Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The purpose of this discussion is to focus on the important factors affecting the financial condition, results of operations, liquidity and capital resources of Eagle Financial Services, Inc. (the “Company”). This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
GENERAL
The Company is a bank holding company which owns 100% of the stock of Bank of Clarke (the “Bank”). 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 corporate, municipal and U.S. government agency securities. The Bank also operates a wealth management division, which provides both a full-service trust department and a separate brokerage area. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the extent permitted by law. At December 31, 2024, the Company had total assets of $1.87 billion, net loans of $1.45 billion, total deposits of $1.58 billion and shareholders’ equity of $119.0 million. The Company’s net income was $15.3 million for the year ended December 31, 2024.
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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:
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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 financial institution as well as predominantly locally owned. While the Company expanded its ownership to institutional investors though a public offering of its common stock in February 2025, its operating strategy remains the same. The public offering increased 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 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 has a marketing department which seeks to develop new business. This is accomplished through an ongoing calling program whereby account officers contact existing and potential customers to discuss the products and services offered. The Bank conducts advertising through television commercials, radio ads, newspaper ads, printed materials, electronic materials, billboards, emails, and social media posts.
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. 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
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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.
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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. In August 2023, the Company completed a sale of specific assets from its marine lending segment and reduced its workforce associated with the marine lending division, as it ceased accepting new marine lending business. As part of the sale, the Company sold its interest in marine vessel floor plan loans, its rights to service loans that had been sold to secondary market investors prior to the date of sale, and other assets that were not individually significant. 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”). The financial information contained within these statements is, to a significant extent, based on measurements of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change.
Allowance for 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. 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 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
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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 2024 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 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.
FORWARD LOOKING STATEMENTS
The Company makes forward looking statements in this report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for credit losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:
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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;
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the successful management of interest rate risk;
•
risks inherent in making loans such as repayment risks and fluctuating collateral values;
•
changes in general economic and business conditions in the Bank’s market area;
•
reliance on the Bank’s management team, including the ability to attract and retain key personnel;
•
changes in interest rates and interest rate policies;
•
maintaining capital levels adequate to support growth;
•
maintaining cost controls and asset qualities as new branches are opened or acquired;
•
demand, development and acceptance of new products and services;
•
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 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.
Because of these uncertainties, actual future results may be materially different from the results indicated by these forward looking statements. In addition, past results of operations do not necessarily indicate future results.
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RESULTS OF OPERATIONS
Net Income
Net income for 2024 was $15.3 million, an increase of $6.0 million or 63.97% from 2023’s net income of $9.4 million. Basic and diluted earnings per share were $4.32 and $2.66 for 2024 and 2023, respectively.
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. The ROA of the Company, on an annualized basis, was 0.85% and 0.54% for 2024 and 2023, respectively.
Return on average equity (“ROE”) measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by the shareholders. The ROE for the Company was 13.77% and 9.05% for 2024 and 2023, respectively.
Net income for 2024 was significantly impacted by a sale-leaseback transaction of the Bank's OTC branch in Winchester, VA, during the fourth quarter of 2024. The impact of the sale-leaseback transaction was a net of tax gain of $3.1 million, or $0.86 per share, and contributed 0.17% and 2.75% to ROA and ROE, respectively, for the twelve months ended December 31, 2024.
In conjunction with its capital offering completed in February of 2025, the Company executed on its strategy to restructure its investment portfolio in March 2025. While the restructuring is expected to result a pre-tax loss of $12.6 million for the quarter ended March 31, 2025, it is also expected to improve core net income, net interest income, net interest margin, and return on average assets beginning in the second quarter of 2025. See further details in the section titled Securities under the heading Financial Condition.
Net Interest Income
Net interest income, the difference between total interest income and total interest expense, is the Company’s primary source of earnings. Net interest income was $51.2 million for 2024 and $50.3 million for 2023, which represents an increase of $971 thousand or 1.93%. Net interest income is derived from the volume of earning assets and the rates earned on those assets as compared to the cost of funds. Total interest income was $91.3 million for 2024 and $83.1 million for 2023, which represents an increase of $8.2 million or 9.90% for 2024. Total interest expense was $40.1 million for 2024 and $32.8 million for 2023, which represents an increase of $7.3 million or 22.10% in 2024. The increase in total interest income, total interest expense and net interest income during 2024 was driven by higher rates, growth in interest-bearing liabilities and, to a lesser extent, growth in interest-earning assets. The average rate on interest-earning assets and interest-bearing liabilities increased 45 basis points and 40 basis points, respectively, during the twelve months ended December 31, 2024 compared to the twelve months ended December 31, 2023, while average balances of interest-earning assets and interest-bearing liabilities increased 0.69% and 6.68%, respectively. Refer to the table titled “Volume and Rate Analysis” for further detail.
The net interest margin was 3.00% for 2024 and 2.96% for 2023. The net interest margin is calculated by dividing tax-equivalent net interest income by total average earnings assets. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The tax rate used to calculate the tax benefit was the federal statutory rate of 21%. The table titled “Tax-Equivalent Net Interest Income” reconciles net interest income to tax-equivalent net interest income, which is not a measurement under GAAP, for the years ended December 31, 2024 and 2023.
The net interest spread for the twelve months ended December 31, 2024 was 2.17%, an increase of five basis points compared to 2.12% for the twelve months ended December 31, 2023.
Net interest income and net interest margin may experience some decline due to deposit pricing pressure as interest rates change and ongoing competition for new deposits is experienced. These combined factors also could result in the Company having to borrow wholesale funding to fund asset growth which is more expensive than deposits.
The following table titled “Average Balances, Income and Expenses, Yields and Rates” displays the composition of interest earning assets and interest bearing liabilities and their respective yields and rates for the years ended December 31, 2024 and 2023.
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Average Balances, Income and Expenses, Yields and Rates
(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:
Noninterest-bearing liabilities:
Net interest spread 2.17 % 2.12 %
Interest expense as a percent of average earning assets 2.34 % 1.93 %
Net interest margin 3.00 % 2.96 %
(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.
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Tax-Equivalent Net Interest Income
(dollars in thousands)
Twelve Months Ended
December 31,
(in thousands)
GAAP Financial Measurements:
Interest Income - Securities and Other Interest-Earnings Assets 9,542 7,573
Interest Expense - Other Borrowings 8,240 9,207
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans (1) $ 110 $ 104
Add: Tax Benefit on Tax-Exempt Interest Income - Securities (1) 4 4
Total Tax Benefit on Tax-Exempt Interest Income $ 114 $ 108
Tax-Equivalent Net Interest Income $ 51,341 $ 50,364
(1)
Tax benefit was calculated using the federal statutory tax rate of 21%.
The tax-equivalent yield on earning assets increased 45 basis points from 2023 to 2024. The tax-equivalent yield on securities increased 13 basis points from 2023 to 2024. The tax-equivalent yield on loans increased 33 basis points from 2023 to 2024. The increase in the tax-equivalent yield on earning assets resulted mostly from the sustained elevated interest rate environment as well as the increase in total average loan balances. The increase in average loan balances is primarily due to real estate loans, which more than offset the balance decline in the marine loan portfolio as loans pay down and were not replaced with new originations.
