UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-20146
EAGLE FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Virginia
54-1601306
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2 East Main Street
P.O. Box 391
Berryville, VA
22611
(Address of principal executive offices)
(Zip Code)
(540) 955-2510
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s Common Stock ($2.50 par value) outstanding as of August 8, 2024 was 3,550,580.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements:
Consolidated Balance Sheets at June 30, 2024 and December 31, 2023
1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2024 and 2023
2
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2024 and 2023
3
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023
4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023
5
Notes to Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
54
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
Legal Proceedings
55
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
56
Item 1. Financial Statements
Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
June 30, 2024
December 31, 2023
(Unaudited)
Assets
Cash and due from banks
$
15,202
15,417
Interest-bearing deposits with other institutions
45,977
96,649
Federal funds sold
62,476
26,287
Total cash and cash equivalents
123,655
138,353
Securities available for sale, at fair value, amortized cost of $153,250 and $160,251, respectively
129,489
137,443
Restricted investments, at cost
8,780
9,568
Loans held for sale
3,058
1,661
Loans
1,448,934
1,462,686
Allowance for credit losses
(15,014
)
(14,493
Net Loans
1,433,920
1,448,193
Bank premises and equipment, net
18,114
18,108
Bank owned life insurance
30,103
29,575
Other assets
43,286
42,696
Total assets
1,790,405
1,825,597
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand deposits
415,017
436,619
Savings and interest bearing demand deposits
647,358
656,439
Time deposits
426,209
413,264
Total deposits
1,488,584
1,506,322
Federal funds purchased
302
—
Federal Home Loan Bank advances, short-term
20,000
Federal Home Loan Bank advances, long-term
145,000
Subordinated debt, net of unamortized issuance costs
29,478
29,444
Other liabilities
15,926
16,452
Total liabilities
1,679,290
1,717,218
Commitments and contingencies
Shareholders’ Equity
Preferred stock, $10 par value; 500,000 shares authorized and unissued
Common stock, $2.50 par value; authorized 10,000,000 shares; issued and outstanding 2024, 3,556,844 including 74,216 shares of unvested restricted stock; issued and outstanding 2023, 3,520,894 including 56,914 shares of unvested restricted stock
8,707
8,660
Surplus
14,604
14,280
Retained earnings
106,567
103,445
Accumulated other comprehensive (loss)
(18,763
(18,006
Total shareholders’ equity
111,115
108,379
Total liabilities and shareholders’ equity
See Notes to Consolidated Financial Statements
Consolidated Statements of Income (Unaudited)
Three Months Ended
Six Months Ended
June 30,
2024
2023
Interest and Dividend Income
Interest and fees on loans
19,525
18,754
39,488
35,921
Interest and dividends on securities available for sale:
Taxable interest income
739
785
1,497
1,589
Interest income exempt from federal income taxes
8
9
Dividends
155
136
311
219
Interest on deposits in banks
1,258
656
2,249
1,146
Interest on federal funds sold
68
28
107
38
Total interest and dividend income
21,748
20,364
43,660
38,922
Interest Expense
Interest on deposits
7,515
5,535
14,939
8,994
Interest on federal funds purchased
70
Interest on Federal Home Loan Bank advances
1,712
2,032
3,422
4,063
Interest on subordinated debt
355
709
Total interest expense
9,582
7,922
19,070
13,836
Net interest income
12,166
12,442
24,590
25,086
Provision for Credit Losses
181
403
1,067
Net interest income after provision for credit losses
11,985
12,039
23,934
24,019
Noninterest Income
Wealth management fees
1,273
1,263
2,729
2,421
Service charges on deposit accounts
456
447
910
883
Other service charges and fees
1,164
1,135
2,133
2,182
(Loss) gain on the sale of bank premises and equipment
(11
7
Gain on sale of loans
492
192
653
648
Bank owned life insurance income
269
179
537
358
Other operating income
652
134
815
384
Total noninterest income
4,295
3,357
7,766
6,883
Noninterest Expenses
Salaries and employee benefits
7,353
7,561
14,538
14,859
Occupancy expenses
470
533
1,039
1,051
Equipment expenses
401
315
774
638
Advertising and marketing expenses
245
342
482
Stationery and supplies
32
78
ATM network fees
373
365
753
716
Other real estate owned expense
(Gain) on other real estate owned
(7
FDIC assessment
351
346
760
612
Computer software expense
221
281
454
591
Bank franchise tax
338
313
669
576
Professional fees
511
1,017
1,466
Data processing fees
558
478
1,123
880
Other operating expenses
1,657
1,612
3,222
3,238
Total noninterest expenses
12,510
12,955
24,887
25,341
Income before income taxes
3,770
2,441
6,813
5,561
Income Tax Expense
585
383
1,080
918
Net income
3,185
2,058
5,733
4,643
Earnings Per Share
Net income per common share, basic
0.89
0.58
1.61
1.32
Net income per common share, diluted
Consolidated Statements of Comprehensive Income
(dollars in thousands)
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities, net of deferred income tax of $280 and $(517) for the three months ended, and $(200) and $275 for the six months ended, respectively
1,054
(1,945
(753
1,035
Changes in benefit obligations and plan assets for post retirement benefit plans, net of reclassification adjustments, net of deferred income tax of $0 for the three months ended, and $1 and $(3) for the six months ended, respectively
(4
(5
Total other comprehensive income (loss)
(757
1,030
Total comprehensive income
4,239
113
4,976
5,673
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
Common Stock
RetainedEarnings
AccumulatedOtherComprehensive(Loss)
Total
December 31, 2022
8,629
13,268
100,278
(20,446
101,729
Cumulative effect adjustment for CECL
(1,961
2,585
Other comprehensive income
2,975
Vesting of restricted stock awards, stock incentive plan (12,749 shares)
31
(31
Stock-based compensation expense
317
Repurchase and retirement of common stock (3,590 shares)
(9
(119
(128
Dividends declared ($0.30 per share)
(1,057
March 31, 2023
8,651
13,435
99,845
(17,471
104,460
Other comprehensive (loss)
323
Issuance of common stock, employee benefit plan (3,803 shares)
10
123
133
(1,059
June 30, 2023
8,661
13,881
100,844
(19,416
103,970
Cumulative effect adjustment for adopton of ASU 2023-02
(477
2,548
(1,811
Vesting of restricted stock awards, stock incentive plan (23,557 shares)
59
(59
Repurchase and retirement of common stock (5,605 shares)
(14
(155
(169
(1,067
March 31, 2024
8,705
14,368
104,449
(19,817
107,705
Vesting of restricted stock awards, stock incentive plan (1,081 shares)
(3
249
Repurchase and retirement of common stock (385 shares)
(1
(10
Consolidated Statements of Cash Flows (Unaudited)
Cash Flows from Operating Activities
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation
498
Amortization of other assets
182
435
Origination of loans held for sale
(29,466
(11,490
Proceeds from sale of loans held for sale
28,722
8,409
Net (gain) on sales of loans
(653
(648
Provision for credit losses
Loss (gain) on the sale and disposal of premises and equipment
11
Amortization of subordinated debt issuance costs
551
640
Premium amortization on securities, net
138
185
Bank-owned life insurance income
(537
(357
(Gain) on bank-owned life insurance settlement
(254
Changes in assets and liabilities:
(Increase) in other assets
(967
(5,784
Increase in other liabilities
285
199
Net cash provided by (used in) operating activities
4,933
(2,189
Cash Flows from Investing Activities
Proceeds from maturities, calls, and principal payments of securities available for sale
6,863
7,345
Proceeds from the sale of restricted investments
1,425
3,788
Purchases of restricted investments
(637
(3,132
Proceeds of bank-owned life insurance settlement
263
Purchases of bank premises and equipment
(515
(516
Proceeds from the sale of bank premises and equipment
Proceeds from the sale of other real estate owned
115
Proceeds from the sale of repossessed assets
12
Proceeds from sales of loans
38,802
Origination of loans net of principal collected
13,372
(185,650
Funding of capital commitments related to other investments
(664
(435
Net cash provided by (used in) investing activities
20,119
(139,652
Cash Flows from Financing Activities
Net (decrease) in noninterest bearing demand deposits, savings, and interest bearing demand deposits
(30,683
(27,127
Net increase in time deposits
12,945
221,060
Net increase (decrease) in federal funds purchased
(32,980
Net (decrease) in short-term Federal Home Loan Bank advances
(20,000
(150,000
Advances of long-term Federal Home Loan Bank advances
Issuance of common stock, employee benefit plan
Repurchase and retirement of common stock
(180
Cash dividends paid
(2,134
(2,116
Net cash (used in) provided by financing activities
(39,750
153,842
(Decrease) increase in cash and cash equivalents
(14,698
12,001
Cash and Cash Equivalents
Beginning
66,894
Ending
78,895
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest
19,037
12,465
Income taxes
1,206
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized (loss) gain on securities available for sale
(953
1,310
Minimum postretirement liability adjustment
(8
Repossessed assets acquired in settlement of loans
111
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. General
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP.
