its senior management team and the unexpected loss of key officers could adversely affect operations.
The Company believes that its growth and success depends heavily upon the skills of its senior management team. The Company also depends on the experience of its subsidiary’s officers and on their relationships with the customers they serve. The loss of one or more of these officers could disrupt the Company’s operations and impair its ability to implement its business strategy, which could adversely affect the Company’s financial condition and performance.
Legal, Regulatory and Compliance Risks
The Company operates in a highly regulated industry, and the laws and regulations that govern the Company’s operations, including changes in them or the Company’s failure to comply with them, and regulatory actions implementing such laws and regulations, may adversely affect the Company.
The Company is subject to extensive regulation and supervision that govern almost all aspects of its operations. These laws and regulations are generally intended to benefit consumers, borrowers and depositors, but not investors. Our success depends on our ability to maintain compliance with existing and new laws and regulations. Changes to laws, regulations, or regulatory policies, or supervisory guidance, including changes in interpretation or implementation of laws, regulations, policies, or supervisory guidance, could affect the Company in substantial and unpredictable ways. Regulatory responses in connection with unforeseen stress events, including failures of banks and other financial institutions, often lead to increased regulatory scrutiny and heightened supervisory expectations and could adversely impact the Company’s business, financial condition, and results of operations, or alter or disrupt the Company’s planned future strategies and actions. Compliance with laws and regulations, and regulatory actions implementing such laws and regulations, can be difficult and costly, and changes to laws and regulations could make compliance more difficult or expensive or otherwise adversely affect the Company’s business and financial condition.
The Company expects the Trump administration will implement a regulatory agenda that could reduce and streamline certain prudential and regulatory requirements applicable to banking organizations at a federal level. At this time, however, it is unclear what the impacts to the rulemaking, supervision, examination, and enforcement priorities of the federal banking agencies will be, what laws, regulations, and policies may change, and whether future changes or uncertainty surrounding future changes will adversely affect the Company’s operating environment, and therefore its business, financial condition, and results of operations.
16
The Bank is subject to stringent capital and liquidity requirements as a result of the Basel III regulatory capital reforms and the Dodd-Frank Act.
The Bank is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which it must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. Under the Dodd-Frank Act, the federal banking agencies have established stricter capital requirements and leverage limits for banks and bank holding companies that are based on the Basel III regulatory capital reforms. The Basel III Capital Rules require banking organizations to maintain significantly more capital and adopt more demanding regulatory capital risk weightings and calculations. While the Economic Growth Act requires that federal banking regulators establish a simplified leverage capital framework for smaller banks, these more stringent capital requirements could, among other things, limit banking operations and activities, and growth of loan portfolios, in order to focus on retention of earnings to improve capital levels. The Bank believes that it maintains sufficient levels of Tier 1 and Common Equity Tier 1 capital to comply with the Basel III Final rules. However, if the Bank fails to meet these minimum capital guidelines and/or other regulatory requirements, the Bank could be subject to regulatory restrictions, including limitations on paying dividends to the holding company for shareholder dividends and share repurchases and paying discretionary bonuses, or experience other adverse consequences that could cause its financial condition to be materially and adversely affected.
Changes in accounting standards could impact reported earnings and capital.
The authorities that promulgate accounting standards, including the Financial Accounting Standards Board (the “FASB”), the SEC, and other regulatory authorities, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of financial statements for prior periods. Such changes could also impact the capital levels of the Bank, or require the Company to incur additional personnel or technology costs.
Evolving expectations from customers, regulators, investors, and other stakeholders with respect to environmental, social and governance ("ESG") practices may impose additional costs on the Company or expose it to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to corporate social responsibility, environmental concerns, governance and related practices. Failure to act responsibly or in line with regulatory and stakeholder expectations in a number of areas, such as climate risk, human capital and hiring practices, human rights, support for local communities, and corporate governance and transparency, could negatively impact the Company’s reputation, ability to do business with certain partners, and stock price. The rules, regulations and expectations of regulators, customers, investors, associates, and other stakeholders with respect to these matters continue to evolve, which could result in increases to the Company’s overall operational costs and increased management time and attention. Further, as these rules, regulations and expectations continue to evolve, the Company’s stakeholders may have differing views on related matters. Scrutiny, or the perception that the Company’s efforts are too ambitious or misdirected, could expose the Company to the risk of investigations, litigation and other proceedings or reputational harm. If the Company is unable to meet its social- or environmentally-related goals or evolving and divergent stakeholder expectations and industry standards, it could negatively impact the value of the Company’s brand, the cost of its operations and/or relationships with customers, investors or employees, any of which could adversely affect its business and results.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact the Company’s business.
The current and anticipated effects of climate change continue to raise concerns for the state of the global environment. As a result, the Company and its customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. While the Trump administration has shifted federal policy to reduce the emphasis on climate change initiatives and environmental regulations, state and local regulations or guidance relating to climate change, as well as changes in consumers’ and businesses’ behaviors and business preferences, could affect our business operations. Among other things, the Company and its customers could face cost increases, compliance-related risks, asset value reductions and operating process changes.
17
The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact the Company’s financial condition and results of operations; however, the physical effects of climate change may also directly impact the Company. Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in the Bank’s loan portfolio. Additionally, if insurance obtained by borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to borrowers, the collateral securing loans may be negatively impacted by climate change, which could impact the Company’s financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on customers and impact the communities in which the Company operates. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on the Company’s financial condition and results of operations.
Risks Relating to an Investment in Our Common Stock
There can be no assurances concerning continuing dividend payments.
Our common stockholders are only entitled to receive the dividends declared by our Board of Directors out of funds legally available for such payments. Although we have historically paid quarterly dividends on our common stock, there can be no assurances that we will be able to continue to pay regular quarterly dividends or an annual stock dividend or that any dividends we do declare will be in any particular amount. The primary source of money to pay our cash dividends comes from dividends paid to the Company by the Bank. The Bank’s ability to pay dividends to the Company is subject to, among other things, its earnings, financial condition and applicable regulations, which in some instances limit the amount that may be paid as dividends. In addition, the Company and the Bank are required to maintain a capital conservation buffer of 2.5% of Common Equity Tier 1 Capital on top of minimum risk-weighted asset ratios to pay dividends without additional restrictions. Any change in the level of dividends or the suspension of the payment thereof could have an adverse effect on the market price of our common stock.
There is a limited trading market for our common shares, and you may not be able to resell your shares at or above the price you paid for them.
Although our common shares are listed for trading on the Nasdaq Capital Market, the trading volume in our common shares may be lower than other larger financial institutions or publicly traded companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that volume of trading in our common shares will increase in the future.
The market price of our common stock may be volatile, and we may not be able to meet investor or analyst expectations. You may not be able to resell your shares at or above the price you paid and may lose part or all of your investment as a result.
Our stock price can fluctuate widely. On February 10, 2025, the Company completed a public offering increasing its common shares outstanding by 1,796,875 shares, or 50.2%, at a price of $32.00.
Volatility in the market price of our common stock may negatively impact the price at which our common stock may be sold and may also negatively impact the timing of any sale. The market price of our common stock may continue to fluctuate widely in response to a variety of factors including the risk factors described herein and, among other things:
•
actual or anticipated variations in quarterly or annual operating results, financial conditions, or credit quality;
•
changes in business or economic conditions;
•
changes in accounting standards, policies, guidance, interpretations, or principles;
•
prevailing interest rates;
•
changes in recommendations or research reports about us or the financial services industry in general published by securities analysts;
•
the failure of securities analysts to cover, or to continue to cover, us;
•
changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions;
•
news reports relating to trends, concerns, and other issues in the financial services industry;
18
•
reports related to the impact of natural or man-made disasters in our market;
•
perceptions in the marketplace regarding us and our competitors;
•
sudden increases in the demand for our common stock, including as a result of any "short squeezes";
•
significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors;
•
additional investments from third parties;
•
additions or departures of key personnel;
•
future sales or issuance of additional shares of our common stock;
•
fluctuations in the market price of our competitors' common stock and the operating results of our competitors;
•
changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting our business, or enforcement of these laws or regulations;
•
new technology used, or services offered, by competitors;
•
additional investments from third parties; or
•
geopolitical conditions such as acts or threats of terrorism, pandemics, or military conflicts.