The average rate on interest-bearing liabilities increased 40 basis points from 2023 to 2024. The average rate on total interest-bearing deposits increased 54 basis points from 2023 to 2024. The Federal Reserve's interest rate increases began in early 2022, continued into 2023 and have remained heightened during 2024 impacting interest rates paid on deposit accounts. In general, deposit pricing is done in response to monetary policy actions and yield curve changes. Local competition for funds also affects the cost of time deposits, which are primarily comprised of certificates of deposit. The Company prefers to rely most heavily on non-maturity deposits when possible, which include NOW accounts, money market accounts, and savings accounts. The average balance of non-maturity interest-bearing deposits increased $4.9 million or 0.75% from $653.3 million during 2023 to $658.2 million in 2024. The Company also actively pursued time deposits during 2024 adding $94.1 million, or 28.01%, in average balances, primarily in amounts less than $250,000. These time deposits were obtained through pricing and customer outreach efforts. The average cost of total time deposits increased to 4.56% during 2024 from 4.08% during 2023. The cost of interest-bearing deposits were slightly offset by decreases in average balance and rate of FHLB advances of $17.2 million and six basis points, respectively during 2024, reflecting the payoff of higher cost advances and not replacing balances at the same level.
The following table titled “Volume and Rate Analysis (Tax-Equivalent Basis)” provides information about the effect of changes in financial assets and liabilities and changes in rates on net interest income.
Tax-equivalent net interest income increased $977 thousand during 2024. The net increase in tax-equivalent net interest income during 2024 is comprised of an increase due to rate of $3.5 million and a decrease due to volume of $2.6 million. The increase in tax-equivalent net interest income during 2024 was largely affected by an increase in rates earned on taxable loans and federal funds sold and interest-bearing deposits in other banks, as well as increased volume of loans. This increase was mostly offset by the increased volume in time deposits and increases in rates paid on interest- bearing deposits.
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Volume and Rate Analysis (Tax-Equivalent Basis)
(dollars in thousands)
2024 vs 2023Increase (Decrease)Due to Changes in:
Volume Rate Total
Earning Assets:
Securities:
Tax-exempt — (1 ) (1 )
Loans:
Interest-Bearing Liabilities:
Savings accounts (17 ) (13 ) (30 )
Time deposits:
Federal funds purchased (218 ) 148 $ (70 )
Federal Home Loan Bank advances (801 ) (96 ) (897 )
Provision for Credit Losses
The provision for credit losses is based upon management’s estimate of the amount required to maintain an adequate allowance for credit losses 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 provision for credit losses was $2.6 million for 2024 and $1.6 million for 2023. The amount of provision for credit losses on loans is affected by several factors including the growth rate of loans, net charge-offs (recoveries), and the estimated amount of expected losses within the loan portfolio.The amount of provision for credit losses during each period reflects the results of the Company’s analysis used to determine the adequacy of the allowance for credit losses. 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. Also contributing to the provision for credit losses total were specific reserves on two individually evaluated relationships of $248 thousand, and growth in the portfolio balance as compared to the prior measurement period. Net charge-offs during 2024 totaled $2.0 million. The provision for credit losses in 2023 reflects loan growth during the year, largely in the residential and commercial real estate portfolios. Net charge-offs during 2023 totaled $443 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.
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Noninterest Income
Total noninterest income was $21.6 million and $14.8 million during 2024 and 2023, respectively. This represents an increase of $6.8 million or 45.85% for 2024. 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, 2024 and 2023, 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) 2024 2023 $ Change % Change
Gain on the sale of marine finance assets — 435 (435 ) NM
Gain on the sale and disposal of bank premises and equipment 3,863 14 3,849 NM
NM - Not Meaningful
Wealth management fees increased from 2023 to 2024. Wealth management fee income is comprised of income from fiduciary activities as well as 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. Higher interest rates and more favorable conditions in the stock market have resulted in an expansion of total assets under management. One-time fees for estates and other services have also contributed to the year over year increase in revenue. Investment sales increased as favorable market activity during 2024 made the use of brokerage and advisory investments more attractive.
Services charges on deposit accounts increased when comparing the year ended December 31, 2024 to 2023. This increase is mainly due to increases in overdraft charges. Overdraft charges can fluctuate based on changes in customer activity and number of accounts.
Other service charges and fees decreased during the twelve months ended December 31, 2024 compared to the same period in 2023. This decrease is attributable to no longer servicing sold marine loans, beginning during the third quarter of 2023.
Gain on the sale of marine finance assets was $435 thousand for the year ended December 31, 2023 as the result of the Company's sale of certain marine finance division assets on August 23, 2023. Refer to additional discussion of marine lending under the heading "Lending Policies" in Item 7 above and in Notes 1 and 27 to the Consolidated Financial Statements.
Gain on the sale and disposal of bank premises and equipment was $3.9 million for the year ended December 31, 2024 reflecting the sale of the Company's operating center and branch building in a sales-leaseback transaction during the fourth quarter, resulting in a realized gain of $3.9 million.
During 2024, the Company sold $59.0 million in mortgage loans on the secondary market and $14.3 million in Small Business Association ("SBA") loans. During 2023, the Company sold $32.1 million in mortgage loans on the secondary market, $51.7 million of loans from the commercial and consumer loan portfolios and $8.0 million in SBA loans. These loan sales resulted in gains of $2.1 million and $1.4 million during the years ended December 31, 2024 and 2023, respectively.
Income from holdings in small business investment companies increased during 2024 as the result of higher cash distributions received compared to 2023. The level of distributions are based on the results of the individual companies performance.
Bank owned life insurance ("BOLI") fee income totaled $2.0 million for the year ended December 31, 2024 compared to $713 thousand for the year ended December 31, 2023. The increase was due to death benefit settlement gains of
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$907 thousand and increased earnings on the cash surrender value reflecting the impact of market conditions and an investment of $5 million into BOLI by the Company during the fourth quarter of 2023.
Other operating income decreased primarily as a result of a decline in loan swap fee income recognized during 2024 compared to 2023. Loan swap agreements with initial notional balances of $4.1 million and $20.9 million were entered into during the years ended December 31, 2024 and 2023, respectively.
Noninterest Expenses
Total noninterest expenses were $51.3 million and $52.8 million during 2024 and 2023, respectively. This represents a decrease of $1.4 million or 2.70% during 2024.
The following table provides the components of noninterest expense for the twelve months ended December 31, 2024 and 2023, 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) 2024 2023 $ Change % Change
Other real estate owned expense — 5 (5 ) NM
(Gain) on other real estate owned — (7 ) 7 NM
Loss on sale of repossessed assets 204 — 204 NM
NM - Not Meaningful
On August 23, 2023, the Company completed a sale of specific assets from its marine lending segment. As part of the sale, the Company sold its interest in marine vessel floor plan loans totaling $52.8 million, its rights to service loans that had been sold to secondary market investors prior to the date of sale (valued at $595 thousand on balance sheet prior to sale), and other assets that were not individually significant. The Company received total consideration, net of selling expenses, of $53.5 million and recognized a gain of $435 thousand. The assets sold as well as their related revenues and contribution to earnings did not constitute a significant portion of the Company's assets or operating results for the year ended December 31, 2023. As part of the sale, the Company reduced its workforce associated with the marine lending division, and ceased accepting new marine lending business. Subsequent to the sale of these assets, the Company retained ownership of approximately $260.5 million 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. Subsequent to the sale, non-interest expenses related to marine lending have been significantly reduced or eliminated as discussed in variance explanation paragraphs below.
Salaries and employee benefits expense decreased during 2024 reflecting decreases in salaries and stock-based compensation expenses while experiencing increases in employee benefits and annual incentive plan expenses. The Company had 231 and 241 full-time equivalent employees (FTEs) at December 31, 2024 and December 31, 2023, respectively. As part of the sale of the marine finance assets during the third quarter of 2023, the Company reduced its workforce associated with the marine lending division and ceased accepting new marine lending business. Stock based compensation expense decreased due to a higher level of share forfeitures recognized during the twelve months ended December 31, 2024, compared to the twelve months ended December 31, 2023. Partially offsetting these decreases were higher costs related to the annual incentive accrual, employee insurance and enhanced employee benefit plans.