In the opinion of management, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at June 30, 2024 and December 31, 2023, the results of operations and the changes in shareholders' equity for the three and six months ended June 30, 2024 and 2023, and cash flows for the six months ended June 30, 2024 and 2023. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Consolidated Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).
Eagle Financial Services, Inc. (the "Company") owns 100% of Bank of Clarke (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.
Certain amounts in the consolidated financial statements have been reclassified to conform to current year presentations. None of the reclassifications were of a material nature and they had no effect on prior year net income or shareholders' equity.
On January 1, 2024, the Company adopted Accounting Standards Update ("ASU") 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method," ("ASC 323"). These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The adoption resulted in an adjustment of $477 thousand, which reduced the investment balance and shareholders' equity. The Company invests in qualified affordable housing projects. The general purpose of these investments is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, provide tax credits and other tax benefits to investors, and to preserve and protect project assets.
NOTE 2. Stock-Based Compensation Plan
On May 16, 2023, the Company’s shareholders approved the 2023 Stock Incentive Plan which allows key employees and directors to increase their personal financial interest in the Company. The 2023 plan permits the issuance of incentive stock options and non-qualified stock options and the award of common stock, restricted stock, and stock units. The plan authorizes the issuance of up to 250,000 shares of common stock. The 2023 Stock Incentive Plan replaced the 2014 Stock Incentive Plan.
The Company periodically grants restricted stock to its directors, executive officers and certain non-executive officers. Restricted stock provides grantees with rights to shares of common stock upon completion of a service period or achievement of Company performance measures. During the restriction period, all shares are considered outstanding and dividends are paid to the grantee. Outside directors are periodically granted restricted shares which vest over a period of one year. Executive officers have been granted restricted shares which vest over a three year service period and restricted shares which vest based on meeting annual performance measures over a two year period. Certain non-executive officers also have been granted restricted shares which vest
over a three year service period. The Company recognizes compensation expense over the restricted period based on the fair value of the Company's stock on the grant date. The Company's policy is to recognize forfeitures as they occur. As of June 30, 2024, there was $1.1 million of unrecognized compensation cost related to nonvested restricted stock, with a weighted average remaining term of 2.05 years.
The following table presents restricted stock activity for the six months ended June 30, 2024 and 2023:
Shares
WeightedAverageGrant DateFair Value
Nonvested, beginning of period
56,914
35.06
38,780
33.47
Granted
41,940
30.00
37,941
36.60
Vested
(24,638
34.10
(12,749
32.33
Forfeited
Nonvested, end of period
74,216
32.46
63,972
35.55
NOTE 3. Earnings Per Common Share
Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Nonvested restricted shares are included in the weighted average number of common shares used to compute basic earnings per share because of dividend participation and voting rights. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The number of potential common shares is determined using the treasury method.
The following table shows the weighted average number of shares used in computing earnings per share for the three and six months ended June 30, 2024 and 2023. During 2024 and 2023, there were no potentially dilutive securities outstanding.
Average number of common shares outstanding used to calculate basic and diluted earnings per share
3,556,935
3,526,934
3,557,069
3,524,695
NOTE 4. Securities
Amortized costs and fair values of securities available for sale at June 30, 2024 and December 31, 2023 were as follows:
AmortizedCost
GrossUnrealizedGains
GrossUnrealized(Losses)
Fair Value
(in thousands)
Obligations of U.S. government corporations and agencies
8,959
(696
8,263
Mortgage-backed securities
133,819
(22,070
111,749
Obligations of states and political subdivisions
5,722
(347
5,375
Subordinated debt
4,750
4,102
153,250
(23,761
9,258
(667
8,591
140,052
(21,230
118,822
6,191
(261
5,931
(651
4,099
160,251
(22,809
The amortized cost and estimated fair value of securities at June 30, 2024, by the earlier of contractual maturity or expected maturity, are shown below. The Company has elected to exclude accrued interest receivable, totaling $379 thousand at June 30, 2024, from the amortized cost basis of securities. The deferred tax asset on the securities portfolio at June 30, 2024 and December 31, 2023 was $5.0 million and $4.8 million, respectively, and is included in Other Assets in the Consolidated Balance Sheets. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
Amortized Cost
Due in one year or less
800
799
Due after one year through five years
9,946
9,384
Due after five years through ten years
14,644
12,965
Due after ten years
127,860
106,341
There have been no sales of available for sale securities during the six months ended June 30, 2024 or 2023.
The fair value and gross unrealized losses for securities available for sale, totaled by the length of time that individual securities have been in a continuous gross unrealized loss position, at June 30, 2024 and December 31, 2023 were as follows:
Less than 12 months
12 months or more
GrossUnrealizedLosses
696
22,070
489
4,386
336
4,875
347
3,602
128,000
23,750
128,489
23,761
Gross Unrealized Losses
667
21,230
5,430
261
29
3,378
622
3,599
651
136,221
22,780
136,442
22,809
The reference point for determining when securities are in an unrealized loss position is month end. As such, it is possible that a security's market value exceeded its amortized cost on other days during the past twelve-month period.
There were 102 debt securities with a fair value below the amortized cost basis, totaling $128.5 million of aggregate fair value as of June 30, 2024. The Company concluded that a credit loss does not exist in its securities portfolio at June 30, 2024 based on the fact that (1) changes in fair value were caused by non-credit-related factors, primarily fluctuations in interest rates, (2) securities with unrealized losses had generally high credit quality, (3) the Company intends to hold these investments in debt securities to maturity and it is more-likely-than-not that the Company will not be required to sell these investments before a recovery of its investment, and (4) issuers have continued to make timely payments of principal and interest. Additionally, the Company’s mortgage-backed securities and obligations of U.S. government corporations and agencies are entirely issued by either U.S. government agencies or U.S. government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments.
Securities having a carrying value of $6.9 million at June 30, 2024 were pledged as security for trust accounts.
The composition of restricted investments at June 30, 2024 and December 31, 2023 was as follows:
Federal Reserve Bank Stock
344
Federal Home Loan Bank Stock
8,296
9,084
Community Bankers’ Bank Stock
140
NOTE 5. Loans and Allowance for Credit Losses on Loans
The composition of loans at June 30, 2024 and December 31, 2023 was as follows:
December 31,
Mortgage real estate loans:
Construction & Secured by Farmland
81,609
84,145
HELOCs
46,697
47,674
Residential First Lien - Investor
112,790
117,431
Residential First Lien - Owner Occupied
187,807
178,180
Residential Junior Liens
12,387
12,831
Commercial - Owner Occupied
257,675
251,456
Commercial - Non-Owner Occupied & Multifamily
352,892
348,879
Commercial and industrial loans:
SBA PPP loans
39
51
Other commercial and industrial loans
106,629
107,777
Marine loans
236,890
251,168
Consumer loans
34,076
42,419
Overdrafts
257
253
Other loans
11,951
12,895
Total loans
1,441,699
1,455,159
Net deferred loan costs and premiums
7,235
7,527
At June 30, 2024, the Company was servicing $10.0 million of loans for other financial institutions which are not included in the table above. Also excluded from the table above are net servicing assets of $181 thousand at June 30, 2024, which are recorded in other assets in the Consolidated Balance Sheets. When loans are sold with servicing retained, servicing assets are
recorded which represent the Company's right to service loans that were sold. Servicing assets are initially recorded by the Company at fair value and are subsequently amortized in proportion to, and over the period of, estimated net servicing income.
Changes in the allowance for credit losses on loans for the three and six months ended June 30, 2024 and 2023 were as follows:
Balance, beginning
14,448
13,950
14,493
11,218
Cumulative effect adjustment for adoption of ASC 326
2,077
314
410
789
1,119
Recoveries added to the allowance
424
203
609
224
Credit losses charged to the allowance
(172
(52
(877
(127
Balance, ending
15,014
14,511
Past due loans by class at June 30, 2024 and December 31, 2023 were as follows:
30 - 59DaysPast Due
60 - 89DaysPast Due
90 or MoreDaysPast Due
Total PastDue
Current
Total Loans
90 or MoreDays Past Due StillAccruing
18
46,679
1,063
111,727
173
97
270
187,537
106,626
448
1,004
1,452
235,438
419
82
167
668
33,408
1,058
1,086
1,330
3,474
1,438,225
90 or MoreDays PastDue
90 or MorePast DueStillAccruing
844
1,097
116,334
149
227
177,953
12,822
26
35
107,742
14
552
250,616
340
42,079
1,026
331
903
2,260
1,452,899
Nonaccrual loans by class at June 30, 2024 and December 31, 2023 were as follows:
Nonaccruals with No Allowance for Credit Losses
Nonaccrual with an Allowance for Credit Losses
NonaccrualLoans
95
15
1,085
172
228
22
3,625
969
972
496
1,734
2,703
5,645
The allowance for credit losses on loans by segment at June 30, 2024 and December 31, 2023 was as follows:
As of and For the Six Months Ended
Constructionand Farmland
ResidentialReal Estate
CommercialReal Estate &MultiFamily
Commercial
Marine
Consumer
All OtherLoans
Unallocated
Allowance for credit losses:
Beginning Balance
772
4,725
6,224
1,027
1,153
198
394
Charge-Offs
(94
(62
(75
(453
(117
(69
Recoveries
300
162
30
104
Provision
169
(384
(469
512
752
(16
236
Ending balance
853
4,579
5,910
1,494
321
Ending balance: Individually evaluated for impairment
Ending balance: Collectively evaluated for impairment
1,148
14,668
Loans:
359,681
610,567
106,668
12,208
1,203
2,668
358,478
105,699
236,394
1,439,031
As of and For the Year Ended
2,714
1,735
2,221
2,222
1,555
299
472
(1,840
1,933
3,584
(1,102
(285
(123
(90
(312
(126
(121
(182
(741
43
48
298
(110
176
13
1,641
356,116
600,335
107,828
13,148
1,288
3,639
5,574
84,050
354,828
596,696
1,449,585
The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment:
Real Estate Collateral
Other Collateral
194
1,465
5,022
The Company did not identify any significant changes in the extent to which collateral secures its collateral dependent loans, whether in the form of general deterioration or from other factors during the period ended June 30, 2024.
