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, 2023
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 4, 2023 was 3,525,624.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements:
Consolidated Balance Sheets at June 30, 2023 and December 31, 2022
1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2023 and 2022
2
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2023 and 2022
3
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022
4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022
5
Notes to Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
36
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
57
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
Legal Proceedings
58
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
59
Item 1. Financial Statements
Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
June 30, 2023
December 31, 2022
(Unaudited)
Assets
Cash and due from banks
$
15,692
16,629
Interest-bearing deposits with other institutions
33,215
49,902
Federal funds sold
29,988
363
Total cash and cash equivalents
78,895
66,894
Securities available for sale, at fair value, amortized cost of $167,529 and $175,059, respectively
142,936
149,156
Restricted investments, at cost
8,577
9,233
Loans held for sale
3,570
153
Loans
1,470,970
1,323,783
Allowance for credit losses
(14,511
)
(11,218
Net Loans
1,456,459
1,312,565
Bank premises and equipment, net
18,064
Other real estate owned, net of allowance
—
108
Bank owned life insurance
24,219
23,862
Other assets
43,996
36,682
Total assets
1,776,716
1,616,717
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand deposits
433,220
478,750
Savings and interest bearing demand deposits
645,834
627,431
Time deposits
378,954
157,894
Total deposits
1,458,008
1,264,075
Federal funds purchased
32,980
Federal Home Loan Bank advances, short-term
25,000
175,000
Federal Home Loan Bank advances, long-term
145,000
Subordinated debt, net of unamortized issuance costs
29,411
29,377
Other liabilities
15,327
13,556
Total liabilities
1,672,746
1,514,988
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 2023, 3,528,240 including 63,972 shares of unvested restricted stock; issued and outstanding 2022, 3,490,086 including 38,780 shares of unvested restricted stock
8,661
8,629
Surplus
13,881
13,268
Retained earnings
100,844
100,278
Accumulated other comprehensive (loss)
(19,416
(20,446
Total shareholders’ equity
103,970
101,729
Total liabilities and shareholders’ equity
See Notes to Consolidated Financial Statements
Consolidated Statements of Income (Unaudited)
Three Months Ended
Six Months Ended
June 30,
2023
2022
Interest and Dividend Income
Interest and fees on loans
18,754
11,663
35,921
22,283
Interest and dividends on securities available for sale:
Taxable interest income
785
847
1,589
1,626
Interest income exempt from federal income taxes
75
9
158
Dividends
136
17
219
27
Interest on deposits in banks
656
41
1,146
56
Interest on federal funds sold
28
38
Total interest and dividend income
20,364
12,647
38,922
24,156
Interest Expense
Interest on deposits
5,535
383
8,994
753
Interest on federal funds purchased
8
70
Interest on Federal Home Loan Bank advances
2,032
4,063
Interest on subordinated debt
355
337
709
Total interest expense
7,922
728
13,836
1,098
Net interest income
12,442
11,919
25,086
23,058
Provision for Credit Losses
403
360
1,067
900
Net interest income after provision for credit losses
12,039
11,559
24,019
22,158
Noninterest Income
Wealth management fees
1,263
1,062
2,421
1,983
Service charges on deposit accounts
447
389
883
763
Other service charges and fees
1,135
1,029
2,182
1,938
Gain (loss) on the sale of bank premises and equipment
7
(11
Gain on sale of loans
192
498
648
976
Bank owned life insurance income
179
178
358
357
Other operating income
134
704
384
1,086
Total noninterest income
3,357
3,849
6,883
7,092
Noninterest Expenses
Salaries and employee benefits
7,561
5,983
14,859
11,935
Occupancy expenses
533
516
1,051
1,034
Equipment expenses
315
258
638
515
Advertising and marketing expenses
342
146
257
Stationery and supplies
66
78
101
ATM network fees
365
310
716
596
Other real estate owned expense
(Gain) on other real estate owned
(7
FDIC assessment
346
137
612
314
Computer software expense
281
184
591
438
Bank franchise tax
313
221
576
419
Professional fees
876
1,466
1,340
Data processing fees
478
479
880
959
Other operating expenses
1,612
1,352
3,238
2,543
Total noninterest expenses
12,955
10,528
25,341
20,451
Income before income taxes
2,441
4,880
5,561
8,799
Income Tax Expense
888
918
1,557
Net income
2,058
3,992
4,643
7,242
Earnings Per Share
Net income per common share, basic
0.58
1.14
1.32
2.08
Net income per common share, diluted
Consolidated Statements of Comprehensive Income (Loss)
(dollars in thousands)
Other comprehensive (loss) income:
Unrealized (loss) gain on available for sale securities net of reclassification adjustments, and net of deferred income tax of $(517) and $(1,588) for the three months ended and $275 and ($4,414) for the six months ended, respectively
(1,945
(5,973
1,035
(16,601
Changes in benefit obligations and plan assets for post retirement benefit plans, net of reclassification adjustments, net of deferred income tax of $0 and $0 for the three months ended and $(3) and $0 for the six months ended , respectively
(5
Total other comprehensive (loss) income
1,030
Total comprehensive income (loss)
113
(1,981
5,673
(9,359
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
Common Stock
RetainedEarnings
AccumulatedOtherComprehensiveIncome (Loss)
Total
December 31, 2021
8,556
12,115
89,764
(155
110,280
3,250
Other comprehensive (loss)
(10,628
Vesting of restricted stock awards, stock incentive plan (12,468 shares)
31
(31
Stock-based compensation expense
195
Issuance of common stock, dividend investment plan (2,782 shares)
90
97
Repurchase and retirement of common stock (3,411 shares)
(8
(109
(117
Dividends declared ($0.28 per share)
(974
March 31, 2022
8,586
12,260
92,040
(10,783
102,103
222
Issuance of common stock, employee benefit plan (3,451 shares)
112
120
June 30, 2022
8,594
12,594
95,058
(16,756
99,490
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)
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
323
Issuance of common stock, employee benefit plan (3,803 shares)
10
123
133
(1,059
Consolidated Statements of Cash Flows (Unaudited)
Cash Flows from Operating Activities
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation
492
491
Amortization of other assets
435
327
Origination of loans held for sale
(11,490
(8,698
Proceeds from sale of loans held for sale
8,409
9,437
Net (gains) on sales of loans
(648
(976
Provision for credit losses
(Gain) loss on the sale and disposal of premises and equipment
11
Amortization of subordinated debt issuance costs
34
640
417
Premium amortization on securities, net
185
332
(357
Changes in assets and liabilities:
(Increase) in other assets
(5,784
(4,707
Increase (decrease) in other liabilities
199
(1,446
Net cash (used in) provided by operating activities
(2,189
2,990
Cash Flows from Investing Activities
Proceeds from maturities, calls, and principal payments of securities available for sale
7,345
17,424
Purchases of securities available for sale
(25,813
Proceeds from the sale of restricted investments
3,788
Purchases of restricted investments
(3,132
(750
Purchases of bank premises and equipment
(516
(408
Proceeds from the sale of bank premises and equipment
Proceeds from the sale of other real estate owned
115
Changes in collateral posted with other financial institutions, net
(550
Proceeds from sales of loans
38,802
68,363
Origination of loans net of principal collected
(185,650
(203,033
Funding of capital commitments related to other investments
(435
(485
Net cash (used in) investing activities
(139,652
(145,252
Cash Flows from Financing Activities
Net (decrease) increase in noninterest bearing demand deposits, savings, and interest bearing demand deposits
(27,127
62,840
Net increase (decrease) in time deposits
221,060
(8,562
Net (decrease) increase in federal funds purchased
(32,980
28,575
Net (decrease) in short-term Federal Home Loan Bank advances
(150,000
Advances of long-term Federal Home Loan Bank advances
Issuance of subordinated debt, net of issuance costs
29,326
Issuance of common stock, employee benefit plan
Repurchase and retirement of common stock
Cash dividends paid
(2,116
(1,851
Net cash provided by financing activities
153,842
110,331
Increase (decrease) in cash and cash equivalents
12,001
(31,931
Cash and Cash Equivalents
Beginning
64,068
Ending
32,137
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest
12,465
764
Income taxes
1,206
1,356
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized gain (loss) on securities available for sale
1,310
(21,015
Minimum postretirement liability adjustment
Issuance of common stock, dividend investment plan
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, 2023 and December 31, 2022, the results of operations and the changes in shareholders' equity for the three and six months ended June 30, 2023 and 2022, and cash flows for the six months ended June 30, 2023 and 2022. The results of operations for the three and six months ended June 30, 2023 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, 2022 (the “2022 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, 2023, the Company adopted Accounting Standards Update ("ASU") 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial instruments—Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842)—Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” ASU 2020-02, “Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842),” ASU 2020-03, “Codification Improvements to Financial Instruments” and ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures” (collectively, "ASC 326").