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Equipment expenses increased during the twelve months ended December 31, 2024 compared to the same period in 2023. A new loan origination system implemented during the fourth quarter of 2023 was a significant driver of the year-over-year increase.
Advertising and marketing expenses decreased during 2024. This reflects an increase in the Company's continued marketing campaigns, including its recognition of receiving a Great Place to Work® certified. designation, which was more than offset by a reduction in business development expenses during 2024. The reduction in business development expenses was due to the discontinuation of new marine lending subsequent to August 2023 and corporate rebranding that occurred in early 2023.
A repossessed marine vessel was sold during the twelve months ended December 31, 2024, resulting in the recognition of a $204 thousand loss. There were no sales of repossessed assets during the twelve months ended December 31, 2023.
FDIC assessment expense decreased in 2024 reflecting an improvement in the financial ratios portion of the assessment rate, largely due to the decline in the one-year asset growth factor.
Computer software expense decreased during 2024 over 2023, largely due to the discontinuation of new marine lending subsequent to August 2023, including its loan software platform.
Professional fees decreased during 2024. There are several factors that contributed to the decrease, primarily legal and professional expenses related to the marine lending business transaction and legal fees for the ESOP termination and establishment of a new stock incentive plan that were recognized during 2023.
Other operating expenses decreased during 2024. The largest driver of the decrease was due to the workforce reduction described above, which included a change in control agreement, and sales and travel expenses in 2023. Additional year-over-year decreases reflect the Company's focus on expense control measures, as well as the impact of the adoption of ASU 2023-02 to account for its investments in low-income residential rental properties under the proportional amortization method effective January 1, 2024. Upon adoption of this accounting method, amortization expense is no longer recorded in other operating expenses, rather as an adjustment to income tax expense. These decreases were partially offset by increases in loan servicing and collections expenses.
The efficiency ratio of the Company was 75.08% and 81.55% for 2024 and 2023, respectively. The improvement in the efficiency ratio during 2024 reflects an increase in noninterest income, coupled with lower noninterest expenses. Noninterest expenses during the twelve months ended December 31, 2023 included one-time expenses of $1.0 million related to the sale of the marine finance assets during the third quarter of 2023. Excluding these expenses, the efficiency ratio for 2023 would have been 80.00%. 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.
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The calculation of the efficiency ratio for the twelve months ended December 31, 2024 and 2023 was as follows:
December 31,
(in thousands)
Summary of Operating Results:
Less: Loss (Gain) on other real estate owned and repossessed assets 204 (7 )
Adjusted noninterest expenses (non-GAAP) $ 51,128 $ 52,761
Less: Gain on the sale of marine finance assets — 435
Less: Gain on the sale and disposal of premises and equipment 3,863 14
Less: Life insurance proceeds 935 —
Adjusted noninterest income (non-GAAP) $ 16,759 $ 14,331
Tax equivalent adjustment (1) 114 108
(1)
Includes tax-equivalent adjustments on loans and securities using the federal statutory tax rate of 21%.
Income Taxes
Income tax expense was $3.6 million and $1.3 million for the years ended December 31, 2024 and 2023, respectively. These amounts correspond to an effective tax rate of 18.82% and 12.00% for 2024 and 2023, respectively. The effective tax rate is below the statutory rate of 21%, due primarily to the recognition of tax-exempt life insurance income, qualified rehabilitation credits and tax credits on qualified affordable housing project investments as discussed in Note 25 to the Consolidated Financial Statements. During both 2024 and 2023, qualified rehabilitation projects were completed and the corresponding tax credits were finalized with the total amount of credits to be received determined and certified. The effective tax rate is also impacted by tax-exempt income on investment securities and loans. 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 2024 and 2023.
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 operations for the community banking business segment for the twelve months ended December 31, 2024 and 2023.
December 31,
(dollars in thousands) 2024 2023 $ Change % Change
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Gain on sales of loans increased $1.0 million, or 91.67%, from 2023, largely reflecting an increase in sales of SBA loans. See further discussion of gain on sales of loans under the caption "Noninterest Income" above.
Other noninterest income for the twelve months ended December 31, 2024 was up by $6.4 million, or 87.70% compared to the same period in 2023 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.
The following table presents a summarized statement of operations for the marine lending segment for the twelve months ended December 31, 2024 and 2023.
December 31,
(dollars in thousands) 2024 2023 $ Change % Change
Gain on sales of loans — 311 (311 ) NM
Other noninterest income — 1,078 (1,078 ) NM
NM - Not Meaningful
On August 23, 2023, the Company completed a sale of specific assets from its marine lending segment. As part of the sale, the Company sold its interest in marine vessel floor plan loans totaling $52.8 million, its rights to service loans that had been sold to secondary market investors prior to the date of sale (valued at $595 thousand on balance sheet prior to sale), and other assets that were not individually significant. The Company received total consideration, net of selling expenses, of $53.5 million and recognized a gain of $435 thousand. As part of the sale, the Company reduced its workforce associated with the marine lending division, as it ceased accepting new marine lending business. Subsequent to the sale of these assets, the Company retained ownership of approximately $260.5 million 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.
Marine Lending net revenues declined $4.1 million, or 37.14%, for the twelve months ended December 31, 2024 compared to the twelve months ended December 31, 2023 due to pay downs in the portfolio, which are not being replaced with new loan originations. The average balance of the marine loan portfolio was $239.9 million for the twelve months ended December 31, 2024, a decline of $33.9 million, compared to $273.8 million for the twelve months ended December 31, 2023. Additionally, there were no marine loan sales during 2024.
This decline was mostly offset by a decrease in noninterest expense due to the reduction in its workforce in August 2023. Noninterest expenses for twelve months ended December 31, 2024 primarily reflect servicing and collections expenses.
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The following table presents a summarized statement of operations for the wealth management business segment for the twelve months ended December 31, 2024 and 2023.
December 31,
(dollars in thousands) 2024 2023 $ Change % Change
Net Interest Income $ — $ — $ — — %
Gain on sales of loans — — — — %
Provision for credit losses — — —
Wealth Management's net revenues were up $698 thousand, or 14.17%, for the twelve months ended December 31, 2024 compared to the twelve months ended December 31, 2023, 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 2024 primarily reflecting increases in salaries, commission and annual incentive plan expenses.
FINANCIAL CONDITION
Assets, Liabilities and Shareholders’ Equity
The Company’s total assets were $1.87 billion at December 31, 2024, an increase of $40.6 million or 2.22% from $1.83 billion at December 31, 2023. Securities decreased $16.1 million or 11.72% between 2023 and 2024. Loans, net of the allowance for credit losses, increased by $3.8 million or 0.26% from 2023 to 2024. Total liabilities were $1.75 billion at December 31, 2024, compared to $1.72 billion at December 31, 2023. Total shareholders’ equity at year end 2024 and 2023 was $119.0 million and $108.4 million, respectively.
Securities
Total securities, excluding restricted stock, were $121.3 million and $137.4 million for the years ended December 31, 2024 and December 31, 2023, respectively. The Company purchased U.S. Treasuries totaling $5.0 million during 2024. The Company had $20.0 million in maturities, calls, and principal repayments on securities during 2024. This amount includes $1.1 million, or 5.25%, in obligations of U.S. government corporations and agencies, $5.0 million, or 24.92%, in U.S. Treasuries, $12.7 million, or 63.49%, in mortgage-backed securities, and $1.3 million, or 6.34%, in obligations of states and political subdivisions. Note 2 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio as of December 31, 2024 and 2023.