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. This analysis is performed on a quarterly basis. The following table presents risk ratings by loan portfolio segment and origination year. Description of these ratings are as follows:
Pass
Pass loans exhibit acceptable history of profits, cash flow ability and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.
Special Mention
Special mention loans exhibit negative trends and potential weakness that, if left uncorrected, may negatively affect the borrower’s ability to repay its obligations. Loan relationships with stale financial statements at their annual review will also cause a downgrade to special mention until current financials are received and upgrade is approved. The risk of default is not imminent and the borrower still demonstrates sufficient financial strength to service debt.
Classified
Classified loans include loans rated Substandard, Doubtful and Loss.
Credit quality information by class at June 30, 2024 was as follows:
Term Loans Amortized Cost Basis by Origination Year
2022
2021
2020
Prior
Revolving Loans Amortized Cost Basis
Revolving Loans Converted to Term
7,508
31,614
17,577
3,939
4,732
5,074
3,042
73,486
6,922
7,948
175
38,536
4,872
6,135
Current period gross charge-offs
94
5,196
15,410
21,631
28,308
10,211
23,963
1,131
105,850
2,650
985
1,342
598
5,877
18,060
22,616
30,713
10,809
24,265
16,430
55,811
33,754
23,286
35,010
22,310
521
187,122
46
47
93
592
16,476
22,949
433
2,490
2,732
1,983
1,361
3,176
12,357
3,191
197
16,924
33,974
57,176
33,998
21,402
48,076
1,715
4,157
217,422
1,432
13,360
5,374
2,578
16,070
38,814
949
490
1,439
35,406
70,536
40,321
24,470
64,146
9,633
56,670
112,833
65,383
65,416
17,107
1,196
5,469
333,707
2,110
10,728
3,549
19,185
58,780
123,561
67,366
68,965
17,922
18,358
10,313
24,421
7,627
3,953
5,824
29,423
1,081
101,000
2,458
40
1,829
4,657
13,740
7,657
3,956
5,864
31,252
1,381
75
78,246
124,394
33,100
654
78,742
366
87
453
1,720
2,658
13,206
5,765
8,208
1,209
1,272
25
117
69
62
9,431
2,396
Total by Risk Category
16
76,202
287,248
417,155
203,428
150,947
129,135
83,404
12,582
1,360,101
15,572
25,073
8,729
6,725
18,300
76,574
2,012
633
642
5,024
76,505
304,285
442,228
214,169
158,305
148,077
85,233
12,897
Total current period gross charge-offs
151
387
96
163
877
Credit quality information by class at December 31, 2023 was as follows:
17
2019
34,617
21,460
7,584
4,851
2,389
2,829
7,052
57
80,839
1,173
1,040
3,028
145
278
22,633
4,996
3,429
3,777
47,610
49
19,394
23,205
31,371
10,667
4,054
22,265
367
111,323
1,180
626
1,944
5,023
24,478
32,456
11,847
4,680
24,209
59,007
33,793
23,749
35,783
3,932
20,413
589
177,266
258
21,327
2,562
2,902
1,486
606
1,613
189
12,787
27
44
1,640
206
36,736
68,868
40,707
22,871
13,971
50,059
3,088
4,364
240,664
3,817
64
2,145
1,877
1,402
9,305
967
1,487
72,685
41,738
25,514
15,848
51,469
4,378
56,510
88,518
64,005
65,075
15,563
34,619
5,651
331,137
624
4,748
3,685
5,060
14,117
2,355
1,270
57,134
93,266
67,690
72,490
35,889
15,052
26,798
8,659
4,824
2,629
3,898
43,188
1,005
106,053
1,125
220
16,177
4,840
2,630
3,907
43,417
1,349
231
81
312
86,001
128,456
35,492
86,368
128,641
126
3,427
6,205
8,687
1,747
21
8,354
19
66
52
121
10,176
2,587
313,375
418,126
221,252
154,911
44,891
138,304
110,543
12,258
1,413,660
1,749
11,011
3,749
8,398
3,544
4,428
33,492
620
2,052
3,001
2,094
24
8,007
315,744
429,322
227,053
166,310
48,435
144,826
110,836
12,633
413
210
741
Unfunded Commitments: The Company maintains a separate reserve for credit losses on unfunded commitments, which is included in Other Liabilities on the Consolidated Balance Sheet. The reserve for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit losses in the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded, utilizing the same models and approaches for the Company's other loan portfolio segments, as these unfunded commitments share similar risk characteristics as its loan portfolio segments. The Company has identified the unfunded portion of certain lines of credit as unconditionally cancellable credit exposures, meaning the Company can cancel the unfunded commitment at any time. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that maybe drawn prior to the cancellation of the arrangement.
During the three and six months ended June 30, 2024, a reduction to the unfunded commitment reserve of $134 thousand was recorded as a credit to the provision for credit losses in the consolidated income statement. On January 1, 2023, the Company recorded an adjustment for unfunded commitments of $406 thousand for the adoption of ASC 326. For the three and six months ended June 30, 2023, a reduction to the unfunded commitment reserve of $7 thousand and $52 thousand, respectively, was recorded as a credit to the provision for credit losses in the consolidated income statement. The reserve for unfunded commitments at June 30, 2024 and 2023 and December 31, 2023 was $345 thousand, $417 thousand, and $479 thousand, respectively.
20
NOTE 6. Restructurings for Borrowers Experiencing Financial Difficulty
There were no loans modified during the three and six months ended June 30, 2024, or the three months ended June 30, 2023. The following table presents the amortized cost of two loans that were modified during the six months ended June 30, 2023 by loan portfolio segment:
For the Six Months Ended June 30,
(Dollars in thousands)
Term Extension
% of Total Class of Loans
0.25
%
None of the loans that were modified defaulted during the six months ended June 30, 2023 and the loans remain current with contractual payments as of June 30, 2024. The financial effects of the term extensions during the prior-year period added a weighted average of 1.0 years to the life of loans which reduced the payment amounts for the borrowers.
Management defines default as over 30 days contractually past due under the modified terms, the foreclosure and/or repossession of the collateral, or the charge-off of the loan during the twelve-month period subsequent to the modification.
NOTE 7. Deposits
The composition of deposits at June 30, 2024 and December 31, 2023 was as follows:
Savings and interest bearing demand deposits:
NOW accounts
257,819
253,353
Money market accounts
255,481
263,633
Regular savings accounts
134,058
139,453
Time deposits:
Balances of less than $250,000
267,837
257,418
Balances of $250,000 and more
158,372
155,846
NOTE 8. Leases
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.
The Company’s four long-term lease agreements are classified as operating leases. These leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liability to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for a residual value guarantee and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
The following tables present information about the Company’s leases:
Lease liabilities
4,485
4,653
Right-of-use assets
4,194
4,387
Weighted average remaining lease term
13 years
14 years
Weighted average discount rate
3.13
3.09
Lease Cost
Operating lease cost
132
264
267
Short-term lease cost
Total lease cost
271
274
Cash paid for amounts included in the measurement of lease liabilities
119
116
239
235
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities is as follows:
As of
Lease payments due
Twelve months ending June 30, 2025
Twelve months ending June 30, 2026
458
Twelve months ending June 30, 2027
390
Twelve months ending June 30, 2028
393
Twelve months ending June 30, 2029
398
Thereafter
3,554
Total undiscounted cash flows
5,682
Discount
(1,197
NOTE 9. Fair Value Measurements
GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
•
Level 1
Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The following section provides a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
Derivative instruments are recorded at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third-party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.
23
The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at June 30, 2024 and December 31, 2023:
Fair Value Measurements at
Using
Balance as of
Quoted Pricesin ActiveMarkets forIdentical Assets
SignificantOtherObservableInputs
SignificantUnobservableInputs
(Level 1)
(Level 2)
(Level 3)
Assets:
Securities available for sale
Derivative:
Interest rate swaps
1,478
Total assets at fair value
130,967
Liabilities:
Total liabilities at fair value
Interest rate swap
138,908
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:
Loans Held for Sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). The Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during six months ended June 30, 2024 and the year ended December 31, 2023.