In particular, the realization of any of the risks described in this section under Item IA. Risk Factors, could have an adverse effect on the market price of our common stock and cause the value of your investment to decline. In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock over the short, medium or long term, regardless of our actual performance.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, or change their recommendations regarding our common stock or if our operating results do not meet their expectations, the market price of our common stock and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades common stock or publishes inaccurate or unfavorable research about our business, or our operating results do not meet their expectations, either absolutely or relative to our competitors, the market price of our common stock would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports about us regularly, (1) we would lose visibility in the financial markets, which in turn could cause the market price of our common stock or trading volume to decline and (2) demand for our common stock could decrease, which could cause the market price of our common stock and trading volume to decline. If we fail to meet the expectation of analysts for our operating results, the market price of our common stock would likely decline.
Virginia law and the provisions of the Company’s articles of incorporation and amended and restated bylaws may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies.
Certain provisions of the Company’s articles of incorporation and amended and restated bylaws, as well as Virginia law, and the Bank Holding Company Act, and Change in Bank Control Act, could delay or prevent a change of control that you may favor. The Company’s articles of incorporation and amended and restated bylaws include certain provisions that could delay a takeover or change in control of the Company, including: a staggered board of directors, the exclusive right of the Company’s board to fill any director vacancy; and advance notice requirements for shareholder proposals and director nominations.
Virginia law contains two antitakeover statutes: the Affiliated Transactions Statute and the Control Share Acquisitions Statute, each of which could make it more difficult for another party to acquire the Company without the approval of the Company’s board of directors. These provisions are expected to discourage specific types of coercive takeover practices and inadequate takeover bids as well as to encourage persons seeking to acquire control to first negotiate with the Company. Although these provisions may have the effect of delaying, deferring or preventing a change in control, the Company believes that the benefits of increased protection through the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure the Company outweigh the disadvantages of discouraging these proposals because, among other things, negotiation of such proposals could result in an improvement of their terms.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
19
Risk Management and Strategy
Cybersecurity risks are constantly evolving and becoming increasingly pervasive across all industries. To mitigate these risks and protect sensitive customer data, financial transactions, and our information systems, the Company has implemented a comprehensive Information Security Program (“Program”) which is a component of its overarching enterprise risk management program. The Program is achieved through a collaborative effort involving operations, technology, compliance, risk, and senior management. Cybersecurity is a critical component of this program, given the increasing reliance on technology and potential cyber threats.
Key components of the risk management program include:
•
A risk assessment process that identifies and prioritizes material risks; defines and evaluates the effectiveness of controls to mitigate the risks; and reports results to executive management and the Board of Directors.
•
Third-party managed detection and response service, which monitors the security of our information systems around-the-clock, including intrusion detection and alerting.
•
A patch management system that safeguards our environment by keeping software up-to-date and resilient against threats.
•
Internal and external penetration testing that is conducted and reviewed either by independent third parties or qualified employees.
•
A third-party risk management program that is designed to ensure our vendors meet our cybersecurity requirements.
•
A training and awareness program that educates employees about cybersecurity risks and how to protect themselves from cyberattacks.
•
An incident response plan that outlines the steps the Company will take to respond to a cybersecurity incident, which is tested at least annually.
Governance and Oversight
The Board of Directors, including its Risk Subcommittee provides oversight of Company cybersecurity risks.The Board of Directors receives periodic reports on cybersecurity threats, awareness training, and key risk indicators related to cybersecurity.Additionally, the Company’s Audit Committee provides oversight as it relates to annual audits related to information technology and cybersecurity. Management promptly reviews results of these audits to initiate necessary remediation, which are then reviewed by the Audit Committee.
The Board of Directors has designated the Security Committee and Incident Response Team with responsibilities related to information security and cybersecurity.
The Security Committee is a management committee with representation from operations, technology, compliance, risk, and senior management. The Security Committee monitors, reviews, and makes necessary changes to the Information Security Program. This Committee provides accountability for policies and procedures and reviews incidents that may affect information security.
The Incident Response Team has overall authority and responsibility for preparing and responding to incidents and consists of various sub-teams including representation from operations, technology, risk, compliance, human resources, and marketing. While key personnel have identified roles, this team ensures appropriate reports, statuses, and decisions are presented to the Executive Management and the Board of Directors.
The Company’s Chief Technology Officer (“CTO”) oversees the Company’s information technology programs and investments. The Company’s CTO has over 30 years of information technology experience. The Company’s Compliance and Security Officer, who oversees the Company’s information security programs, has over 10 years of experience and reports to the Chief Operating Officer. The Compliance and Security Officer is designated as the program coordinator responsible for coordinating and overseeing the Information Security Program.
Material Effects of Cybersecurity Threats
20
While cybersecurity risks have the potential to materially affect the Company's business, financial condition, and results of operations, the Company does not believe that risks from cybersecurity threats or attacks, including because of any previous cybersecurity incidents, have materially affected the Company, including its business strategy, results of operations or financial condition. However, the sophistication of cyber threats continues to increase, and the Company’s cybersecurity risk management and strategy may be insufficient or may not be successful in protecting against all cyber incidents. Accordingly, no matter how well designed or implemented the Company’s controls are, it will not be able to anticipate all cyber security breaches, and it may not be able to implement effective preventive measures against such security breaches in a timely manner.
For more information on how cybersecurity risk may materially affect the Company’s business strategy, results of operations or financial condition, refer to Item 1A, Risk Factors of this Form 10-K.
Item 2. Properties
The Company owns or leases buildings which are used in normal business operations. The Company’s corporate headquarters, and that of Bank of Clarke, is located at 2 East Main Street, Berryville, Virginia, 22611. At December 31, 2025, Bank of Clarke operated fifteen full-service branches, one loan production office, and one drive-through only facility in the Virginia communities of Berryville, Winchester, Boyce, Stephens City, Purcellville, Warrenton, Leesburg, Ashburn and Fairfax. The Bank also operated one loan production office in the Maryland community of Frederick. See Note 1 “Nature of Banking Activities and Significant Accounting Policies” and Note 6 “Bank Premises and Equipment, Net” and Note 13 "Leases" in the “Notes to the Consolidated Financial Statements” of this Form 10-K for information with respect to the amounts at which bank premises and equipment are carried and commitments under long-term leases.
All of the Company’s properties are well maintained, are in good operating condition and are adequate for the Company’s present and anticipated future needs.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company is a party or of which the property of the Company is subject.
Item 4. Mine Safety Disclosures
None.
21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on The Nasdaq Capital Market (the "Exchange") under the symbol “EFSI.” As of March 3, 2026, the Company had approximately 818 shareholders of record. As of that date, the closing price of our common stock on the Exchange was $34.56.
The Company has historically paid dividends on a quarterly basis. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of the Company’s Board of Directors. Some of the factors affecting the payment of dividends on the Company’s common stock are operating results, financial condition, capital adequacy, regulatory requirements and shareholders returns.
Issuer Purchases of Equity Securities for the Quarter Ended December 31, 2025
On June 18, 2025, the Company re-authorized the purchase of up to 150,000 shares of its common stock under its stock repurchase program, which expires on June 30, 2026. During 2025, the Company purchased 9,598 shares of its Common Stock under its stock repurchase program at an average price of $36.58.
The Company purchased 818 shares of its common stock during the fourth quarter pursuant to the stock repurchase program discussed above and as shown in the following table.
Item 6. Reserved
22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The purpose of this discussion is to focus on certain information relevant to the Company’s financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company’s Audited Consolidated Financial Statements and notes thereto presented in Item 8, Financial Statements and Supplementary Data, of this Form 10-K. Operating results for the year ended December 31, 2025 are not necessarily indicative of the results for any future period.
GENERAL
Eagle Financial Services, Inc. is a bank holding company which owns 100% of the stock of Bank of Clarke (the “Bank” and, collectively with Eagle Financial Services, Inc., the “Company”, “we”, “us” or “our”). Accordingly, the results of operations for the Company are dependent upon the operations of the Bank.