The ability to dispose of available for sale securities prior to maturity provides management more options to react to future rate changes and provides more liquidity, when needed, to meet short-term obligations. The Company had net unrealized losses on available for sale securities of $23.6 million and $22.8 million at December 31, 2024 and 2023, respectively. 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).
In conjunction with its capital offering completed in February of 2025, the Company executed on its strategy to restructure its investment securities portfolio. In March of 2025, approximately $100 million available for sale securities, with a weighted average yield of 1.72%, have been sold and resulting sales proceeds have been used to purchase approximately $72 million in available for sale securities with a weighted average yield of 4.70%. The Company anticipates that a pre-tax loss of approximately $12.6 million resulting from the sales of the investment securities will be recognized in the first quarter of 2025.
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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, 2024. 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:
Mortgage-backed securities — % — % 1.07 % 1.76 % 1.73 %
Subordinated debt — % — % 4.28 % — % 4.28 %
(1)
Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 21%.
Loan Portfolio
The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Gross loans net of net deferred costs and premiums were $1.47 billion and $1.46 billion at December 31, 2024 and 2023, respectively. This represents an increase of $4.4 million or 0.30% for 2024. The ratio of gross loans, net of deferred costs and premiums, to deposits decreased during the year from 97.10% to 93.14% at December 31, 2023 and December 31, 2024, respectively.
Loans secured by real estate were $1.10 billion, or 75.10%, and $1.04 billion, or 71.51%, of total loans at December 31, 2024 and 2023, respectively. This represents an increase of $56.3 million, or 5.41%, for 2024. Consumer installment loans were $31.0 million, or 2.12%, and $42.4 million, or 2.92%, of total loans at December 31, 2024 and 2023, respectively. This represents a decrease of $11.4 million, or 26.88%, for 2024. Commercial and industrial loans were $110.3 million, or 7.55%, and $107.8 million, or 7.41%, of total loans at December 31, 2024 and 2023, respectively. This represents an increase of $2.5 million, or 2.33%, for 2024. Marine loans were $210.1 million, or 14.38%, and $251.2 million, or 17.26%, of total loans at December 31, 2024 and 2023, respectively. All other loans were $12.2 million and $13.1 million at December 31, 2024 and 2023, respectively. This represents a decrease of $928 thousand, or 7.06%.
During the year ended December 31, 2024, loan growth was mainly concentrated in residential and commercial real estate loans, due largely to the continued expansion of the Bank's current market area. The decline in marine loans represents the normal runoff due to paydowns, payoffs and charge-offs as the Company is no longer originating new marine loans. On August 23, 2023, the Company completed a sale of specific assets from its marine lending segment. As part of the sale, the Company sold its interest in marine vessel floor plan loans totaling $52.8 million and reduced its workforce associated with the marine lending division as it ceased accepting new marine lending business. Subsequent to the sale of these assets, the Company retained ownership of marine vessel retail loans. 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 $620.7 million or 42.50% 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.
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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.
Loans risk rated as special mention, which exhibit negative trends and potential weaknesses, totaled $50.1 million at December 31, 2024 compared to $33.5 million at December 31, 2023. The increase in special mention loans of $16.6 million was primarily in the owner-occupied commercial real estate portfolio as loans were downgraded from pass as the result of not having current financial statement information available at their annual review. 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, totaled $4.5 million and $8.0 million at December 31, 2024 and 2023, respectively. Included in the December 31, 2024 classified balance of $4.5 million were current and accruing loans on the watch list totaling $2.4 million. All other loans were classified as pass, exhibiting acceptable history of profits, cash flow ability and liquidity.
There were $2.6 million in total non-performing assets, which consist of nonaccrual loans, loans 90 days or more past due and still accruing, other real estate owned, and repossessed assets at December 31, 2024. This is a decrease of $3.5 million when compared to the December 31, 2023 balance of $6.1 million. This decrease resulted mostly from a decrease in nonaccrual loans.
Nonaccrual loans were $2.1 million at December 31, 2024 and $5.6 million at the end of 2023. The gross amount of interest income that would have been recognized on nonaccrual loans was $81 thousand for 2024 and $140 thousand for 2023. None of this interest income was included in net income for 2024 or 2023. A total of 13 loans totaling $3.8 million were placed on nonaccrual during 2024, seven, of which, made up $2.0 million of the nonaccrual balance at December 31, 2024. Two relationships totaling $908 thousand, or 45.91%, of the loans placed on nonaccrual were added due to delinquent payments and required an allowance for credit losses of $248 thousand based on management's evaluation of the underlying collateral values. The remaining loans added to nonaccrual status during 2024 primarily consisted of four marine loans totaling $1.8 million. These marine loans were either repossessed or charged off as of December 31, 2024. In addition, of the $5.6 million nonaccrual balance at December 31, 2023, payoffs totaling $4.6 million were received, $808 thousand was charged off, $99 thousand was transferred to repossessed assets, and two loans totaling $50 thousand remained on nonaccrual status at December 31, 2024. Management evaluates the financial condition of these borrowers 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
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these nonaccrual loans. Nonaccrual loans that were individually evaluated for impairment at December 31, 2024 totaled $2.1 million, of which $903 thousand required a specific allocation of $248 thousand to be assigned.
Other real estate owned and repossessed assets increased from $304 thousand at December 31, 2023 to $514 thousand at December 31, 2024, consisting of repossessed assets. Three marine vessels and three commercial vehicles, were repossessed during 2024 and placed into repossessed assets. Sales of repossessed assets during 2024 included the three commercial vehicles and a marine vessel repossessed in 2023. A net loss of $204 thousand was recognized on the sale of repossessed assets for the twelve months ended December 31, 2024. There were no sales of repossessed assets in 2023.
There were no real estate properties that foreclosed or sold during 2024, while one property that foreclosed in 2022 was sold in 2023. 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 gain of $7 thousand was recognized on the sale of other real estate owned during the twelve months ended December 31, 2023.
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. The table titled “Nonperforming Assets and Credit Ratios” shows the amount of nonperforming assets and loans past due 90 days and accruing interest outstanding for the past two years. The table also shows the ratios for the allowance for credit losses on loans as a percentage of nonperforming assets and nonperforming assets as a percentage of loans outstanding and other real estate owned.
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.
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 two loan modifications to borrowers experiencing financial difficulty totaling $355 thousand during the year ended December 31, 2023 while no loans were modified during 2024.
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Nonperforming Assets and Credit Ratios
(dollars in thousands)
December 31,
Loans past due 90 days and accruing interest — 181
Other real estate owned and repossessed assets 514 304
Total nonperforming assets $ 2,586 $ 6,130
Allowance for credit losses on loans $ 15,027 $ 14,493
Allowance for credit losses on loans to nonperforming assets 581 % 236 %
Allowance for credit losses on loans to total loans 1.02 % 0.99 %
Allowance for credit losses on loans to nonaccrual loans 725 % 257 %
Nonaccrual loans to total loans 0.14 % 0.40 %
Other potential problem loans are 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, 2024, other potential problem loans totaled $2.4 million.
Allowance for Credit Losses on Loans
The allowance for credit losses on loans 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. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. Additional information on the purpose and the methods for measuring the allowance for credit losses on loans is discussed in the Critical Accounting Policies section above.