Individually Evaluated Collateral-Dependent Loans: The estimated fair value of individually evaluated collateral-dependent loans is based on the value of the underlying collateral or the value of the underlying collateral, less estimated cost to sell, as appropriate. Collateral is generally real estate; however, collateral may include vehicles, equipment, inventory, accounts receivable, and/or other business assets. The value of real estate collateral is determined using a market valuation approach based on an appraisal conducted by an independent, licensed appraiser. The value of other assets may also be based on an appraisal, market quotations, aging schedules or other sources. Collateral-dependent individually evaluated loans are classified within Level 3 of the fair value hierarchy. Any fair value adjustments are recorded in the period incurred as a provision for credit losses on the Consolidated Statements of Income. At June 30, 2024 there was one collateral-dependent relationship totaling $969 thousand, which was individually evaluated and being carried at fair value of $623 thousand. This relationship consists of three commercial business loans collateralized by equipment. There were no individually evaluated collateral dependent loans recorded at fair value at December 31, 2023.
Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for credit losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to fair value less cost to sell. The fair value measurement of real estate held in other real estate owned is assessed in the same manner as collateral-dependent loans described above. We believe that the fair value follows the provisions of GAAP. The Company held no other real estate owned at June 30, 2024 or December 31, 2023.
Repossessed Assets: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the asset, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for credit losses. Costs of significant improvements are capitalized, whereas costs relating to holding assets are expensed. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of an asset to fair value less cost to sell. The fair value measurement of repossessed assets is assessed in the same manner as collateral dependent loans described above. We believe that the fair value follows the provisions of GAAP. The Company held $403 thousand and $304 thousand at June 30, 2024 and December 31, 2023.
The following table displays quantitative information about Level 3 Fair Value Measurements for certain financial assets measured at fair value on a nonrecurring basis for June 30, 2024 and December 31, 2023.
Quantitative information about Level 3 Fair Value Measurements
Valuation Technique(s)
Unobservable Input
Range
Weighted Average (1)
Collateral-dependent loans
Discounted value
Selling cost
36 %
Repossessed assets
Discounted appraised value
10%
10 %
(1) Weighted based on the relative fair value of the specific items measured at fair value.
The following table summarizes the Company's nonfinancial assets that were measured at fair value on a nonrecurring basis at June 30, 2024 and December 31, 2023.
Carrying value at
IdenticalAssets
ObservableInputs
UnobservableInputs
Financial Assets:
623
Nonfinancial Assets:
Quoted Pricesin ActiveMarketsfor IdenticalAssets
304
The carrying value and fair value of the Company’s financial instruments at June 30, 2024 and December 31, 2023 were as follows:
CarryingValueas of
Quoted Pricesin ActiveMarkets forIdenticalAssets
Fair Valueas of
Financial assets:
Cash and short-term investments
Securities
Restricted investments
Loans, net
1,349,266
Accrued interest receivable
5,005
Financial liabilities:
Deposits
1,488,392
144,551
25,136
Accrued interest payable
2,363
Carrying Valueas of
Restricted Investments
1,377,017
5,008
1,506,147
19,954
145,141
25,581
2,364
NOTE 10. Change in Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes unrealized gains and losses on available for sale securities and changes in benefit obligations and plan assets for the post retirement benefit plan. Changes to accumulated other comprehensive income (loss) are presented net of their tax effect as a component of equity. Reclassifications out of accumulated other comprehensive income (loss) are recorded in the Consolidated Statements of Income either as a gain or loss.
Changes to accumulated other comprehensive income (loss) by component are shown in the following table for the periods indicated:
UnrealizedGains andLosses onAvailablefor SaleSecurities
Change inBenefitObligationsand PlanAssets forthe PostRetirementBenefitPlan
April 1
(19,827
(17,485
Other comprehensive income (loss) before reclassifications
1,334
(2,462
Tax effect of current period changes
(280
517
Current period changes net of taxes
June 30
(18,773
(19,430
January 1
(18,020
(20,465
Other comprehensive (loss) income before reclassifications
(958
1,302
200
201
(275
(272
For the three and six months ended June 30, 2024 and 2023, there were no reclassifications out of accumulated other comprehensive income (loss).
NOTE 11. Other Real Estate Owned
The following table is a summary of other real estate owned (“OREO”) activity for the six months ended June 30, 2024 and 2023 and the year ended December 31, 2023:
Year Ended
108
Transfer from loans
Gain on foreclosures
Sales
(108
Valuation adjustments
There were no loans collateralized by residential real estate in the process of foreclosure at June 30, 2024 and December 31, 2023.
NOTE 12. Qualified Affordable Housing Project Investments
The Company invests in qualified affordable housing projects. The general purpose of these investments is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, provide tax credits and other tax benefits to investors, and to preserve and protect project assets.
On January 1, 2024, the Company adopted ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." The adoption resulted in an adjustment of $477 thousand, which reduced the investment and shareholders' equity balances.
At June 30, 2024 and December 31, 2023, the balance of the investment for qualified affordable housing projects was $1.4 million and $2.0 million, respectively. These balances are reflected in Other assets on the Consolidated Balance Sheets. Total unfunded commitments related to the investments in qualified affordable housing projects totaled zero at both June 30, 2024 and December 31, 2023.
During each of the three months ended June 30, 2024 and June 30, 2023, the Company recognized amortization expense of $74 thousand and $54 thousand, respectively. Amortization expense for the six months ended June 30, 2024 and 2023 was $147 thousand and $158 thousand, respectively.
Beginning in 2024, upon adoption of ASU 2023-02, the amortization expense was included in income tax expense, while in 2023 and prior it was included in Other operating expenses on the Consolidated Statements of Income.
Total estimated credits to be received during 2024 are $306 thousand based on the most recent quarterly estimates received from the funds. Total tax credits and other tax benefits recognized during the six months ended June 30, 2024 and 2023, were $153 thousand and $180 thousand, respectively.
NOTE 13. Recent Accounting Pronouncements and Other Authoritative Guidance
There are no recent accounting pronouncements that are expected to have a material impact on the Company's consolidated financial statements.
NOTE 14. Borrowings
On March 31, 2022, the Company entered into Subordinated Note Purchase Agreements with certain purchasers pursuant to which the Company issued and sold $30.0 million in aggregate principal amount of its 4.50% Fixed-to-Floating Rate Subordinated Notes due April 1, 2032 (the “Notes”).
The Company uses the net proceeds of the Notes offering for general corporate purposes, organic growth and to support the Bank’s regulatory capital ratios. The Notes were structured to qualify as Tier 2 capital for regulatory capital purposes at the holding company and bear an initial interest rate of 4.50% until April 1, 2027, with interest during this period payable semi-annually in arrears. From and including April 1, 2027, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to three-month SOFR, plus 2.35%, with interest during this period payable quarterly in arrears. The Notes are redeemable by the Company at its option, in whole or in part, on or after April 1, 2027. Initial debt issuance costs were $673 thousand. The debt balance of $30.0 million is presented net of unamortized issuance costs of $522 thousand at June 30, 2024.
The Company had $145.0 million in total borrowings with the Federal Home Loan Bank of Atlanta ("FHLB") at June 30, 2024, with no short-term borrowings outstanding and $145.0 million being long-term borrowings. The interest rates on the long-term borrowings with the FHLB ranged from 4.43% to 4.83%, with a weighted average rate of 4.65%. Of the long-term FHLB borrowings, $50.0 million is due in 2024, $55.0 million is due in 2025 and $40.0 million is due in 2026. At December 31, 2023, the Company had $145.0 million in long-term and $20.0 million in short-term outstanding borrowings with the FHLB. The Company had $122.0 million in irrevocable letters of credit at June 30, 2024 with the FHLB to secure public deposits.
NOTE 15. Derivatives
The Company uses derivative financial instruments primarily to manage risks to the Company associated with changing interest rates, and to assist customers with their risk management objectives. Derivative contracts that are not designated in a qualifying hedging relationships include customer accommodation loan swaps. The Company enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Company receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest income and sum to zero because of the offsetting terms of the swaps with borrowers and the swaps with dealer counterparties.
The following tables summarize key elements of the Company's derivative instruments at June 30, 2024 and December 31, 2023.
Notional Amount
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower
40,583
1,281
Matched interest rate swaps with counterparty
41,051
621
NOTE 16. Business Segments
The Company has three reportable operating segments: community banking, marine lending and wealth management. Revenue from community banking operations consist primarily of net interest income related to investments in loan and securities and outstanding deposits and borrowings, fees earned on deposit accounts and debit card interchange activity. Revenue from marine lending operations consist primarily of net interest income related to commercial and consumer marine loans. The wealth management division's net revenues are comprised primarily of income from offering wealth management services and insurance products through third-party service providers.
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. Subsequent to the sale of these assets, the Company retained ownership of its marine vessel retail loans which continue to constitute a significant portion of the Company's assets, revenues, and earnings. The Company expects to cease accepting new marine lending business and hold the retained outstanding loans until they are ultimately repaid.
Financial information of the parent company is included in the "All Other" category. The parent company's revenue and expenses are comprised primarily of interest expense associated with subordinated debt.