The Bank conducts a commercial banking business which consists of attracting deposits from the general public and investing those funds in commercial, consumer and real estate loans and mortgage-backed securities, municipal and U.S. government agency securities. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the maximum extent permitted by law.
The Company strives to be an outstanding financial institution in its market by building solid sustainable relationships with its customers, employees, communities, and shareholders.
At December 31, 2025, the Company had total assets of $1.89 billion, net loans of $1.46 billion, total deposits of $1.61 billion, and shareholders’ equity of $188.8 million.
During 2025, the Company strengthened its balance sheet and improved its forward earnings profile, as marked by a successful capital raise, a strategic balance sheet repositioning of its investment securities portfolio, and subsequent uplist of its stock to NASDAQ. The Company sold available for sale securities with an amortized cost balance of $99.2 million, resulting in a net realized pre-tax loss of $12.4 million, and reinvested $66.0 million into purchases of available for sale securities. Additionally, the Company completed an underwritten public offering of 1,796,875 shares of its common stock at a public offering price of $32.00 per share. Net proceeds from the offering were $53.5 million. Also during 2025, the Company opened a full-service branch in McLean, VA offering a full suite of retail and business banking, lending, and wealth management solutions offered at the Bank's other locations.
23
The following table presents selected financial data, which was derived from the Company’s audited financial statements for the periods indicated.
As of or for the Years Ended
December 31,
(dollars in thousands, except per share amounts)
Income Statement Data:
Performance Ratios:
Share and Per Share Data:
Balance Sheet Data:
24
MANAGEMENT’S STRATEGY
The Company strives to be an outstanding financial institution in its market by building solid sustainable relationships with: (1) its customers, by providing highly personalized customer service, a network of conveniently placed branches and ATMs, a competitive variety of products/services and courteous, professional employees, (2) its employees, by providing generous benefits, a positive work environment, advancement opportunities and incentives to exceed expectations, (3) its communities, by participating in local concerns, providing monetary support, supporting employee volunteerism and providing employment opportunities, and (4) its shareholders, by providing sound profits and returns, sustainable growth, regular dividends and committing to our local, independent status.
OPERATING STRATEGY
The Bank is a locally managed, commercial focused banking institution operating in several of the country's most attractive markets. The Company expanded its ownership to institutional investors through a public offering of its common stock in February 2025, increasing the number of shares outstanding by 50% and added approximately $53.5 million in capital. This operating strategy allows the Bank to be flexible and responsive in the products and services it offers and to further grow by lending funds to local residents and businesses at a competitive price that reflects the inherent risk of lending. The Bank strives to fund these loans through deposits gathered from local residents and businesses. The Bank prices its deposits by comparing alternative sources of funds and selecting the lowest cost available. When deposits are not adequate to fund asset growth, the Bank relies on borrowings, both short and long term. The Bank’s primary source of borrowed funds is the Federal Home Loan Bank of Atlanta which offers numerous terms and rate structures to the Bank.
As interest rates change, the Bank attempts to maintain its net interest margin. This is accomplished by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through the Bank of Clarke Wealth Management Division, which is the Bank’s investment management division that offers both trust services and investment sales, mortgage originations, loan sales to the secondary market, and deposit operations. The Bank also incurs noninterest expenses associated with compensating employees, maintaining and acquiring fixed assets, and purchasing goods and services necessary to support its daily operations.
The Bank maintains a full-service marketing department dedicated to driving new business and increasing awareness of the Bank's banking, lending, and wealth management offerings across its footprint. Marketing employs an integrated, multi-channel strategy that includes television and radio advertising, digital media (such as display ads, SEO/SEM, podcasts, and streaming platforms), print and electronic publications, billboards, email campaigns, branch signage, and social media. The Marketing department is responsible for all content creation, campaign strategy and execution, marketing-related internal and external communications, marketing vendor management, and brand stewardship.
LENDING POLICIES
Administration and supervision over the lending process is provided by the Bank’s Credit Administration Department. The principal risk associated with the Bank’s loan portfolio is the creditworthiness of its borrowers. In an effort to manage this risk, the Bank’s policy gives loan amount approval limits to individual loan officers based on their position and level of experience. Credit risk is increased or decreased, depending on the type of loan and prevailing economic conditions. In consideration of the different types of loans in the portfolio, the risk associated with real estate mortgage loans, commercial loans and consumer loans varies based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay debt.
The Company has written policies and procedures to help manage credit risk. The Company utilizes a loan review process that includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and regular portfolio reviews to establish loss exposure and to ascertain compliance with the Company’s policies.
The Bank uses a tiered approach to approve credit requests consisting of individual lending authorities, joint approval of Co-Approval officers (Executive, Regional Credit Officer, Small Business Credit Officer), and a director loan committee. Lending limits for individuals are set by the Board of Directors and are determined by loan purpose, collateral type, and internal risk rating of the borrower. The highest individual authority (Executive) is assigned to the Bank’s President/ Chief Executive Officer, Chief Banking Officer and Chief Credit Officer (approval authority only). Two Executive officers may combine their authority to approve loan requests to borrowers with credit exposure up to $10.0 million on a secured basis and $6.0 million unsecured. Three Executive officers may combine to approve loan requests to borrowers with credit exposure up to $15.0 million on a secured basis and $9.0 million unsecured. Consumer Central Lenders are individual lenders who have been assigned to an Approval Category (A through F) based on their level of experience and job function. Consumer Central Lenders can co-approve consumer, home equity lines of credit and home equity loan requests up to their stated authorities.
25
Officers in Categories A through F have lesser authorities and with approval of an Executive officer may extend loans to borrowers with exposure of $5.0 million on a secured basis and $3.0 million unsecured. Officers in Categories A through F can also utilize the co-approval of the Regional and Small Business Credit Officers to extend loans with exposures up to $2.5 million and $1.5 million, respectively on a secured basis, and up to $1 million and $750 thousand, respectively on an unsecured basis. Loans exceeding $15.0 million and up to the Bank’s legal lending limit can be approved by the Risk Committee consisting of four directors (three directors constituting a quorum). The Director’s Loan Committee also reviews and approves changes to the Bank’s Loan Policy as presented by management. The following sections discuss the major loan categories within the total loan portfolio:
One-to-Four-Family Residential Real Estate Lending
Residential lending activity may be generated by the Bank’s loan officer solicitations, referrals by real estate professionals, and existing or new bank customers. Loan applications are taken by a Bank loan officer. As part of the application process, information is gathered concerning income, employment and credit history of the applicant. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Directors Loan Committee. In connection with residential real estate loans, the Bank requires title insurance, hazard insurance and, if applicable, flood insurance. In addition to traditional residential mortgage loans secured by a first or junior lien on the property, the Bank offers home equity lines of credit.
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real estate in the Bank’s market area, including multi-family residential buildings, commercial buildings and offices, small shopping centers and churches. Commercial real estate loan originations are obtained through broker referrals, direct solicitation of developers and continued business from customers. In its underwriting of commercial real estate, the Bank’s loan to original appraised value ratio is generally 80% or less. Commercial real estate lending entails significant additional risk as compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or the economy, in general. The Bank’s commercial real estate loan underwriting criteria require an examination of debt service coverage ratios, the borrower’s creditworthiness, prior credit history and reputation, and the Bank typically requires personal guarantees or endorsements of the borrowers’ principal owners.
Construction and Land Development Lending
The Bank makes local construction loans and land acquisition and development loans. The construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The average life of most construction loans is less than one year and the Bank offers both fixed and variable rate interest structures. The interest rate structure offered to customers depends on the total amount of these loans outstanding and the impact of the interest rate structure on the Bank’s overall interest rate risk. There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of the estimated appraised value of the finished property. The Bank also obtains a first lien on the property as security for its construction loans and typically requires personal guarantees from the borrower’s principal owners. Finally, the Bank performs inspections of the construction projects to ensure that the percentage of construction completed correlates with the amount of draws on the construction line of credit.
Commercial and Industrial Lending
Commercial business loans generally have more risk than residential mortgage loans but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of its business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.