Charged-off loans were $2.8 million and $741 thousand for 2024 and 2023, respectively. Recoveries were $853 thousand and $298 thousand for 2024 and 2023, respectively. Net charge-offs were $2.0 million for 2024 and $443 thousand for 2023. The year over year increase in net charge-offs was primarily due to the marine portfolio, which had net charge-offs of $1.8 million during 2024, partially offset by a higher level of recoveries during 2024 over 2023. The increase in marine loan charge-offs of $1.7 million during 2024 was attributable to six loans, which is not believed to be a systemic performance issue or trend. The allowance for credit losses as a percentage of loans was 1.02% and 0.99% at the end of 2024 and 2023, respectively. The increase in the allowance percentage year over year was attributable to growth in the loan portfolio and the specific reserve allocation. The ratio of net charge-offs to average loans was 0.14% for 2024 and 0.03% for 2023.
The provision for credit losses for the years ended December 31, 2024 and 2023 was $2.6 million and $1.6 million, respectively. The provision for credit losses in 2024 and 2023 reflected the level of net charge-offs and the specific reserve allocation in addition to loan growth in the portfolio.
The table titled “Allocation of Allowance for Credit Losses on Loans” shows the amount of the allowance for credit losses which is allocated to the indicated loan categories, along with that category’s percentage of total loans, at December 31, 2024 and 2023. The amount of allowance for credit losses allocated to each loan category is based on the amount of delinquent loans in that loan category, the status of nonperforming assets in that loan category, the historical losses for that loan category, the evaluation of qualitative factors impacting the portfolio and the financial condition of certain borrowers
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whose financial conditional is monitored on a periodic basis. Management believes that the allowance for credit losses is adequate to absorb the current expected losses in the loan portfolio.
Analysis of Allowance for Credit Losses
(dollars in thousands)
Years Ended December 31,
Allocation of Allowance for Credit Losses on Loans
(dollars in thousands)
Deposits
Total deposits were $1.58 billion and $1.51 billion at December 31, 2024 and 2023, respectively, which represents an increase of $68.8 million or 4.57% during 2024. The table titled “Average Deposits and Rates Paid” shows the average deposit balances and average rates paid for 2024 and 2023.
Average Deposits and Rates Paid
(dollars in thousands)
Years Ended December 31,
Amount Rate Amount Rate
Interest-bearing:
Time deposits:
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Noninterest-bearing demand deposits, which are comprised of checking accounts, decreased $30.4 million, or 6.97%, from $436.6 million at December 31, 2023 to $406.2 million at December 31, 2024. Interest-bearing deposits, which include NOW accounts, money market accounts, regular savings accounts and time deposits, increased $99.3 million, or 9.28%, from $1.07 billion at December 31, 2023 to $1.17 billion at December 31, 2024. Total money market account balances increased $5.5 million, or 2.08%, from $263.6 million at December 31, 2023 to $269.1 million at December 31, 2024 and regular savings accounts decreased $8.1 million, or 5.79%, from $139.5 million at December 31, 2023 to $131.4 million at December 31, 2024. Reciprocal deposit accounts balances (included in total money market account and NOW account balances) increased from $115.7 million to $152.0 million at December 31, 2023 and December 31, 2024, respectively. The reciprocal deposits balance at December 31, 2024 and December 31, 2023 consists of money market and NOW accounts obtained through the ICS network. The growth in deposits was mainly organic growth as we continue to expand and grow into newer market areas. Brokered accounts, reported within total NOW accounts, increased $5.6 million to $41.6 million at December 31, 2024 compared to $36.0 million at December 31, 2023. Time deposits increased $76.3 million, or 18.48%, from $413.3 million at December 31, 2023 to $489.6 million at December 31, 2024, reflecting the Company’s pricing strategy for retention of maturing time deposits and new account acquisition. Total estimated uninsured deposits at December 31, 2024 and December 31, 2023 were $388.2 million and $389.3 million, respectively.
The Company attempts to fund asset growth with deposit accounts and focus upon core deposit growth as its primary source of funding. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, and time deposits of less than $250,000. Core deposits totaled $1.30 billion, or 82.49%, and $1.26 billion, or 85.54%, of total deposits at December 31, 2024 and 2023, respectively.
The table titled “Maturities of Certificates of Deposit and Other Time Deposits of $250,000 and Greater” shows the amount of certificates of deposit of $250,000 and more maturing within the time periods indicated at December 31, 2024. The total amount maturing within one year is $186.3 million, or 95.14%, of the total amount outstanding.
Maturities of Certificates of Deposit and Other Time Deposits of $250,000 and Greater
(dollars in thousands)
The table titled “Certificates of Deposit and Other Time Deposits Otherwise Uninsured" shows the balances of certificates of deposit that were in excess of the FDIC insurance limit at December 31, 2024. The total amount maturing within one year is $125.0 million, or 96.51%, of the total amount outstanding.
Certificates of Deposit and Other Time Deposits Otherwise Uninsured
(dollars in thousands)
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CAPITAL RESOURCES
Total shareholders’ equity on December 31, 2024 was $119.0 million, reflecting a percentage of total assets of 6.38% as compared to $108.4 million and 5.94% at December 31, 2023. Our common stock’s book value per share increased $2.74, or 8.90%, to $33.52 per share at December 31, 2024 from $30.78 per share at December 31, 2023. During 2024, the Company paid $1.21 per share in dividends as compared to $1.20 per share for 2023. The Company has a Dividend Investment Plan that allows participating shareholders to reinvest the dividends in Company stock. During 2024, the Company purchased 7,868 shares of its Common Stock under its stock repurchase program at an average price of $30.08. During 2023, the Company purchased 8,531 shares of its Common Stock under its stock repurchase program at an average price of $35.34. At December 31, 2024, and 2023, Management believes the Bank met all capital adequacy requirements to which it was subject. Additionally, at December 31, 2024, the most recent notification from the Federal Reserve categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category.
Federal regulatory risk-based capital guidelines require percentages to be applied to various assets, including off-balance sheet assets, based on their perceived risk in order to calculate risk-weighted assets. Tier 1 capital consists of total shareholders’ equity plus qualifying trust preferred securities outstanding less net unrealized gains and losses on available for sale securities, goodwill and other intangible assets. Total capital is comprised of Tier 1 capital plus the allowable portion of the allowance for credit losses and any excess trust preferred securities that do not qualify as Tier 1 capital.
Effective January 1, 2015, the Federal Reserve issued final risk-based capital rules to align with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. In addition, a capital conservation buffer requirement of 2.5% was effective January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with any ratio (excluding the leverage ratio) above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The capital conservation buffer rule requires the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
In 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the Community Bank Leverage Ratio framework (CBLR), for qualifying community banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule became effective on January 1, 2020. The CBLR removes the requirement for qualifying banking organizations to calculate and report risk-based capital but rather only requires a Tier 1 to average assets (leverage) ratio. Qualifying banking organizations that elect to use the CBLR and that maintain a leverage ratio of greater than the required minimum will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. Under the regulatory capital rules, an institution electing to use the CBLR must maintain a minimum leverage ratio of 9%. Qualifying institutions are allowed a two-quarter grace period to correct a ratio that falls below the required amount, provided the institution maintains a ratio of more than 8%. At December 31, 2022, the Bank was a qualifying institution and elected to utilize the CBLR to measure capital adequacy. During 2023, the Bank fell below the minimum ratio of 9% and therefore, the amounts and ratios at December 31, 2024 and 2023 are presented using the risk-based capital framework and not the CLBR. The Bank's leverage ratio was 8.79% and 8.48% at December 31, 2024 and 2023, respectively.
Pursuant to the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the Company, are not subject to consolidated regulatory capital requirements.