The following tables provide income and asset information as of June 30, 2024 and December 31, 2023 and for three and six months ended June 30, 2024 and 2023, which are included within the Consolidated Balance Sheets and Consolidated Statements of Income. The results by business segment are based on management’s accounting process, which assigns income statement items and assets to each operating segment. Given the Company's reportable segments are contained within the Bank, management must make certain allocations of expenses, which may not be representative of the costs expected to be incurred if the specific business segments operated as stand-alone entities. The Company expects it will continue to evaluate its business segments and internal reporting structure, including the production of discrete financial information to the chief operating decision-maker.
Community Banking
Marine Lending
Wealth Management
All Other
Eliminations
Consolidated
Interest Income
18,568
3,180
7,815
1,412
Net Interest Income (Expense)
10,753
1,768
(355
Gain on sales of loans
Other noninterest income
2,453
1,350
3,803
Net Revenue (Expense)
13,698
16,461
207
(26
Noninterest expense
11,662
135
618
Income (loss) before taxes
1,659
732
(450
Income tax expense (benefit)
349
154
Net Income (Loss)
1,653
578
(356
Other data:
Capital expenditures
421
Depreciation and amortization
293
16,459
3,905
6,085
1,482
10,374
2,423
122
1,859
3,165
12,355
2,536
15,799
446
(43
10,756
1,358
670
171
1,221
593
(526
256
125
(111
965
468
(415
509
218
364
37,018
6,642
15,509
2,852
21,509
3,790
(709
4,385
2,728
7,113
26,547
32,356
363
22,979
353
1,347
208
3,275
3,074
(917
646
290
(177
2,954
2,428
1,091
(740
515
583
63
680
31,700
7,222
10,452
2,675
21,248
4,547
3,721
6,235
25,305
4,952
31,969
952
21,116
2,640
3,237
2,197
(1,021
440
461
242
(225
2,797
1,736
906
(796
480
36
516
927
Total assets at June 30, 2024
1,542,490
245,861
1,019
Total assets at December 31, 2023
1,562,600
261,011
33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion is to focus on important factors affecting the Company’s financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Part I, Item 1, Financial Statements, of this Form 10-Q and Part II, Item 8, Financial Statements and Supplementary Data, of the 2023 Form 10-K.
GENERAL
Eagle Financial Services, Inc. is a bank holding company which owns 100% of the stock of Bank of Clarke (the “Bank” and, collectively with Eagle Financial Services, Inc., the “Company”, “we”, “us” or “our”). Accordingly, the results of operations for the Company are dependent upon the operations of the Bank. The Bank conducts a commercial banking business which consists of attracting deposits from the general public and investing those funds in commercial, consumer and real estate loans and municipal and U.S. government agency securities. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the maximum extent permitted by law. At June 30, 2024, the Company had total assets of $1.79 billion, net loans of $1.43 billion, total deposits of $1.49 billion, and shareholders’ equity of $111.1 million. The Company’s net income was $5.7 million for the six months ended June 30, 2024.
MANAGEMENT’S STRATEGY
The Company strives to be an outstanding financial institution in its market by building solid sustainable relationships with: (1) its customers, by providing highly personalized customer service, a network of conveniently placed branches and ATMs, a competitive variety of products/services and courteous, professional employees, (2) its employees, by providing generous benefits, a positive work environment, advancement opportunities and incentives to exceed expectations, (3) its communities, by participating in local concerns, providing monetary support, supporting employee volunteerism and providing employment opportunities, and (4) its shareholders, by providing sound profits and returns, sustainable growth, regular dividends and committing to its local, independent status.
OPERATING STRATEGY
The Company is a locally owned and managed financial institution. This allows the Bank to be flexible and responsive in the products and services it offers. The Bank grows primarily by lending funds to local residents and businesses at a competitive price that reflects the inherent risk of lending. The Bank attempts to fund these loans through deposits gathered from local residents and businesses. The Bank prices its deposits by comparing alternative sources of funds and selecting the lowest cost available. When deposits are not adequate to fund asset growth, the Bank relies on borrowings, both short and long term. The Bank’s primary source of borrowed funds is the Federal Home Loan Bank of Atlanta which offers numerous terms and rate structures to the Bank.
As interest rates change, the Bank attempts to maintain its net interest margin by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through its trust department, sales of investments, secondary market mortgage activities, and deposit operations. The Bank also incurs noninterest expenses such as compensating employees, maintaining and acquiring fixed assets, and purchasing goods and services necessary to support its daily operations.
The Bank has a marketing department which seeks to develop new business. This is accomplished through an ongoing calling program whereby account officers visit with existing and potential customers to discuss the products and services offered. The Bank also utilizes traditional advertising such as television commercials, radio ads, newspaper ads, and billboards.
LENDING POLICIES
Administration and supervision over the lending process is provided by the Bank’s Credit Administration Department. The principal risk associated with the Bank’s loan portfolio is the creditworthiness of its borrowers. In an effort to manage this risk, the Bank’s policy gives loan amount approval limits to individual loan officers based on their position and level of experience. Credit risk is increased or decreased, depending on the type of loan and prevailing economic conditions. In consideration of the different types of loans in the portfolio, the risk associated with real estate mortgage loans, commercial loans and consumer loans varies based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay debt.
The Company has written policies and procedures to help manage credit risk. The Company utilizes a loan review process that includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and regular portfolio reviews to establish loss exposure and to ascertain compliance with the Company’s policies.
The Bank uses a tiered approach to approve credit requests consisting of individual lending authorities, joint approval of 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 upon 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 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, primarily residential, and land acquisition and development loans. The construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The average life of most construction loans is less than one year and the Bank offers both fixed and variable rate interest structures. The interest rate structure offered to customers depends on the total amount of these loans outstanding and the impact of the interest rate structure on the Bank’s overall interest rate risk. There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of the estimated appraised value of the finished construction project. The Bank also obtains a first lien on the property as security for its construction loans and typically requires personal guarantees from the borrower’s principal owners. Finally, the Bank performs inspections of the construction projects to ensure that the percentage of construction completed correlates with the amount of draws on the construction line of credit.
Commercial and Industrial Lending
Commercial business loans generally have more risk than residential mortgage loans, but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of its business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.
Consumer Lending
The Bank offers various secured and unsecured consumer loans, which include personal installment loans, personal lines of credit, automobile loans, and credit card loans. The Bank originates its consumer loans within its geographic market area and these loans are generally made to customers with whom the Bank has an existing relationship. Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral on a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and from any verifiable secondary income. Although creditworthiness of the applicant is the primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.
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 expects to cease 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.
37
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 consider a range of possible assumptions and outcomes related to the various factors identified above. Refer to the 2023 Form 10-K for additional detail 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 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 expectations, intentions or objectives concerning our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” "could," “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:
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.
RESULTS OF OPERATIONS
Net Income
Net income for the six months ended June 30, 2024 was $5.7 million, an increase of 23.48%, or $1.1, when compared to the same period in 2023. For the three months ended June 30, 2024, net income was $3.2 million, an increase of $1.1 million, or 54.76% compared to the three months ended June 30, 2023. Earnings per share, basic and diluted, were $1.61 and $1.32 for the six months ended June 30, 2024 and 2023, respectively. Earnings per share, basic and diluted, were $0.89 and $0.58 for the three months ended June 30, 2024 and 2023, respectively.
Return on average assets ("ROA") measures how efficiently the Company uses its assets to produce net income. Some issues reflected within this efficiency include the Company’s asset mix, funding sources, pricing, fee generation, and cost control. The ROA of the Company, on an annualized basis, for the six months ended June 30, 2024 and 2023 was 0.65% and 0.55%, respectively. For the three months ended June 30, 2024 and 2023 the Company's annualized ROA was 0.72% and 0.48%, respectively.
Return on average equity ("ROE") measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by shareholders. The ROE of the Company, on an annualized basis, for the six months ended June 30, 2024 and 2023 was 10.71% and 9.01%, respectively. For the three months ended June 30, 2024 and 2023 the Company's annualized ROE was 11.89% and 7.93%, respectively.
Net Interest Income
Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. Net interest income was $24.6 million and $25.1 million for the six months ended June 30, 2024 and 2023, respectively, which represents a decrease of $496 thousand, or 1.98%. Net interest income was $12.2 million and $12.4 million for the three months ended June 30, 2024 and 2023, respectively, which represents a decrease of $276 thousand, or 2.22%. Net interest income decreased due to the impact of the rising interest rate environment throughout 2023 as the increase in average rates paid outpaced the increase in average rates earned as well as offering promotional rates on time deposits to retain and attract account balances.
The Company's net interest spread and net interest margin decreased 42 basis points and 26 basis points, respectively, for the six months ended June 30, 2024 compared to six months ended June 30, 2023. For the three months ended June 30, 2024, the Company's net interest spread and net interest margin decreased 30 basis points and 18 basis points, respectively, compared to the same period in 2023.