26
Consumer Lending
The Bank offers various secured and unsecured consumer loans, which include personal installment loans, personal lines of credit, automobile loans, and credit card loans. The Bank generally originates its consumer loans within its geographic market area and these loans are largely made to customers with whom the Bank has an existing relationship. Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral on a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and from any verifiable secondary income. Although creditworthiness of the applicant is the primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.
Marine Lending
The Bank's marine loan portfolio is comprised of originated retail loans. The Company ceased accepting new marine business in August 2023, upon completion of a sale of specific assets from its marine lending segment. Subsequent to the sale the Company retained ownership of its portfolio of marine vessel retail loans, which continue to constitute a significant portion of the Company's assets, revenues, and earnings. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid. Retail loans were generally limited to premium manufacturers with established relationships with the Company which have a vested interest in the secondary market pricing of their respective brand due to the limited inventory available for resale. Consequently, while not contractually committed, 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.
CRITICAL ACCOUNTING POLICIES
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which requires us to make estimates and assumptions. Actual results could differ from those estimates. The financial information contained within these statements is, to a significant extent, based on measurements of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change. The accounting estimate with the greatest uncertainty and susceptibility to significant near-term change for the Company is the allowance for credit losses on loans.
Allowance for Credit Losses on Loans
The Company establishes the allowance for credit losses through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. Loans that share common risk characteristics are evaluated collectively using a loss-rate, or cohort methodology to estimate its current expected credit losses on loans.
The measurement of the allowance for credit losses is based in part on forecasts of unemployment, inflation, as well as the consumer price index, and may also consider other factors, which we believe to be indicative of risk factors related to collectability. Management also assesses the risk of credit losses arising from changes in economic conditions; the nature
27
and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances; lending policy and procedures; credit administration and lending staff; loan review; concentrations of credit and the value of underlying collateral in determining the recorded balance of the allowance for credit losses.
This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the allowance, we consider a range of possible assumptions and outcomes related to the various factors identified above. Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the 2025 Form 10-K, provides additional information concerning the determination of the allowance for credit losses on loans.
NON-GAAP FINANCIAL MEASURES
This report refers to certain financial measures that are computed under a basis other than GAAP ("non-GAAP"). The Company uses certain non-GAAP financial measures, including non-GAAP net income, non-GAAP noninterest income, non-GAAP earnings per share, non-GAAP return on average equity and average assets, tax-equivalent net interest income and efficiency ratio, to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. Non-GAAP measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.
The realized loss on the sale of the available for sale securities, which resulted from the balance sheet repositioning transactions during the first quarter of 2025 and the December 2024 sale of the Company's operating center and branch building in a sales-leaseback transaction, significantly impacted the Company's operating results and certain performance metrics and ratios.
The following table reconciles the GAAP reported measure to the adjusted non-GAAP measure to show the impact of these transactions during the twelve months ended December 31, 2025 and 2024.
Twelve Months Ended
December 31,
(dollars in thousands except for per share data) 2025 2024
Adjustments to net income:
Loss on sales of securities 12,425 —
(Gain) on sale of fixed assets — (3,875 )
Tax effect of adjustments to net income (2,609 ) 814
Adjustments to noninterest income:
Loss on sales of securities 12,425 —
(Gain) on sale of fixed assets — (3,875 )
Earnings per share, basic and diluted (GAAP) $ 1.59 $ 4.32
Effect of adjustments to net income 1.90 (0.86 )
Non-GAAP Earnings per share, basic and diluted $ 3.49 $ 3.46
Return on average equity 4.81 % 13.77 %
Effect of adjustments to net income (5.75 )% 2.75 %
Non-GAAP Return on average equity 10.56 % 11.03 %
Return on average assets 0.42 % 0.85 %
Effect of adjustments to net income (0.51 )% 0.17 %
Non-GAAP Return on average assets 0.93 % 0.68 %
28
For additional information and calculations of tax-equivalent net interest income and efficiency ratio, see the sections entitled "Tax-Equivalent Net Interest Income" and "Efficiency Ratio" below.
FORWARD LOOKING STATEMENTS
This report contains statements that are "forward looking statements." The Company may also make forward looking statements in other documents that are filed with the Securities and Exchange Commission, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors, or employees. Forward looking statements include statements regarding our expectations, intentions, and objectives, or other expressions that predict or indicate future events and trends and which do not relate to historical matters. The words “believe,” “expect,” “may,” “will,” “should,” "could," “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. You should not rely on forward looking statements, as they involve known and unknown risks, uncertainties, and other factors, some of which are beyond our control. These risks, uncertainties, and other factors may cause our actual results, performance, or achievements to be materially different than the anticipated future results, performance, or achievements expressed or implied by the forward looking statements.
Some of the factors that might cause these differences include the following:
•
difficult market conditions in our industry;
•
the ability to successfully manage growth or implement growth strategies if the Bank is unable to identify attractive markets, locations or opportunities to expand in the future or if the Bank is unable to successfully integrate new branches, business lines or other growth opportunities into its existing operations;
•
competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;
•
the successful management of interest rate risk;
•
risks inherent in making loans such as repayment risks and fluctuating collateral values;
•
the Company's ability to successfully resolve non-performing assets;
•
changes in general economic and business conditions in the Bank’s market area;
•
reliance on the Bank’s management team, including the ability to attract and retain key personnel;
•
changes in interest rates and interest rate policies;
•
maintaining capital levels adequate to support growth;
•
maintaining cost controls and asset qualities as new branches are opened or acquired;
•
demand, development and acceptance of new products and services;
•
deposit flows;
•
the Bank's ability to manage liquidity;
•
the cost and availability of secondary funding sources;
•
effects of the soundness of other financial institutions;
•
problems with technology utilized by the Bank;
•
changing trends in customer profiles and behavior;
•
geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;
•
the economic impact of duties, tariffs or other barriers or restrictions on trade, any retaliatory counter measures, or the volatility and uncertainty arising there from;
•
political developments, including government shutdowns, and other significant disruptions and changes in the funding, size, scope, and efficiencies of the federal government, its agencies and services;
•
the Company's potential exposure to fraud, negligence, computer theft, and cyber-crime;
•
potential impact on us of existing and future legislation and regulations;
•
changes in accounting policies and banking and other law and regulations; and
•
other factors described in Item 1A., “Risk Factors,” in this annual report on Form 10-K.
You should carefully review all of these factors and you should be aware that there may be other factors that cause these differences. These forward looking statements were based on information, plans, and estimates at the date of this report, and we assume no obligation to update any forward looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
29
RESULTS OF OPERATIONS
Net Income
The following table presents a summarized consolidated statement of income for the periods indicated:
Twelve Months Ended
December 31, Change
(dollars in thousands) 2025 2024 $ Change % Change
Net income for 2025 and 2024 was significantly impacted by two transactions. During the first quarter of 2025, the Company recognized a loss on the sale of available for sale securities totaling $9.8 million, net of tax, and during the fourth quarter of 2024, the Bank's operating center and branch building in Winchester, VA was sold in a sale-leaseback transaction and the Company recognized a net of tax gain of $3.1 million. The twelve months ended December 31, 2025 also experienced a strong increase in net interest income over the corresponding 2024 period, largely due to the restructuring of the investment securities portfolio further described in the section titled Securities under the heading Financial Condition.
The following table presents a summary of performance metrics and ratios for the periods indicated:
Twelve Months Ended
December 31,
Earnings per share, basic and diluted $ 1.59 $ 4.32
Adjusted earnings per share, basic and diluted (non-GAAP)(1) $ 3.49 $ 3.46
Return on average assets 0.42 % 0.85 %
Adjusted return on average assets (non-GAAP)(1) 0.93 % 0.68 %
Return on average equity 4.81 % 13.77 %
Adjusted return on average equity (non-GAAP)(1) 10.56 % 11.03 %
(1) Adjusted to exclude the loss on sale of securities in 2025 and the gain recognized on the sale of the Company's operating center and branch building in 2024.