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Analysis of Bank Capital
(dollars in thousands)
Tier 1 Capital:
Nonmortgage servicing assets (326 ) (153 )
Tier 2 Capital:
Capital Ratios:
Common equity Tier 1 capital ratio 11.04 % 10.27 %
Tier 1 risk-based capital ratio 11.04 % 10.27 %
Total risk-based capital ratio 12.00 % 11.16 %
Note 15 to the Consolidated Financial Statements provides additional discussion and analysis of regulatory capital requirements.
On February 10, 2025, the Company completed a public stock offering and issued 1,562,500 shares of its common stock, $2.50 par value per share. On February 13, 2025, an additional 234,375 shares were issued upon exercise of the underwriters overallotment option. The public offering price was $32.00. The expected proceeds to the Company, after deducting the underwriting discount and commissions but before deducting operating expenses payable by the Company, are approximately $53.8 million. The offering of common stock was made pursuant to a registration statement on Form S-3 (File No. 333-269804) that was declared effective by the SEC on February 28, 2023. A final prospectus supplement dated February 6, 2025 and accompanying prospectus dated February 28, 2023, which form part of the registration statement have been filed with the SEC.
LIQUIDITY
Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, unpledged securities classified as available for sale, and loans maturing within one year. At December 31, 2024 liquid assets totaled $335.9 million as compared to $367.7 million at December 31, 2023. These amounts represent 19.22% and 21.41% of total liabilities at December 31, 2024 and 2023, respectively. Securities provide a constant source of liquidity through paydowns and maturities. Also, the Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity. The Bank’s membership with the Federal Home Loan Bank of Atlanta also provides a source of borrowings with numerous rate and term structures. At December 31, 2024 and 2023, the Company had remaining credit availability in the amounts of $254.3 million and $169.6 million, respectively, with the Federal Home Loan Bank of Atlanta. The Company also had unused lines of credit with financial institutions of $78.0 million at December 31, 2024 and 2023. Beginning in the third quarter of 2024, the Company pledged available for sale mortgage-backed securities with the Federal Reserve Bank discount window, which reduced its liquid assets and reinforced its ability to obtain liquidity from the Federal Reserve Bank discount window. At December 31, 2024 the Company had $74.0 million in funds available through the discount window. The Company’s senior management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. As a result
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of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Note 18 to the Consolidated Financial Statements provides information about the off-balance sheet arrangements which arise through the lending activities of the Company. These arrangements increase the degree of both credit and interest rate risk beyond that which is recognized through the financial assets and liabilities on the consolidated balance sheets.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As the holding company of the Bank, the Company’s primary component of market risk is interest rate volatility. Interest rate fluctuations will impact the amount of interest income and expense the Bank receives or pays on almost all of its assets and liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those which have a very short term until maturity. Interest rate risk exposure of the Company is, therefore, experienced at the Bank level. Asset / liability management attempts to maximize the net interest income of the Company by adjusting the volume and price of rate sensitive assets and liabilities. The Company does not subject itself to foreign currency exchange or commodity price risk due to prohibition through policy and the current nature of operations. Derivative instruments and hedging activities of the Company have historically been minimal.
The Bank’s interest rate management strategy is designed to maximize net interest income and preserve the capital of the Company. The Bank’s financial instruments are periodically subjected to various simulations whose results are discussed in the following paragraphs. These models are based on actual data from the Bank’s financial statements and assumptions about the performance of certain financial instruments. Prepayment assumptions are applied to all mortgage related assets, which includes real estate loans and mortgage-backed securities. Prepayment assumptions are based on a median rate at which principal payments are received on these assets over their contractual term. The rate of principal payback is assumed to increase when rates fall and decrease when rates rise. Term assumptions are applied to non-maturity deposits, which includes demand deposits, NOW accounts, savings accounts, and money market accounts. Demand deposits and NOW accounts are generally assumed to have a term greater than one year since the total amount outstanding does not fluctuate with changes in interest rates. Savings accounts and money market accounts are assumed to be more interest rate sensitive, therefore, a majority of the amount outstanding is assumed to have a term of less than one year.
The simulation analysis evaluates the potential effect of upward and downward changes in market interest rates on future net interest income. The Bank views the immediate shock of rates as a more effective measure of interest rate risk exposure. The analysis assesses the impact on net interest income over a 12 month period after an immediate change or “shock” in rates, of 100 basis points up to 400 basis points. The simulation analysis results are presented in the table below:
Year 1 Net Interest Income Simulation
(dollars in thousands)
Change inNet Interest Income
Assumed Market Interest Rate Shock Dollars Percent Change
The Bank uses simulation analysis to assess earnings at risk and economic value of equity ("EVE") analysis to assess economic value at risk. This analysis method allows management to regularly monitor the direction and magnitude of the Bank’s interest rate risk exposure. The modeling techniques cannot be measured with complete precision. Maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturity deposit sensitivity and loan and deposit pricing are key assumptions used in acquiring this analysis. There is a realm of uncertainty in using these assumptions but the analysis does provide the Bank with the ability to estimate interest rate risk position over time.
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The table below examines the EVE. The EVE of the balance sheet is defined as the discounted present value of expected asset cash flows minus the discounted present value of the expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The model indicates a more significant exposure to falling interest rates. These results are driven primarily by the relative change in value of the Bank’s core deposit base as rates rise.
Static EVE Change
(dollars in thousands)
Change in EVE
Assumed Market Interest Rate Shift Dollars Percent Change
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Eagle Financial Services, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Eagle Financial Services, Inc. and its subsidiary (the Company) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses – Collectively Evaluated Loans
As further described in Notes 1 and 4 to the consolidated financial statements, the allowance for credit losses on loans (ACLL) is a valuation allowance that represents management’s best estimate of expected credit losses on loans measured at amortized cost considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms. Loans which share common risk characteristics are pooled and collectively evaluated by the Company using historical data, as well as assessments of current conditions and reasonable and supportable forecasts of future conditions. The Company’s ACLL related to collectively evaluated loans represented $14.8 million of the total recorded ACLL of $15.0 million as of December 31, 2024. The collectively evaluated ACLL consists of quantitative and qualitative components.
The quantitative component consists of loss estimates derived from the Company’s application of its cohort methodology, which identifies and tracks respective losses generated by specific cohorts (or pools) of loans over their remaining lives. These estimates consider large amounts of data over an extended period of time. In addition to the quantitative component, the collectively evaluated ACL also includes a qualitative component which aggregates management’s assessment of available information relevant to assessing collectability that is not captured in the quantitative loss estimation process. This evaluation
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is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Management exercised significant judgment when estimating the ACL on collectively evaluated loans. We identified the estimation of the collectively evaluated ACL as a critical audit matter as auditing the collectively evaluated ACL involved significant audit effort and judgment in evaluating management’s assessment of the inherently subjective estimates.
How We Addressed the Matter in Our Audit
The primary audit procedures we performed to address this critical audit matter included:
•
Obtaining an understanding of the Company’s processes for determining its ACL on collectively evaluated loans, including the underlying methodology and significant inputs to the calculation.
•
Substantively testing management’s process for measuring the collectively evaluated ACL, including:
•
Evaluating the conceptual soundness of the methodology for determining the collectively evaluated ACL.
•
Testing the completeness and accuracy of data used in developing the quantitative loss calculations.
•
Evaluating the pools of collectively evaluated and individually evaluated loans for completeness.
•
Evaluating management’s determination of qualitative adjustments, including the data on which the qualitative adjustments were based as well as the relative magnitude of the adjustments.
•
Testing the mathematical accuracy of the ACL for collectively evaluated loans, including the calculations underlying the quantitative component as well as application of qualitative factors to the collectively evaluated loan balances.