Total interest and dividend income was $43.7 million and $38.9 million for the six months ended June 30, 2024 and 2023, respectively, which represents an increase of $4.7 million, or 12.17%. Total interest and dividend income was $21.7 million and $20.4 million for the three months ended June 30, 2024 and 2023, respectively, which represents an increase of $1.3 million, or 6.80%. The increase in interest income was driven by an increase in the average balance of the loan portfolio along with the rise in interest rates. Average interest-earning assets increased $110.4 million, or 6.80%, when comparing the six months ended June 30, 2023 to the six months ended June 30, 2024, while the average yield on earning-assets increased by 23 basis points over the same period. For the three months ended June 30, 2024, the increase in interest income on loans was primarily due to the higher yields earned as the average balances were level with the prior year period.
Total interest expense was $19.1 million and $13.8 million for the six months ended June 30, 2024 and 2023, respectively, which represents an increase of $5.3 million, or 37.83%. Total interest expense was $9.6 million and $7.9 million for the three months ended June 30, 2024 and 2023, respectively, which represents an increase of $1.7 million, or 20.95%. The interest rate environment, coupled with the growth of higher-paying deposit accounts, have been the main drivers for the increase in interest expense during both the three and six months ended June 30, 2024 and 2023. Interest expense on deposit accounts increased $5.9 million, or 66.10%, during the six months ended June 30, 2024, of which $4.3 million was attributable to time deposits. During the six months ended June 30, 2024 and 2023 the average balance of interest-bearing deposits was $1.05 billion and $919.9 million, respectively. The $5.9 million increase in deposit interest expense was slightly offset by a decrease in interest expense on FHLB advances. The average balance of FHLB advances was $145.5 million and $170.9 million with an average rate of 4.73% and 4.79% during the six months ended June 30, 2024 and 2023, respectively. The increase in interest expense during the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was primarily due to time deposits, while FHLB borrowings experienced a decrease in expense reflecting a lower level of utilization during the three month period ending June 30, 2024.
The net interest margin was 2.86% and 3.12% for the six months ended June 30, 2024 and 2023, respectively, and 2.81% and 2.99% for the three months ended June 30, 2024 and 2023, respectively. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The tax rate used to calculate the tax benefit was 21% for 2024 and 2023.
Net interest margin has primarily declined due to deposit pricing pressure as interest rates increased throughout 2023 and and as competition for new deposits continues to be experienced. If these factors persist, net interest margin may experience further downward pressure and may also result in the Company having to borrow additional wholesale funding to fund asset growth, which is more expensive than deposits.
41
The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the three months ended June 30, 2024 and 2023 (dollars in thousands):
Average
Income/
Yield/
Balance
Expense
Rate (2)
Securities:
Taxable
137,588
893
2.61
155,347
921
2.38
Tax-Exempt (1)
4.13
510
4.11
Total Securities
138,080
898
2.62
155,857
2.39
1,424,304
19,421
5.48
1,425,873
18,659
5.25
Non-accrual
4,600
2,608
10,603
5.01
9,810
4.86
1,439,507
19,553
5.45
1,438,291
18,778
5.24
Federal funds sold and interest-bearing deposits in other banks
170,858
1,326
3.12
80,251
684
3.42
Total earning assets
1,748,445
21,777
1,674,399
20,389
4.88
(14,604
(14,201
Total non-earning assets
33,281
73,702
1,767,122
1,733,900
Liabilities and Shareholders' Equity:
Interest-bearing deposits:
258,965
1,538
240,401
1,247
2.08
261,557
1,463
2.25
254,136
1,093
1.72
Savings accounts
136,370
0.12
153,659
$250,000 and more
138,531
1,652
4.80
99,903
888
3.57
Less than $250,000
255,776
2,823
4.44
224,041
2,261
4.05
Total interest-bearing deposits
1,051,199
2.88
972,140
2.28
NM
178
Federal Home Loan Bank advances
145,110
4.74
172,198
4.73
29,467
4.84
29,400
4.83
Total interest-bearing liabilities
1,225,791
3.14
1,173,916
2.71
Noninterest-bearing liabilities:
Demand deposits
417,128
440,728
Other Liabilities
16,489
15,212
1,659,408
1,629,856
Shareholders' equity
107,714
104,044
Total liabilities and shareholders' equity
12,195
12,467
Net interest spread
1.87
2.17
Interest expense as a percent of average earning assets
2.20
1.90
Net interest margin
2.81
2.99
NM - Not Meaningful
42
The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the six months ended June 30, 2024 and 2023 (dollars in thousands):
140,144
1,808
2.59
156,208
2.33
4.10
527
4.14
140,640
1,818
2.60
156,735
1,819
2.34
1,429,088
39,279
5.53
1,390,761
35,735
5.18
5,109
2,352
10,654
265
5.00
9,702
1,444,851
39,544
5.50
1,402,815
35,970
5.17
Federal funds sold and Interest-bearing deposits in other banks
149,032
2,356
3.18
64,602
1,184
3.70
1,734,523
43,718
5.07
1,624,152
38,973
Allowance for loan losses
(14,570
(13,816
43,196
85,716
1,763,149
1,696,052
257,623
3,035
2.37
238,317
2,301
1.95
262,656
2,876
256,096
1,934
1.52
137,554
80
160,195
99
0.13
140,912
3,353
4.78
88,901
1,455
3.30
253,815
5,595
4.43
176,344
3,205
3.66
1,052,560
2.85
919,853
1.97
5,648
2.50
145,495
170,939
4.79
29,459
29,391
1,227,527
1,125,831
2.48
411,147
451,437
16,878
14,892
1,655,552
1,592,160
107,597
103,892
24,648
25,137
1.94
2.36
2.21
2.86
The following table reconciles tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income.
GAAP Financial Measurements:
Interest Income - Loans
Interest Income - Securities and Other Interest-Earnings Assets
2,223
1,610
4,172
Interest Expense - Deposits
Interest Expense - Other Borrowings
2,067
2,387
4,131
4,842
Total Net Interest Income
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans (1)
Add: Tax Benefit on Tax-Exempt Interest Income - Securities (1)
Total Tax Benefit on Tax-Exempt Interest Income
58
Tax-Equivalent Net Interest Income
The tax-equivalent yield on earning assets was 5.07% for the six months ended June 30, 2024 compared to 4.84% for the six months ended June 30, 2023, an increase of 23 basis points during the current year period. The tax-equivalent yield on securities increased 26 basis points for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The tax equivalent yield on loans increased 33 basis points from 5.17% for the six months ended June 30, 2023 to 5.50% for the same time period in 2024. For the three months ended June 30, 2024 and 2023, the tax-equivalent yield on earning assets was 5.01% and 4.88%, respectively, an increase of 13 basis points in the current year period. The tax-equivalent yields on securities and loans also increased during the three month period in 2024 compared to 2023 by 23 basis points and 21 basis points, respectively.
The increase in the tax-equivalent yield on earning assets for the three and six months ended June 30, 2024 resulted mostly from the increase in the tax-equivalent yield on loans. The increase in the yield on loans as compared to the corresponding periods in 2023 was primarily due to the sustained elevated interest rate environment,
The average rate on interest-bearing liabilities increased 64 basis points to 3.12% from 2.48% for the six months ended June 30, 2024 compared to the 2023 period, and increased 43 basis points for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The average rate on interest-bearing deposits increased 60 basis points and 88 basis points during the three and six months ended June 30, 2024, respectively, compared to the same 2023 periods, driven by increases in time deposits. The interest rate environment, marketplace competition and growth of higher-cost deposit accounts have been the main drivers for the increases in the average rate and total expense paid on interest-bearing deposits.
The provision for credit losses is based upon management’s estimate of the amount required to maintain an adequate allowance for credit losses. The Company's calculation of the provision for credit losses consists of changes in the allowance for credit losses on loans and the reserve for unfunded loan commitments. 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. 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 provision for credit losses for the six months ended June 30, 2024 and 2023 was $656 thousand and $1.1 million, respectively. The provision for credit losses for the three months ended June 30, 2024 and 2023 was $181 thousand and $403 thousand, respectively. The provision for credit losses for the six months ended June 30, 2024 resulted largely from a specific reserve on an individually evaluated relationship, net credit losses, and a reduction in the reserve for unfunded commitments. The composition and balance of the portfolio was substantially the same as the prior measurement period.
Total noninterest income was $4.3 million and $3.4 million for the three months ended June 30, 2024 and 2023, respectively and for the six months ended June 30, 2024 and 2023 was $7.8 million and $6.9 million, respectively. Management reviews the activities which generate noninterest income on an ongoing basis. The following table provides the components of noninterest income for the three and six months ended June 30, 2024 and 2023, which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.
$ Change
% Change
308
(49
(2
)%
(Loss) gain on disposal of bank premises and equipment
(18
(257
156
90
50
518
431
112
938
Wealth management fee income 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. Total assets under management have increased as a result of new business efforts. Fee increases and one-time fees for estates and other services have also contributed to the year over year increase in revenue.
Gain on sale of loans increased during the three and six months ended June 30, 2024 when compared to the same period in 2023. During the first half of 2024, the Company sold $25.5 million in mortgage loans on the secondary market and $2.6 million SBA commercial loans. During the first half of 2023, the Company sold $5.2 million in mortgage loans on the secondary market, $2.9 million in SBA commercial loans and $38.6 million of marine loans. These loan sales resulted in gains of $653 thousand and $648 thousand during the six months ended June 30, 2024 and 2023, respectively. Gain on loan sales during the three months ended June 30, 2024 and 2023 was $492 thousand and $192 thousand, respectively, and resulted from mortgage loan sales of $14.6 million and $2.6 million in SBA commercial loans during the second quarter of 2024 compared to mortgage loan sales of $3.0 million, marine loan sales of $15.0 million, and SBA commercial loans sales of $797 thousand during the second quarter of 2023.