Return on average assets (“ROA”) measures how efficiently the Company uses its assets to produce net income. Factors reflected within this efficiency include the Company’s asset mix, funding sources, pricing, fee generation, and cost control.
Return on average equity (“ROE”) measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by the shareholders.
30
Average Balances, Income and Expenses, Yields and Rates (Tax-Equivalent Basis)
The following table shows average balance, interest, and yield/rate information, as well as net interest margin on a tax- equivalent basis for the years ended December 31, 2025 and 2024 (dollars in thousands):
Years Ended
Average InterestIncome/ Average Average InterestIncome/ Average
Balance Expense Rate Balance Expense Rate
Assets:
Securities:
Loans: (2)
Liabilities and Shareholders' Equity:
Interest-bearing deposits:
Time deposits:
Federal funds purchased 4 — NM 11 — NM
Noninterest-bearing liabilities:
Net interest spread 2.48 % 2.17 %
Interest expense as a percent of average earning assets 1.97 % 2.34 %
Net interest margin (3) 3.40 % 3.00 %
(1)
Income and yields are reported on a tax-equivalent basis using the federal tax rate of 21%.
(2)
Interest and yields on loans include the amortization/accretion of origination costs/fees as well as any purchase premiums or discounts.
(3)
Refer to the section titled "Tax-Equivalent Net Interest Income" for the reconciliation of tax-equivalent net interest income.
NM = Not Meaningful
31
Tax-Equivalent Net Interest Income
The following table reconciles tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income. Tax-equivalent net interest income (Non-GAAP) is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The tax rate used to calculate the tax benefit was 21% for 2025 and 2024.
Twelve Months Ended
December 31,
(in thousands)
GAAP Financial Measurements:
Interest Income - Securities and Other Interest-Earnings Assets 16,635 9,542
Interest Expense - Other Borrowings 4,212 8,240
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans (1) $ 104 $ 110
Add: Tax Benefit on Tax-Exempt Interest Income - Securities (1) 1 4
Total Tax Benefit on Tax-Exempt Interest Income $ 105 $ 114
Tax-Equivalent Net Interest Income $ 62,719 $ 51,341
(1)
Tax benefit was calculated using the federal statutory tax rate of 21%.
Net Interest Income
Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is primarily impacted by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates.
The year-over-year improvements in net interest income, tax-equivalent net interest income, net interest spread, and net interest margin primarily reflect the impact of the balance sheet repositioning strategy, pursuant to which the Company raised capital, increased cash on hand and replaced lower-yielding investment securities with higher yielding securities. Declining average rates paid on interest-bearing deposits and maturities of FHLB advances also contributed to the increase in net interest income, which was partially offset the amount of interest paid also increased due to higher average balance levels of time deposits during the 2025 period.
Net interest income was $62.6 million for 2025 and $51.2 million for 2024, which represents an increase of $11.4 million or 22.23%. Tax-equivalent net interest income was $62.7 million and $51.3 million for the twelve months ended December 31, 2025 and 2024, respectively.
The net interest margin was 3.40% for 2025 and 3.00% for 2024. The net interest margin is calculated by dividing tax-equivalent net interest income by total average earnings assets. Ongoing margin pressures include deposit pricing, the Bank's strategy of originating mortgage loans for sale, and an increase in nonaccrual assets.
The net interest spread for the twelve months ended December 31, 2025 was 2.48%, an increase of 31 basis points compared to 2.17% for the twelve months ended December 31, 2024. The 31 basis point increase was due to improvements of three basis points and 28 basis points in the tax-equivalent yield on earning assets and the average rate paid on interest-bearing liabilities, respectively.
Total average balance of securities decreased by $18.0 million during 2025 from the average balances in the prior year period primarily due to routine paydowns and maturities in the portfolio. The average yield on securities increased 139 basis points during 2025 reflecting the sale of lower-yielding securities and reinvestment into higher-yielding securities in the first quarter of 2025.
The total average loan balances decreased by $6.7 million during the year ended December 31, 2025 largely reflecting the sale of a pool of mortgage loans totaling $18.8 million early in the first quarter of 2025 as well as continuing paydowns and payoffs in the marine loan portfolio as the Company is no longer originating new marine business. These
32
decreases were partially offset by new loan growth in the commercial real estate loan portfolios. The average yield on loans increased by six basis points during 2025.
The average balance of federal funds sold and interest-bearing deposits in other banks increased $155.2 million, or 135.90%, during 2025 compared to 2024, resulting from higher cash levels, which were bolstered by proceeds received from the public stock offering and increased deposit balances during 2025. The average yield earned during 2025 decreased by 83 basis points reflecting the decline in market interest rates experienced during the current year.
Total average interest-bearing deposit balances during 2025 increased by $83.0 million from the prior year, primarily in NOW accounts and time deposits. The average rate paid on interest-bearing deposits decreased 18 basis points during the 2025, reflecting the lower market interest rate environment balanced by pricing strategies.
The average balance of FHLB advances decreased $87.8 million, or 60.38%, during the year ended December 31, 2025 due to maturing advances that were not replaced with new borrowings. The average rate paid on FHLB advances increased 16 basis points during the 2025.
Volume and Rate Analysis (Tax-Equivalent Basis)
Interest income and expense are affected by fluctuation in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each.
The following table provides information about changes in rate and volume (dollars in thousands):
2025 vs 2024Increase (Decrease)Due to Changes in:
Volume Rate Total
Earning Assets:
Securities:
Loans:
Interest-Bearing Liabilities:
Savings accounts (13 ) — (13 )
Time deposits:
Total interest-bearing deposits $ 2,646 $ (2,321 ) $ 325
Total interest-bearing liabilities $ (1,623 ) $ (2,080 ) $ (3,703 )
Provision for Credit Losses
The provision for credit losses results from management's review of the adequacy of the allowance for credit losses. The allowance for credit losses is management’s estimate, at the reporting date, of expected lifetime credit losses and includes consideration of current forecasted economic conditions. Estimating the amount required to maintain an adequate allowance
33
for credit losses involves a high degree of judgment.as discussed within the Critical Accounting Policies section above and Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data.
The following table presents the provision for credit losses:
Twelve Months Ended
December 31,
(dollars in thousands) 2025 2024 $ Change % Change
Provison for credit losses on unfunded commitments (179 ) 26 (205 ) (788 )%
The provision for credit losses for the years ended December 31, 2025 and 2024 included the impact of net losses and specific reserve allocations on individually evaluated nonaccrual loans and reflected management's estimate of forecasted economic conditions and changes in loan balances.
Net charge-offs were $3.6 million and $2.0 million during 2025 and 2024, respectively. Net charge-offs for 2025 were primarily within the commercial real estate and marine loan portfolios and consisted of six relationships totaling $3.3 million. The provision for credit losses in 2024 resulted largely from a $1.9 million provision against the marine portfolio due to charge-offs against six marine loans totaling $1.8 million.
Specific reserve allocations were $467 thousand and $248 thousand at December 31, 2025 and 2024, respectively. The majority of the specific reserve at December 31, 2025 reflects three commercial loan relationships with loan balances totaling $880 thousand. The specific reserve allocation in 2024 represented two commercial loan relationships with loan balances totaling $908 thousand.
The Company is committed to maintaining an allowance that it believes will adequately absorb the current expected losses in the loan portfolio. This commitment is more fully discussed in the “Asset Quality” section.
Noninterest Income
Total noninterest income was $6.9 million and $21.6 million during 2025 and 2024, respectively. This represents a decrease of $14.7 million or 68.07% for 2025. Management reviews the activities which generate noninterest income on an ongoing basis.
The following table provides the components of noninterest income for the twelve months ended December 31, 2025 and 2024, which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.
December 31,
(dollars in thousands) 2025 2024 $ Change % Change
(Loss) on sale of securities (12,425 ) — (12,425 ) NM
NM - Not Meaningful
Wealth management fees increased in 2025 compared to 2024. Wealth management fee income is primarily comprised of income from fiduciary activities and commissions from the sale of non-deposit investment products. The amount of income from fiduciary activities is determined by the number of active accounts and total assets under management. Income from investment sales increased due to the continued attractiveness of brokerage and advisory investments products. Wealth
34
management revenue also includes transaction-based revenues that are not primarily derived from the value of assets. Transaction-based revenues related to estates and other services have also contributed to the year over year increase in revenue. These include estate settlement fees which increased primarily due to two large trusts that were settled.