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Company's auditor since 2015.
Winchester, Virginia
March 31, 2025
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EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2024 and 2023
(dollars in thousands, except per share amounts)
Assets
Interest-bearing deposits with other institutions 162,595 96,649
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Federal Home Loan Bank advances, short-term 25,000 20,000
Federal Home Loan Bank advances, long-term 95,000 145,000
Subordinated debt, net of unamortized issuance costs 29,512 29,444
Commitments and contingencies
Shareholders’ Equity
Preferred stock, $10 par value; 500,000 shares authorized and unissued $ — $ —
Accumulated other comprehensive loss (18,640 ) (18,006 )
See Notes to Consolidated Financial Statements
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EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 2024 and 2023
(dollars in thousands, except per share amounts)
Interest and Dividend Income
Interest and dividends on securities:
Interest income exempt from federal income taxes 16 16
Interest on deposits in banks 5,851 3,733
Interest on federal funds sold 123 160
Total interest and dividend income $ 91,321 $ 83,093
Interest Expense
Interest on federal funds purchased — 70
Interest on Federal Home Loan Bank advances 6,823 7,720
Interest on subordinated debt 1,417 1,417
Net interest income after provision for credit losses $ 48,676 $ 48,607
Noninterest Income
Service charges on deposit accounts 1,936 1,810
Other service charges and fees 4,179 4,413
Gain on the sale of marine finance assets — 435
Gain on the sale and disposal of bank premises and equipment 3,863 14
Small business investment company income 1,357 385
Bank owned life insurance income 1,981 713
Noninterest Expenses
Advertising and marketing expenses 1,038 1,157
Stationery and supplies 145 191
Other real estate owned expense — 5
(Gain) on other real estate owned — (7 )
Loss on sale of repossessed assets 204 —
Earnings Per Share
Net income per common share, basic $ 4.32 $ 2.66
Net income per common share, diluted $ 4.32 $ 2.66
See Notes to Consolidated Financial Statements
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EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2024 and 2023
(dollars in thousands)
Other comprehensive (loss) income:
Total other comprehensive (loss) income (634 ) 2,440
See Notes to Consolidated Financial Statements
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EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2024 and 2023
(dollars in thousands, except per share amounts)
Cumulative effect adjustment for CECL (1,961 ) (1,961 )
Restricted stock awards, stock incentive plan (17,402 shares) 43 (43 ) —
Stock-based compensation expense 1,213 1,213
Issuance of common stock, employee benefit plan (3,803 shares) 9 123 132
Repurchase and retirement of common stock (8,531 shares) (21 ) (281 ) (302 )
Cumulative effect adjustment for adoption of ASU 2023-02 (477 ) (477 )
Other comprehensive (loss) (634 ) (634 )
Restricted stock awards, stock incentive plan (29,426 shares) 74 (74 ) —
Stock-based compensation expense 912 912
Repurchase and retirement of common stock (7,868 shares) (20 ) (217 ) (237 )
See Notes to Consolidated Financial Statements
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EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2024 and 2023
(dollars in thousands)
Cash Flows from Operating Activities
Amortization of other assets 564 988
Origination of loans held for sale (74,216 ) (41,606 )
Proceeds from sale of loans held for sale 75,358 41,224
Net (gain) on sales of loans (2,141 ) (1,428 )
(Gain) on other real estate owned — (7 )
(Gain) on the sale of marine finance assets — (435 )
(Gain) on the sale and disposal of premises and equipment (3,863 ) (14 )
Loss on the sale of repossessed assets 204 —
Amortization of subordinated debt issuance costs 67 67
Stock-based compensation expense 912 1,213
Premium amortization on securities, net 258 335
Bank owned life insurance income (1,074 ) (713 )
(Gain) on bank-owed life insurance settlement (907 ) —
Deferred tax accrual (benefit) 600 (1,509 )
Changes in assets and liabilities:
Decrease (increase) in other assets 2,770 (4,583 )
Increase in other liabilities 1,357 1,335
Net cash provided by operating activities $ 18,762 $ 6,875
Cash Flows from Investing Activities
Purchases of securities available for sale (4,983 ) —
Proceeds from the sale of restricted investments 3,851 4,975
Purchase of restricted investments (1,840 ) (5,310 )
Proceeds from bank-owned life insurance settlement 935 —
Proceeds from the sale of bank premises and equipment 7,672 39
Purchases of bank premises and equipment (1,019 ) (1,071 )
Purchase of bank-owned life insurance — (5,000 )
Proceeds from the sale of other real estate owned — 115
Proceeds from the sale of repossessed assets 112 —
Changes in collateral posted with other financial institutions, net (400 ) —
Proceeds from sale of marine finance assets — 53,987
Proceeds from sales of loans — 51,871
Origination of loans, net of prinicpal collected (6,964 ) (243,441 )
Funding of capital commitments related to other investments (664 ) (922 )
Net cash provided by (used in) investing activities $ 16,746 $ (130,284 )
Cash Flows from Financing Activities
Net (decrease) in federal funds purchased — (32,980 )
Issuance of common stock, employee benefit plan — 132
Repurchase and retirement of common stock (237 ) (302 )
Net cash provided by financing activities $ 19,298 $ 194,868
Increase in cash and cash equivalents $ 54,806 $ 71,459
Cash and Cash Equivalents
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized (loss) gain on securities available for sale $ (791 ) $ 3,095
Minimum postretirement liability adjustment $ (11 ) $ (8 )
Repossessed assets acquired in settlement of loans $ 525 $ 304
Lease liabilities arising from right-of-use assets $ 5,466 $ —
See Notes to Consolidated Financial Statements
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NOTE 1. Nature of Banking Activities and Significant Accounting Policies
Eagle Financial Services, Inc. (the “Company” or “Corporation”) and Bank of Clarke (the “Bank”) make commercial, financial, agricultural, residential and consumer loans to customers in Virginia, Maryland and the Eastern Panhandle of West Virginia. The loan portfolio is well diversified and generally is collateralized by assets of the customers. The loans are expected to be repaid from cash flows or proceeds from the sale of selected assets of the borrowers. In addition, the Bank of Clarke Wealth Management Division, a division of the Bank, provides both a full-service Trust Department and a separate brokerage area.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to accepted practices within the banking industry.
Principles of Consolidation
The Company owns 100% of the Bank. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated.
Wealth Management Assets
The Bank of Clarke Wealth Management Division provides both a full-service Trust Department and a separate brokerage area. The Trust Department features a full range of fiduciary expertise, including service as Trustee of personal trusts, service as guardian or conservator by court appointment, fiduciary investment management, estate settlement, and agency for trustees. The brokerage area offers advisory services and a broad selection of investment products, including Individual Retirement Accounts, mutual funds, tax-deferred annuities, 529 college savings plans, life insurance, long term care insurance, brokerage certificates of deposit, among other brokerage services. Securities and other property held by the Bank of Clarke Wealth Management Division in a fiduciary or agency capacity are not assets of the Bank and are not included in the accompanying consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for credit losses on loans.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and interest bearing deposits. Generally, federal funds are purchased and sold for one-day periods.
Securities
The Company determines the appropriate classification of securities at the time of purchase. Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Debt securities not classified as held to maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
Purchase premiums are recognized in interest income using the effective interest rate method over the period from purchase to maturity or, for callable securities, the earliest call date, and purchase discounts are recognized in the same manner from purchase to maturity.
The Bank is required to maintain an investment in the capital stock of certain correspondent banks. No readily available market exists for this stock and it has no quoted market value. The investment in these securities is recorded at cost and they are reported on the Company’s consolidated balance sheet as restricted investments.