Bank owned life insurance ("BOLI") fee income increased during the three and six months ended June 30, 2024 when compared to the same periods in 2023 as a result of an investment of $5 million into BOLI by the Company during the fourth quarter of 2023.
45
Other operating income increased for the three and six months ended June 30, 2024 when compared to the same periods in 2023. The increases during the current year periods can be mainly attributed to higher cash distributions received from investments in Small Business Investment Companies as well as the receipt of a BOLI settlement, which resulted in a gain of $254 thousand.
Total noninterest expenses decreased $445 thousand, or 3.43% for the three months ended June 30, 2024 and $454 thousand, or 1.79%, for the six months ended June 30, 2024 compared to the same periods in 2023. The following table presents the components of noninterest expense for the three and six months ended June 30, 2024 and 2023, which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.
(208
(321
(63
(12
86
(97
(28
(156
(24
Stationary and supplies
(22
148
(60
(21
(137
(23
(242
(32
(449
243
(0
(445
(454
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 decreased during the three and six months ended June 30, 2024 over 2023, largely reflecting decreases in salaries while experiencing increases in employee benefits and annual incentive plan expenses. The Company's number of full-time equivalent employees ("FTE's") has decreased from 275 at June 30, 2023 to 244 at June 30, 2024. In addition to normal staffing fluctuation, the decrease in the number of FTE's was due to 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. Partially offsetting the expense decreases due to the lower number of FTE's, were annual pay increases, commissions paid on new business efforts, increasing insurance costs and enhanced employee benefit plans.
Equipment expenses have increased during the three and six months ended June 30, 2024 compared to the same periods 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 and computer software expenses decreased during the three and six months ended June 30, 2024 compared to the same periods in 2023. This was primarily due to the discontinuation of new marine lending business, including the cost of business development and computer systems, as well as corporate rebranding expenses incurred during the 2023 periods.
FDIC assessment and bank franchise tax expenses, which are based in part on asset size and capital levels, have increased during the three and six months ended June 30, 2024 over 2023. The increase in FDIC assessment for the six months ended June 30, 2024 was also due to a two basis point increase in the assessment rate charged by the FDIC, which was applied to all financial institutions beginning in June 2023.
Professional fees decreased between the three and six months ended June 30, 2024 and the same periods in 2023. During the 2023 period there were legal expenses for the marine lending business, legal costs related to the ESOP termination, and strategic planning expenses that were not incurred during the 2024 periods. These decreases were partially offset by a slight increase in external audit expenses.
Data processing fee expenses increased during three and six months ended June 30, 2024 over the same period in 2023, reflecting increased costs for core systems, including fees that are volume based.
The efficiency ratio of the Company was 77.00% and 81.91% for the three months ended June 30, 2024 and 2023, respectively. The efficiency ratio of the Company was 77.36% and 79.18% for the six months ended June 30, 2024 and 2023. The improvement in the efficiency ratio during 2024 primarily reflects an increase in noninterest income. The efficiency ratio is not a measurement under accounting principles generally accepted in the United States. It is calculated by dividing noninterest expense by the sum of tax equivalent net interest income and noninterest income excluding gains and losses on the investment portfolio and other gains/losses from OREO, repossessed vehicles, disposals of bank premises and equipment, etc. The tax rate utilized is 21%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency.
The calculation of the efficiency ratio for the three and six months ended June 30, 2024 and 2023 was as follows:
Summary of Operating Results:
Noninterest expenses (GAAP)
Less: (Gain) on other real estate owned
Adjusted noninterest expenses (non-GAAP)
25,348
Noninterest income (GAAP)
Less: (Loss) gain on the sale and disposal of premises and equipment
Less: Income from life insurance proceeds
254
Adjusted noninterest income (non-GAAP)
4,052
3,350
7,523
6,876
Tax equivalent adjustment (1)
Total net interest income and noninterest income, adjusted (non-GAAP)
16,247
15,817
32,171
32,013
Efficiency ratio
77.00
81.91
77.36
79.18
Income Taxes
Income tax expense was $585 thousand and $383 thousand during the three months ended June 30, 2024 and 2023, respectively and $1.1 million and $918 thousand during the six months ended June 30, 2024 and 2023, respectively. The effective tax rate was 15.52% and 15.69% for the three months ended June 30, 2024 and 2023, respectively. The effective tax rate was 15.85% and 16.51% for the six months ended June 30, 2024 and 2023, respectively. The effective tax rate is below the statutory rate of 21% due to tax-exempt income on investment securities and loans, BOLI, income tax credits on qualified affordable housing project investments, and qualified rehabilitation credits. Qualified affordable housing project investments are discussed in Note 12 to the Consolidated Financial Statements.
FINANCIAL CONDITION
Total securities available for sale were $129.5 million at June 30, 2024, compared to $137.4 million at December 31, 2023. This represents a decrease of $7.9 million, or 5.79%. The Company purchased no securities during the six months ended June 30, 2024. The Company had total maturities, calls, and principal repayments of $6.9 million during the six months ended June 30, 2024. Note 4 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio at June 30, 2024 and December 31, 2023. The Company had a net unrealized loss on available for sale securities of $23.8 million at June 30, 2024 as compared to a net unrealized loss of $22.8 million at December 31, 2023. 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). The primary cause of the unrealized losses at June 30, 2024 and December 31, 2023 was changes in market interest rates and other market conditions and not credit concerns of the issuers. Since the losses can be primarily attributed to changes in market interest rates and conditions and not expected cash flows or an issuer’s financial condition and management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, the Company concluded a credit loss did not exist.
Loan Portfolio
The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Gross loans were $1.45 billion and $1.46 billion at June 30, 2024 and December 31, 2023, respectively. This represents a decrease of $13.7 million, or 0.94%, during the six months ended June 30, 2024. The ratio of gross loans to deposits increased during the six months ended June 30, 2024 from 97.10% at December 31, 2023 to 97.34% at June 30, 2024.
The loan portfolio consists primarily of loans for owner-occupied single-family dwellings and loans secured by commercial real estate. Note 5 to the Consolidated Financial Statements provides the composition of the loan portfolio at June 30, 2024 and December 31, 2023. During the six months ended June 30, 2024, through the normal course of business, $28.1 million in loans were sold, consisting primarily of mortgage loans. These loan sales resulted in net gains of $653 thousand. The balance of gross loans remained essentially level from year-end 2023, reflecting paydowns and a large consumer loan payoff, offset by modest growth during 2024.
Residential real estate loans, consisting of first liens, junior liens and home equity loans, were $359.7 million, or 24.82%, and $356.1 million, or 24.35%, of total loans at June 30, 2024 and December 31, 2023, respectively. The modest increase of $3.6 million, or 1.00%, largely reflects the Company's efforts to originate more salable loans than portfolio loans.
Commercial real estate loans (including multifamily loans) were $610.6 million, or 42.14%, and $600.3 million, or 41.04%, of total loans at June 30, 2024 and December 31, 2023, respectively, representing an increase of $10.2 million, or 1.70%, during the six months ended June 30, 2024. Owner occupied commercial real estate loans experienced a $6.2 million increase during the six months ended June 30, 2024, and non-owner occupied and multifamily commercial real estate loans increased $4.0 million during the same period.
Marine loans were $236.9 million, or 16.35%, and $251.2 million, or 17.17%, of total loans at June 30, 2024 and December 31, 2023, respectively, representing a decrease of $14.3 million, or 5.68%. The decline in marine loans reflects paydowns and payoffs only and no new originations. 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 expects to cease accepting new marine lending business. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid.
The purpose of, and the methods for, measuring the allowance for credit losses on loans are discussed in the Critical Accounting Policies section in the 2023 Form 10-K. Note 5 to the Consolidated Financial Statements shows the activity within the allowance for credit losses on loans during the three and six months ended June 30, 2024 and 2023 and the year ended December 31, 2023. Charged-off loans were $877 thousand and $127 thousand for the six months ended June 30, 2024 and 2023, respectively. Recoveries were $609 thousand and $224 thousand for the six months ended June 30, 2024 and 2023, respectively. This resulted in net charge-offs (recoveries) of $268 thousand and $(97) thousand for the six months ended June 30, 2024 and 2023, respectively. The annualized ratio of net charge-offs (recoveries) to average loans was 0.07% and (0.03)% for the six months ended June 30, 2024 and 2023, respectively. The allowance for credit losses on loans as a percentage of loans was 1.04% at June 30, 2024 and 0.99% at December 31, 2023. The increase as compared to December 31, 2023 was mainly attributable to net loan charge-offs and a specific reserve on a collateral-dependent commercial business loan relationship.
Management believes that the allowance for credit losses on loans is currently adequate to absorb the current expected losses in the loan portfolio.