Services charges on deposit accounts increased when comparing the year ended December 31, 2025 to 2024. This increase is mainly due to growth in the number of accounts as well as higher levels of overdraft charges.
Gain on the sale and disposal of bank premises and equipment decreased during the year ended December 31, 2025 due to sale of the Company's operating center and branch building in a sales-leaseback transaction during the fourth quarter of 2024, which resulted in a realized gain of $3.9 million. There was no similar transaction during the year ended December 31, 2025.
The Company executed balance sheet repositioning transactions within its investment securities portfolio during March 2025. The sale of $99.2 million of available for sale debt securities, with a fair value of $86.8 million, resulted in a pre-tax loss of $12.4 million during the twelve months ended December 31, 2025. Management utilized the proceeds from the public offering capital raise completed in February 2025 to enable the balance sheet repositioning.
During 2025, the Company sold $89.7 million in mortgage loans on the secondary market and $21.8 million in Small Business Association ("SBA") loans. During 2024, the Company sold $59.0 million in mortgage loans on the secondary market and $14.3 million in SBA loans. These loan sales resulted in gains of $3.4 million and $2.1 million during the years ended December 31, 2025 and 2024, respectively.
Income from holdings in small business investment companies decreased during 2025 compared to 2024. The decrease during the current year period is mainly attributed to lower cash distributions received, based on the results of their performance and timing of distributions.
Bank owned life insurance ("BOLI") fee income totaled $1.1 million for the year ended December 31, 2025 compared to $2.0 million for the year ended December 31, 2024. The decrease was primarily due to death benefit settlement gains of $907 thousand received during the year ended December 31, 2024.
Other operating income increased primarily as a result of an increase in loan swap fee income recognized on agreements with initial notional balances totaling $21.6 million and $4.1 million during the years ended December 31, 2025 and 2024 respectively. The agreements resulted in a gain of $271 thousand during 2025 compared to $27 thousand in 2024.
Noninterest Expenses
Total noninterest expenses were $55.9 million and $51.3 million during 2025 and 2024, respectively. This represents an increase of $4.5 million or 8.84% during 2025.
35
The following table provides the components of noninterest expense for the twelve months ended December 31, 2025 and 2024, which are included within the respective Consolidated Statements of Income headings. The following paragraphs provide information about activities which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.
December 31,
(dollars in thousands) 2025 2024 $ Change % Change
Other real estate owned expense 20 — 20 NM
Loss on other real estate owned 51 — 51 NM
NM - Not Meaningful
Salaries and employee benefits expense increased during 2025 reflecting increases in salaries, commission, stock-based compensation expenses, and annual incentive plan expenses. The Company's number of full-time equivalent employees (FTEs) increased from 231 at December 31, 2024 to 254 at December 31, 2025. Stock based compensation expense increased due to a higher grant price in the twelve months ended December 31, 2025, compared to the twelve months ended December 31, 2024. Partially offsetting these increases was a net reduction in employee medical costs due to lower claims deficit expenses during the twelve months ended December 31, 2025.
Occupancy expenses increased during 2025 largely due to the impact of the sales-leaseback transaction of the Company's operating center and branch building in December 2024. Rental expense, net of building depreciation increased $498 thousand during 2025 compared to 2024. The increase in rental expense also reflects a new long-term lease executed during the first quarter of 2025 as the Company moved its standalone loan production office and established a full-service branch in McLean, Virginia.
Advertising and marketing expenses decreased during 2025. This reflects fewer advertising campaigns and a marketing bonus credit related to the Bank's credit card provider relationship.
ATM network fees decreased during 2025 due, in part, to a contract renegotiation which lowered per unit transaction fees as well as lower costs associated with fewer plastic cards purchased.
FDIC assessment expense, which is based in part on asset size and capital levels, decreased in 2025 compared to 2024. The decrease reflects an improvement in the financial ratios primarily due to the capital raise completed in early 2025. An improved loan mix index, partially offset by an increase in nonperforming loans also contributed to the decreased assessment rate during 2025.
Computer software expense increased during 2025 compared to 2024 due to the Company's continued investment in technology to enhance systems security and drive operational efficiencies. Additionally, approximately $200 thousand of the increase was due to existing loan software expenses, which were recorded to other operating expenses in the prior year.
Bank franchise tax which is based on asset and capital levels, increased during 2025 compared to 2024 reflecting growth of the Company's capital.
36
Professional fees increased during 2025 primarily due to higher legal fees as a result of increased problem loan workouts and activity as well as increased internal audit services, testing, and annual loan review costs.
Data processing fees decreased reflecting core provider pricing discounts and credits recognized during 2025.
Other operating expenses increased during 2025. The largest drivers of the increase were loan collection costs, higher contributions towards charitable activities, debit card usage incentive rewards, and greater travel costs related to investor relations activities. These increases were partially offset by the reclassification of loan software expenses as described above in computer software expenses.
Efficiency Ratio
The efficiency ratio of the Company was 67.67% and 75.08% for 2025 and 2024, respectively. The improvement in the efficiency ratio during 2025 reflects an increase in net interest and noninterest income. The efficiency ratio is not a measurement under GAAP. It is calculated by dividing total noninterest expenses by the sum of tax-equivalent net interest income and total noninterest income. The Company adjusts for non-recurring items such as gains and losses on investment portfolio sales and other gains/losses from OREO, repossessed assets, sale or disposals of bank assets, etc. The tax rate utilized is 21%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency.
The calculation of the efficiency ratio for the twelve months ended December 31, 2025 and 2024 was as follows:
December 31,
(in thousands)
Summary of Operating Results:
Less: Loss on other real estate owned and repossessed assets 353 204
Adjusted noninterest expenses (non-GAAP) $ 55,518 $ 51,128
Less: (Loss) on sales of securities (12,425 ) —
Less: (Loss) Gain on the sale and disposal of premises and equipment (19 ) 3,863
Less: Life insurance proceeds — 935
Adjusted noninterest income (non-GAAP) $ 19,327 $ 16,759
Tax equivalent adjustment (1) 105 114
(1) Includes tax-equivalent adjustments on loans and securities using the federal statutory tax rate of 21%.
Income Taxes
The following table presents the Company's income tax provision and applicable tax rates for the periods indicated:
Twelve Months Ended
December 31,
Effective income tax rate 17.24 % 18.82 %
Income tax expense was $1.7 million and $3.6 million for the years ended December 31, 2025 and 2024, respectively. These amounts correspond to an effective tax rate of 17.24% and 18.82% for 2025 and 2024, respectively. Total income tax expense is comprised of federal and state income taxes of $1.6 million and $100 thousand, respectively, for the year ended December 31, 2025 and $3.4 million and $134 thousand, respectively, for the year ended December 31, 2024.
The effective tax rate is below the statutory rate of 21%, due primarily to the recognition of tax-exempt life insurance income, which also included death benefit proceeds during 2024. The effective tax rate is also impacted by
37
tax-exempt income on investment securities and loans, qualified rehabilitation credits and tax credits on qualified affordable housing project investments. Note 9 to the Consolidated Financial Statements provides a reconciliation between income tax expense computed using the federal statutory income tax rate and the Company’s actual income tax expense during 2025 and 2024 and Note 25 further discusses qualified affordable housing project investments.
As previously discussed in the "Non-GAAP Financial Measures" section above, both 2025 and 2024 had large out of the ordinary transactions due to balance sheet repositioning events that affected taxable income. Due to lower taxable income in 2025, resulting from realized losses on the sale of securities, the strategies employed by the Company to reduce its effective tax rate had a greater impact. Conversely, higher taxable income in 2024 due to the realized gain on the sale of the Company's operating center and branch building, lessened the impact of the Company's effective tax rate strategies.
Business Segments
The Company has three reportable operating segments: community banking, marine lending and wealth management. See Note 27 to the Consolidated Financial Statements.