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Allowance for Credit Losses on Securities
For available for sale debt securities in an unrealized loss position, management first assesses whether the Company intends to sell, or if it is likely that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through a provision for credit losses charge to earnings. For debt securities available for sale that do not meet either of these criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers both quantitative and qualitative factors,
A substantial portion of the available for sale debt securities held by the Company are obligations issued by U.S. government agency and U.S. government-sponsored enterprises, including mortgage-backed securities. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies and have a long history of no credit losses. For these securities, management takes into consideration the long history of no credit losses and other factors to assess the risk of nonpayment even if the U.S. government were to default. As such, the Company utilized a zero credit loss estimate for these securities.
For available for sale debt securities that are not guaranteed by U.S. government agencies and U.S. government-sponsored enterprises, management utilizes a third-party credit modeling tool based on observable market data, which assists management in identifying any potential credit risk associated with these available for sale debt securities. Qualitative factors are also considered, including the extent to which fair value is less than amortized cost, changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If a credit loss exists, an allowance for credit losses is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the security's amortized cost basis exceeds its fair value.
Changes in the allowance for credit losses are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value of debt securities available for sale not resulting from credit losses are recorded in other comprehensive income (loss).
Loans Held for Sale
Mortgage loans originated with the intent to sell in the secondary market are classified as loans held for sale and carried at the lower of cost or fair value as determined by commitments from investors. Mortgage loans that are sold in the secondary market are sold servicing released. The Company may also classify other loans as loans held for sale as part of its ongoing portfolio management strategies. Such other loans are generally not originated with the intent to sell. Once a decision is made to sell loans not previously classified as held for sale, such loans are transferred into the held-for-sale classification and carried at the lower of cost or fair value. In 2024, the Company sold non-mortgage loans totaling approximately $14.3 million as part of its portfolio management strategies that were previously classified as held for investment. Gains and losses on sales of loans are recorded based on the differential between the sales proceeds and carrying value of the underlying loans.
Loan Servicing Rights
Loan servicing rights are separate from the underlying loan and may be retained or sold by the Company when the related loan is sold. In connection with sale of certain loans, the Company has recognized assets for retained loan servicing rights. Capitalized loan servicing rights represent the economic benefits associated with contracts to service loans under which the benefits of servicing are expected to more than adequately compensate the Company for performing the servicing. Assets for retained loan servicing rights are initially recognized as a component of the gain recognized on the sale of the underlying loan(s) and are recorded at fair value on the consolidated balance sheets. Loan servicing rights are subsequently accounted for using the amortization method. The amortization method requires the servicing assets to be amortized in proportion to and over the period of estimated net servicing income. Additionally, the recorded balances are evaluated for impairment each reporting period and are reported at the lower of amortized cost or fair value. Assets for loan servicing rights are recorded in other assets in the consolidated balance sheets. Servicing fee income, net of amortization and impairment, if any, is reported in other service charges and fees in the consolidated statements of income.
Loans Held for Investment
The Company makes mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout the Counties of Clarke, Frederick, Loudoun and Fairfax, Virginia as well as the Towns of Leesburg and Purcellville and the Cities of Winchester and Frederick, Maryland. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.
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Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the charge-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for credit losses. The Company has elected to exclude accrued interest receivable from the amortized cost basis. Accrued interest totaled $4.8 million and $4.6 million at December 31, 2024 and 2023, and is included in the other assets line item in the Consolidated Balance Sheets.
Interest income is accrued on the unpaid principal balance. Loan fees collected and certain costs incurred related to loan originations are deferred and amortized as an adjustment to interest income over the life of the related loans. Deferred fees and costs are recorded as an adjustment to interest income using a method that approximates a constant yield.
A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest income. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across our loan portfolio.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. All payments, including any interest collected, on these loans are accounted for on the cash-basis or cost-recovery method and applied to principal, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.
Loan Modifications
The Company accounts for loan modifications to borrowers experiencing financial difficulty in accordance with Accounting Standards Update ("ASU") No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.”
Modifications made to loans are considered for disclosure under the guidance in ASU 2022-02 if a borrower is experiencing financial difficulty, if the modification is in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension (or a combination thereof). 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. If a loan was accruing prior to being modified and if the Company concludes that the borrower is able to make such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on accrual status. If a loan was on non-accrual status at the time of the modification, the loan will remain on non-accrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above.
Risks by Loan Portfolio Segment
One-to-Four-Family Residential Real Estate Lending
Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. As part of the application process, information is gathered concerning income, employment and credit history of the applicant. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Directors Loan Committee.
Commercial Real Estate Lending
Commercial real estate lending entails significant additional risk as compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or the economy, in general.
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Construction and Land Development Lending
There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of the estimated appraised value of the finished home or other real estate property.
Commercial and Industrial Lending
Commercial business loans generally have more risk than residential mortgage loans, but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of the borrower. Commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as accounts receivable, equipment, inventory and boats. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.
Consumer Lending
Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. A portion of the Company’s consumer loans are also secured by boats. In such cases, any repossessed collateral on a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation.
Marine Lending
The Bank’s marine loan portfolio is comprised of retail loans originated through August 2023. The Company ceased accepting new marine lending business and expects to hold the retained outstanding loans until they are ultimately repaid.
The Company’s relationships were limited to well established dealers of global premium brand manufacturers, with the top three manufacturer customers have been in business between 30 and 100 years. Retail loans were generally limited to premium manufactures 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.
Allowance for Credit Losses on Loans
The allowance for credit losses is established through charges to earnings in the form of a provision for credit losses. The allowance for credit losses is also increased by recoveries of amounts previously charged-off and is reduced by charge-offs on loans. Loan charge-offs are recognized as 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. Full or partial charge-offs on collateral dependent individually analyzed loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.
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. No allowance for credit losses is recorded on accrued interest receivable and amount written-off are reversed by an adjustment to interest income. 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 cohort method identifies and captures the balances of pooled loans with similar risk characteristics, as a point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over their remaining lives. The method encompasses loan balances for as long as the loans are outstanding.
Management's estimate of the allowance for credit losses on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the loss estimation process. Factors considered by management include economic conditions including reasonable and supportable forecasts of economic
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conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances; ending policy and procedures; credit administration and lending staff; loan review; concentrations of credit and the value of underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
Loans that do not share common risk characteristics with other loans are evaluated individually and are not included in the collective analysis. The allowance for credit losses on loans that are individually evaluated may be estimated based on their expected cash flows, or, in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral or the fair value of collateral less estimated costs to sell.
Allowance for Credit Losses on Unfunded Commitments
The Company records a reserve, reported in other liabilities, for expected credit losses on commitments to extend credit that are not unconditionally cancelable by the Company. The reserve for unfunded commitments is measured based on the principles utilized in estimating the allowance for credit losses on loans and an estimate of the amount of unfunded commitments expected to be advanced. Changes in the reserve for unfunded commitments are recorded through the provision for credit losses. The reserve totaled $505 thousand and $479 thousand at December 31, 2024 and 2023, respectively. The Company recorded a provision of $26 thousand and $8 thousand for the twelve months ended December 31, 2024 and 2023. For the twelve months ended December 31, 2023, the Company also recorded an increase to the reserve of $406 thousand for the adoption of ASC 326.
Bank Premises and Equipment
Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range from 10 to 39 years for buildings and 3 to 10 years for furniture and equipment. Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation balances are cleared the differential between the proceeds, if any, and the carrying value is recorded as a gain or loss in the Company's results of operations.