Credit Risk, Nonperforming Assets and Other Assets
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 $76.6 million at June 30, 2024 compared to $33.5 million at December 31, 2023. Loans risk rated as classified, include substandard, doubtful, and loss loans, totaled $5.0 million and $8.0 million at June 30, 2024 and December 31, 2023, respectively. All other loans were classified as pass, exhibiting acceptable history of profits, cash flow ability and liquidity. The increase in special mention loans of $43.1 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.
Nonperforming assets consist of nonaccrual loans, repossessed assets, OREO (foreclosed properties), and loans past due 90 days or more and still accruing as detailed in the table below.
Nonaccrual loans
Loans past due 90 days or more and accruing interest
Other real estate owned and repossessed assets
Total nonperforming assets
3,273
6,130
Allowance for credit losses on loans
Gross loans
Allowance for credit losses on loans to nonperforming assets
459
Allowance for credit losses on loans to total loans
1.04
0.99
Allowance for credit losses on loans to nonaccrual loans
555
Nonaccrual loans to total loans
0.19
0.40
Non-performing assets to period end loans, other real estate owned and repossessed assets
0.23
0.42
Nonperforming assets decreased by $2.8 million during the six months ended June 30, 2024. Nonaccrual loans were $2.7 million and $5.6 million at June 30, 2024 and December 31, 2023, respectively. There was $403 thousand in OREO and repossessed at June 30, 2024 and $304 thousand at December 31, 2023. There were $167 thousand in loans past due 90 days or more and still accruing at June 30, 2024 and $181 thousand in loans past due 90 days or more and still accruing at December 31, 2023. The percentage of nonperforming assets to loans, OREO and repossessed assets was 0.23% at June 30, 2024 and 0.42% at December 31, 2023, respectively.
Total past due loans, as disclosed in Note 5 to the Consolidated Financial Statements, increased to $3.5 million at June 30, 2024 compared to $2.3 million at December 31, 2023. The $1.2 million increase in past due loans was primarily due to changes in the marine and consumer loan portfolios. Total past due loans consist of $1.5 million in marine loans, loans secured by real estate totaling $1.4 million, and consumer and commercial business loans totaling $671 thousand.
During the six months ended June 30, 2024, nonaccrual loans decreased by $2.9 million and totaled $2.7 million at June 30, 2024 compared to $5.6 million at December 31, 2023. The decrease reflects $3.7 million in payoffs of two commercial real estate loans and loan charge-offs totaling $133 thousand, partially offset by a commercial business loan relationship totaling $969 thousand added to nonaccrual loans during the six months ended June 30, 2024. Management evaluates the financial condition of borrowers and the value of any collateral on nonaccrual loans. The results of these evaluations are used to estimate the amount of losses which may be realized on the disposition of these nonaccrual loans and are reflected in the allowance for credit losses on loans. At June 30, 2024 there was a $346 thousand allowance for credit losses required on the commercial business loan relationship due to a potential deficiency in collateral value. There was no allowance for credit losses required on nonaccrual loans at December 31, 2023.
Loans are placed on nonaccrual status when collection of principal and interest is doubtful, generally when a loan becomes 90 days past due. There are three negative implications for earnings when a loan is placed on non-accrual status. First, all interest accrued but unpaid at the date that the loan is placed on non-accrual status is either deducted from interest income or written off as a loss. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses to principal that require additional provisions for credit losses to be charged against earnings.
For real estate loans, upon foreclosure, the balance of the loan is transferred to OREO and carried at the fair value of the property based on current appraisals and other current market trends, less estimated selling costs. If a write down of the OREO property is necessary at the time of foreclosure, the amount is charged-off to the allowance for credit losses. A review of the recorded property value is performed in conjunction with normal quarterly 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.
Total deposits were $1.49 billion and $1.51 billion at June 30, 2024 and December 31, 2023, respectively. This represents a decrease of $17.7 million or 1.18% during the six months ended June 30, 2024. Note 7 to the Consolidated Financial Statements provides the composition of total deposits at June 30, 2024 and December 31, 2023. The decline in deposits was primarily in core accounts, which decreased $15.6 million and non-core accounts decreased $2.1 million. During the first half of 2024, noninterest demand deposits experienced a decline of $21.6 million, while savings and interest bearing demand deposits declined $9.1 million. Total time deposits increased $12.9 million during the six months ended June 30, 2024 reflecting increases of $10.4 million and $2.5 million for time deposits with balances less than $250,000 and time deposits with balances $250,000 and more, respectively. Marketing efforts, including rate specials, have been utilized to maintain maturing accounts and to acquire new time deposit accounts. Core deposits, consisting of checking accounts, NOW accounts, money market accounts, regular savings accounts and time deposits less than $250,000, totaled $1.26 billion, or 84.63% of total deposits at June 30, 2024 compared to $1.28 billion, or 84.67%, of total deposits at December 31, 2023. At June 30, 2024, over 75% of deposits were fully FDIC insured.
CAPITAL RESOURCES
The Bank continues to be a well capitalized financial institution. Total shareholders’ equity at June 30, 2024 was $111.1 million, reflecting a percentage of total assets of 6.21%, as compared to $108.4 million and 5.94% at December 31, 2023. The $2.7 million increase in shareholders’ equity was primarily due to net income of $5.7 million earned during the six months ended June 30, 2024, partially offset by an increase in unrealized losses on the securities available for sale portfolio of $953 thousand or $753 thousand, net of tax and dividends declared of $2.1 million. During each of the six months ended June 30, 2024 and 2023, the Company declared dividends of $0.60. The Company has a Dividend Investment Plan that allows shareholders to reinvest dividends in Company stock.
At June 30, 2024, the Bank met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions. The Bank monitors these ratios on a quarterly basis and has several strategies, including without limitation the issuance of common stock, to ensure that these ratios remain above regulatory minimums. The Bank's capital amounts and ratios are presented using the Federal Reserve's risk-based capital framework.
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.
At June 30, 2024 and December 31, 2023, the Bank's capital ratios were as follows: Common equity Tier 1 capital was 10.46% and 10.27%, respectively, Tier 1 risk-based capital was 10.46% and 10.27%, respectively, Total risk-based capital was 11.41% and 11.16%, respectively, and Tier 1 leverage was 8.86% and 8.48%, 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.
On March 31, 2022, the Company entered into Subordinated Note Purchase Agreements with certain purchasers pursuant to which the Company issued and sold $30.0 million in aggregate principal amount of its 4.50% Fixed-to-Floating Rate Subordinated Notes due April 1, 2032. See Note 14 to the Consolidated Financial Statements included in this Form 10-Q, for discussion of subordinated debt.
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 June 30, 2024, liquid assets totaled $340.1 million as compared to $367.7 million at December 31, 2023. These amounts represented 20.25% and 21.41% of total liabilities at June 30, 2024 and December 31, 2023, respectively. The Company generally attempts to minimize liquidity demand by primarily utilizing core deposits to fund asset growth. Securities provide a constant source of liquidity through paydowns and maturities. Also, the Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity. The Bank’s membership with the Federal Home Loan Bank of Atlanta provides a source of borrowings with numerous rate and term structures. The Company’s senior management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There have been no material changes in off-balance sheet arrangements and contractual obligations as reported in the 2023 Form 10-K.
53
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in Quantitative and Qualitative Disclosures about Market Risk as reported in the 2023 Form 10-K.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2024 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal control over the Company’s financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended). The Company is currently using the 2013 COSO Framework.
There were no changes in the Company’s internal control over financial reporting during the Company’s three months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company is a party or of which the property of the Company is subject.
Item 1A. Risk Factors
There were no material changes to the Company’s risk factors as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table details the Company's purchases of its common stock during the second quarter of 2024 pursuant to its Stock Repurchase Program ("the Program"). The Company authorized 150,000 shares for repurchase under the Program, which renewed on June 21, 2023 with a start date of July 1, 2023 and an expiration date of June 30, 2024. There were 139,069 shares remaining prior to the Program's expiration on June 30, 2024.
Issuer Purchases of Equity Securities
Total Numberof SharesPurchased
Average PricePaid Per Share
Total Numberof SharesPurchased asPart ofPubliclyAnnounced Plan
MaximumNumber ofShares thatmay Yet BePurchasedUnder thePlan
139,454
April 1 - April 30, 2024
29.50
139,346
May 1 - May 31, 2024
277
27.85
385
139,069
June 1 - June 30, 2024
28.31
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Item 5. Other Information
During the fiscal quarter ended June 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408(a) of Regulation S-K).
Item 6. Exhibits
The following exhibits are filed with this Form 10-Q or incorporated by reference to previous filings. This list includes the exhibit index:
31.1
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following materials from the Eagle Financial Services, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 formatted in Inline Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) notes to Consolidated Financial Statements.
The cover page from the Eagle Financial Services, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 formatted in Inline XBRL (included with Exhibit 101).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, this 14th day of August, 2024.
Eagle Financial Services, Inc.
By:
/S/ BRANDON C. LOREY
Brandon C. Lorey
President and Chief Executive Officer
/S/ KATHLEEN J. CHAPPELL
Kathleen J. Chappell
Executive Vice President, Chief Financial Officer