The following table presents a summarized statement of income for the community banking business segment for the twelve months ended December 31, 2025 and 2024.
December 31,
(dollars in thousands) 2025 2024 $ Change % Change
(Loss) on the sale of securities (12,425 ) — (12,425 ) NM
Net interest income increased during the year ended December 31, 2025 compared to the year ended December 31, 2024 primarily due to income earned on: i) non-marine loans; ii) the investment securities portfolio, which was restructured in the first quarter of 2025 to sell and replace lower yielding investments with higher yielding securities; iii) higher levels of earning deposit balances in other other banks; and iv) reduction in borrowings expense as FHLB advances have matured and were not replaced. These increases were partially offset by an increase in interest-bearing deposit expense due to growth in average balances. Higher levels of interest-earning deposits balances in other banks reflects proceeds received from the capital raise and sales of available for sale securities completed during the first quarter of 2025, as well as increases in customer deposit balances.
Gain on sales of loans increased during 2025 compared to 2024 largely reflecting increases in sales of mortgage loans originated for sale and SBA loans. See further discussion of gain on sales of loans under the caption "Noninterest Income" above.
Loss on the sale of securities resulted from the Company's execution of balance sheet repositioning transactions within its investment securities portfolio in March 2025. Available for sale debt securities totaling $99.2 million, with a fair value of $86.8 million, were sold resulting in a pre-tax loss of $12.4 million.
Other noninterest income for the twelve months ended December 31, 2025 decreased compared to the same period in 2024 primarily reflecting the sale of the Company's operating center and branch building in a sales-leaseback transaction, resulting in a realized gain of $3.9 million during 2024.
Provision for credit losses increased during 2025 largely reflecting the increase in net charge-offs within the commercial real estate loan portfolio. See further discussion under the caption "Provision" above.
Noninterest expense increased during 2025 primarily due to salaries and employee benefits. See further discussion under the caption "Noninterest Expenses" above.
38
Income tax expense decreased by $2.0 million from 2024 primarily due to the impact of securities sale loss recognized in 2025.
The following table presents a summarized statement of income for the marine lending segment for the twelve months ended December 31, 2025 and 2024.
December 31,
(dollars in thousands) 2025 2024 $ Change % Change
NM - Not Meaningful
Marine lending net revenues declined for the twelve months ended December 31, 2025 compared to the twelve months ended December 31, 2024 due to pay downs in the portfolio, which are not being replaced with new loan originations. The marine loan portfolio balance totaled $175.6 million at December 31, 2025 compared to $210.1 million at December 31, 2024.
Provision for credit losses for marine lending decreased due to the declining loan balances, which mostly offset the impact of net charge-offs recorded during 2025. Net charge-offs declined by $1.2 million, or 67.38%, from 2024 levels.
Noninterest expenses were down from 2024 due to decreases in loan servicing and collection expenses, which comprise the majority of total noninterest expenses for marine lending.
The following table presents a summarized statement of income for the wealth management business segment for the twelve months ended December 31, 2025 and 2024.
December 31,
(dollars in thousands) 2025 2024 $ Change % Change
Net Interest Income $ — $ — $ — — %
Wealth Management's net revenues increased $2.0 million, or 35.63%, for the twelve months ended December 31, 2025 compared to the twelve months ended December 31, 2024, reflecting increases in both trust services and investment sales income. See further discussion of wealth management revenues under the caption "Noninterest Income" above.
Noninterest expense increased during 2025 primarily reflecting increases in salaries, commissions and annual incentive plan expenses.
39
FINANCIAL CONDITION
Select financial condition data is presented in the following table:
December 31,
(dollars in thousands) 2025 2024 $ Change % Change
Two significant events impacting the Company's financial condition occurred during the first quarter of 2025. On February 13, 2025, the Company completed an underwritten public offering of 1,796,875 shares of its common stock at a public offering price of $32.00 per share. The net proceeds from the offering were $53.5 million. During March 2025, the Company executed balance sheet repositioning transactions within its investment securities portfolio. The execution of these events was to support continued organic growth and capital generation. These are further described in their corresponding paragraphs below.
Securities
The carrying amounts of the Company's available for sale securities are as follows:
December 31,
Amount Percent Amount Percent
Securities available for sale:
Obligations of U.S. government corporations and agencies $ 7,444 6 % $ 7,668 6 %
U.S. Treasury securities 10,001 8 % — 0 %
Collateralized mortgage obligations 22,495 19 % — 0 %
Obligations of states and political subdivisions — 0 % 4,645 4 %
Total securities available for sale decreased by $1.8 million, or 1.47%, during 2025. The Company purchased $102.7 million of securities during the twelve months ended December 31, 2025 , which includes $66.0 million as part of the balance sheet repositioning transactions in the first quarter of 2025. The Company had total maturities, calls, and principal repayments of $22.7 million and sales of $99.2 million during the twelve months ended December 31, 2025.
Net unrealized loss on available for sale securities was $6.7 million at December 31, 2025 as compared to a net unrealized loss of $23.6 million at December 31, 2024. Unrealized gains or losses on available for sale securities are reported within shareholders’ equity, net of the related deferred tax effect, as accumulated other comprehensive income (loss).
During March 2025, balance sheet repositioning transactions were comprised of sales of available for sale debt securities with an amortized cost balance of $99.2 million (fair value of $86.8 million) and a weighted average yield of 1.72%, with proceeds reinvested into purchases of $66.0 million of available for sale debt securities with a weighted average yield of 4.72%. The total sales of $99.2 million represented 68.48% of December 31, 2024 securities balance. The majority of these repositioning sales and purchases consisted of mortgage-backed securities. The sale of debt securities resulted in a net pre-tax realized loss of $12.4 million (after-tax of $9.8 million) that was recognized in the first quarter of 2025. In addition to the repositioning transactions, the Company purchased U.S. Treasury notes totaling $9.9 million prior to the repositioning to maintain pledging levels throughout the repositioning period and has also made subsequent purchases.
40
The primary cause of the unrealized losses at December 31, 2025 and December 31, 2024 was changes in market interest rates, rather than other market conditions or credit concerns of the issuers over the time between purchase and measurement periods. Since the losses can be primarily attributed to changes in market interest rates and conditions and not expected cash flows or an issuer’s financial condition and management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, the Company concluded a credit loss did not exist.
The table titled “Maturity Distribution and Yields of Securities” shows the maturity period and average yield for the different types of securities in the portfolio at December 31, 2025. The weighted average is calculated based on the relative amortized costs of the securities. Although mortgage-backed securities have definitive maturities, they provide monthly principal curtailments which can be reinvested at a prevailing rate and for a different term.
Maturity Distribution and Yields of Securities
Securities available for sale:
U.S. treasury securities 4.27 % — % — % — % 4.27 %
Collateralized mortgage obligations — % 5.20 % — % 5.09 % 5.12 %
Subordinated debt — % 7.95 % 5.53 % — % 5.91 %
(1)
Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 21%.
41
Loan Portfolio
The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Details of the Company's loan portfolio are presented below:
Mortgage real estate loans:
Net deferred loan costs and premiums 5,615 6,453
Gross loans increased $6.0 million, or 0.41%, and totaled $1.47 billion at December 31, 2025 and 2024. The ratio of gross loans to deposits decreased during the year from 93.14% to 91.65% at December 31, 2024 and December 31, 2025, respectively.
The loan portfolio consists primarily of loans for owner-occupied single-family dwellings and loans secured by commercial real estate. The modest increase in gross loans reflects new loan originations outpacing reductions due to loan sales, paydowns, and significant payoffs of commercial and industrial loans related to the sales of two customers' businesses.
Total residential real estate loans decreased by $6.3 million, or 1.75%, during the year ended December 31, 2025 primarily due to the sale of $18.8 million of portfolio mortgage loans in early 2025, ahead of the Company's public stock offering, in order to bolster on-balance sheet liquidity.
Total commercial real estate loans increased by $57.9 million, or 9.04%, since December 31, 2024, reflecting strong origination growth in both owner and non-owner occupied portfolios. This growth included a large construction loan that converted to permanent financing.
Marine loans are declining due to normal paydowns and payoffs only as the Company is no longer accepting new marine business. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid.
The table titled “Maturity Schedule of Selected Loans” shows the various loan categories and the period during which they mature. For loans maturing in more than one year, the table also shows a breakdown between fixed rate loans and floating rate loans. The table indicates that $764.6 million or 52.11% of the loan portfolio matures within five years. The floating rate loans maturing after five years are primarily comprised of loans secured by 1-4 family residential properties.
42
Maturity Schedule of Selected Loans
(dollars in thousands)
Loans secured by real estate:
For maturities over one year:
Asset Quality
The Company has policies and procedures designed to control credit risk and to maintain the quality of its loan portfolio. These include underwriting standards for new originations and ongoing monitoring and reporting of asset quality and adequacy of the allowance for credit losses. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk on a quarterly basis.
The following table presents credit risk ratings as of December 31, 2025 and 2024:
Risk categories
Loans risk rated as special mention, which exhibit negative trends and potential weaknesses include loans with stale financial information. Of the total special mention loans, $35.7 million had stale financial information at December 31, 2025 compared to $45.0 million at December 31, 2024. Upon receipt of current financial information, the loans will be evaluated and returned to a pass classification if appropriate.
Loans risk rated as classified, include substandard, doubtful, and loss loans. Classified loans increased primarily due to three large relationships being placed on nonaccrual status during 2025 that totaled $9.6 million at December 31, 2025. The first relationship had an outstanding balance of $2.2 million as of December 31, 2025 and was a partially owner-occupied property whose owner passed away unexpectedly causing the business to halt. The second relationship is comprised of three residential multifamily income of producing properties in Washington D.C. (the District) with a combined exposure of $5.3 million at December 31, 2025. The Bank has been granted receivership of these properties and is actively working with the receiver to update the properties and ready them for sale while continuing to collect the housing payments directly from the District. The third relationship had an outstanding balance of $2.1 million at December 31, 2025. The Bank's portion is part of a larger syndicated loan, with the Bank’s portion being 0.31% of the total loan commitment. The borrower is currently under a forbearance agreement, for financial covenant violations and past due payments. The borrower's new management team along with the lead bank continue to work on a restructuring of the business.
43
Classified loans also include other potential problem loans, defined as performing loans that possess certain risks that management has identified that could result in the loans not being repaid in accordance with their terms. Accordingly, these loans are risk rated at a level of substandard or lower. At December 31, 2025, other potential problem loans totaled $1.6 million.
All other loans were classified as pass, exhibiting acceptable history of profits, cash flow ability and liquidity.
Total past due loans were $16.9 million at December 31, 2025, an increase of $12.4 million, compared to $4.5 million at December 31, 2024. The $12.4 million increase in past due loans primarily reflects a $12.7 million increase in loans 90 or more days past due, partially offset by a $292 thousand decrease in loans 30-89 days past due. Loans 90 or more days past due were concentrated in the commercial real estate loan portfolios and reflected the increase in nonaccrual loans.
Nonperforming and Other Assets
Nonperforming assets consist of nonaccrual loans, loans past due 90 days and accruing interest, other real estate owned (foreclosed properties), and repossessed assets.
Loans are placed on non-accrual status when collection of principal and interest is doubtful, generally when a loan becomes 90 days past due. There are three negative implications for earnings when a loan is placed on non-accrual status. First, all interest accrued but unpaid at the date that the loan is placed on non-accrual status is either deducted from interest income or written off as a loss. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses that require additional provisions for credit losses to be charged against earnings.
For real estate loans, upon foreclosure, the properties are recorded at the fair value of the property based on current appraisals and other current market trends, less selling costs. If a write down of the OREO property is necessary at the time of foreclosure, the amount is charged-off against the allowance for credit losses on loans. A review of the recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair value, additional write downs of the property value are charged directly to operations. Gains on properties acquired through foreclosure where the fair value less costs to sell exceeds the related loan balance and there have been no prior charge-offs are recorded to current earnings. Loans secured by other assets, such as marine vessels, are recorded in a similar manner when a repossession occurs.
In addition, the Company may, under certain circumstances, modify loans. Modifications made to a loan are considered when a borrower is experiencing financial difficulty and the modification constitutes a concession to the borrower that is not in line with market rates and/or terms. Modified terms are dependent upon the financial position and needs of the individual borrower. Generally, the modifications granted are extensions of terms, deferrals of payments for an extended period or interest rate reductions. There were three commercial real estate loan modifications to one borrower experiencing financial difficulty totaling $5.3 million during the year ended December 31, 2025. These residential multifamily income producing properties are under a receivership agreement and are expected to be ready for sale during 2026. No loans were modified during 2024.
44
Nonperforming assets and related ratios are detailed in the table below:
December 31,
Loans past due 90 days and accruing interest 60 —
Other real estate owned and repossessed assets 135 514
Allowance for credit losses on loans $ 15,320 $ 15,027
Allowance for credit losses on loans to nonperforming assets 105 % 581 %
Allowance for credit losses on loans to total loans 1.04 % 1.02 %
Allowance for credit losses on loans to nonaccrual loans 106 % 725 %
Nonaccrual loans to total loans 0.98 % 0.14 %
There were $14.6 million in total non-performing assets at December 31, 2025. This increase of $12.0 million when compared to the December 31, 2024 balance of $2.6 million resulted mostly from the increase in nonaccrual loans.
Nonaccrual loans were $14.4 million at December 31, 2025 and $2.1 million at the end of 2024. The gross amount of interest income that would have been recognized on nonaccrual loans was $672 thousand for 2025 and $81 thousand for 2024. None of this interest income was included in net income for 2025 or 2024.
Included in the nonaccrual balance at December 31, 2025 were 20 loans totaling $14.1 million which were placed on nonaccrual during 2025, including three large relationships which made up $9.6 million of the nonaccrual balance at December 31, 2025 and were discussed above. Four additional commercial relationships totaling $2.7 million were added to nonaccrual status during 2025 reflecting their delinquent payment status and required an allowance for credit losses of $467 thousand based on management's evaluation of the underlying collateral values. In addition, of the $2.1 million nonaccrual balance at December 31, 2024, payoffs totaling $1.6 million were received, $89 thousand was charged off, and three loans totaling $316 thousand remained on nonaccrual status at December 31, 2025.
Management evaluates the financial condition of borrowers in nonaccrual status and the value of any collateral on these loans. The results of these evaluations are used to estimate the amount of losses which may be realized on the disposition of these nonaccrual loans. Nonaccrual loans that were individually evaluated for impairment at December 31, 2025 totaled $14.4 million, of which $2.7 million required a specific allocation of $467 thousand to be assigned.
Other real estate owned and repossessed assets decreased from $514 thousand at December 31, 2024 to $135 thousand at December 31, 2025, consisting of repossessed assets. Four marine vessels were repossessed during 2025 and placed into repossessed assets. Sales of repossessed assets during 2025 included three marine vessel repossessed in 2024 and three of the four marine vessels repossessed during 2025. A net loss of $302 thousand and $204 thousand was recognized on the sale of repossessed assets for the twelve months ended December 31, 2025 and 2024, respectively.
There was one real estate property that foreclosed and sold during 2025, compared to no transactions during 2024. The difference between the amount of other real estate owned and the settlement proceeds is recognized as a gain or loss on the sale of other real estate owned. A net loss of $51 thousand was recognized on the sale of other real estate owned during the twelve months ended December 31, 2025.
45
Allowance for Credit Losses on Loans
The purpose of and the methods for measuring the allowance for credit losses on loans is discussed in the Critical Accounting Policies section above as well as in Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the this Form 10-K.
The following table presents the activity in the allowance for credit losses on loans and related ratios for the periods indicated:
Twelve Months Ended
December 31,
Charge-Offs
Construction & secured by farmland — (94 )
Residential real estate (31 ) (277 )
Commercial real estate (2,771 ) (7 )
Recoveries
Construction & secured by farmland 5 102
Residential real estate 308 347
Commercial real estate — 162
Marine — —
Provision for credit losses on loans 3,880 2,525
Net charge-off's to average loans 0.25 % 0.14 %