ASC 326 introduced an approach based on current expected credit losses ("CECL") to estimate credit losses on certain types of financial instruments, replacing the incurred loss methodology from prior GAAP. It also applies to unfunded commitments to extend credit, including loan commitments, standby letters of credit, and other similar instruments. It modified the impairment model for available-for-sale debt securities and provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. It also modified the measurement principles for modifications of loans to borrowers experiencing financial difficulty, including how the allowance for credit losses ("ACL") is measured for such loans.
The amendments of ASC 326, upon adoption, were applied on a modified retrospective basis, recording an increase in the reported balance of the allowance for credit losses on loans, increasing the liability for credit losses on commitments to extend credit, and reducing total equity of both the Company and the Bank of Clarke, which resulted in a reduction of regulatory capital of Bank of Clarke. As a result of adopting ASC 326, the Company recorded a decrease to opening retained earnings of approximately $2.0 million, net of deferred taxes of approximately $521 thousand as of January 1, 2023.
The adoption of ASC 326 also replaced previous TDR accounting guidance, and the evaluation of the ACL will include loans previously designated as TDRs together with other loans that share similar risk characteristics.
The adoption of ASC 326 did not affect the carrying value of debt securities or the amount of unrealized gains and losses recorded in accumulated other comprehensive loss. Upon adoption of ASC 326, the Company did not have any securities included in its portfolio where other-than-temporary-impairments had previously been recognized or that required an ACL.
The following accounting policies have been updated in connection with the adoption of ASC 326 and apply to periods beginning after December 31, 2022. Accounting policies applying to prior periods are described in the 2022 Form 10-K.
Securities: Investments in debt securities are classified as either held to maturity, available for sale, or trading, based on management’s intent. Currently all of the Company’s debt securities are classified as available for sale. Available for sale debt securities are carried at estimated fair value with the corresponding unrealized gains and losses recognized in other comprehensive income (loss). Gains or losses are recognized in net income on the trade date using the amortized cost of the specific security sold. Purchase premiums are recognized in interest income using the interest method over the term of the securities.
Impairment of debt securities occurs when the fair value of a security is less than its amortized cost. The Company has elected to exclude accrued interest receivable from the amortized cost basis. Accrued interest totaled $408 thousand at June 30, 2023, and is included in the other assets line item in the Consolidated Balance Sheets. For debt securities available for sale, impairment is recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-likely-than-not that the Company will be required to sell the security before recovery, the Company evaluates unrealized losses to determine whether a decline in fair value below amortized cost basis is a result of a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security, or other factors such as changes in market interest rates. If a credit loss exists, an allowance for credit losses is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the security’s amortized cost basis exceeds its fair value. Changes in the allowance for credit losses are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value of debt securities available for sale not resulting from credit losses are recorded in other comprehensive income (loss). The Company regularly reviews unrealized losses in its investments in securities and cash flows expected to be collected from impaired securities based on criteria including the extent to which market value is below amortized cost, the financial health of and specific prospects for the issuer, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.
Loans Held for Investment: The Company makes mortgage, commercial and consumer loans to customers. The Company’s recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is reported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for credit losses. The Company has elected to exclude accrued interest receivable from the amortized cost basis. Accrued interest totaled $4.2 million at June 30, 2023, and is included in the other assets line item in the Consolidated Balance Sheet. Interest on loans is credited to operations based on the principal amount outstanding. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the level-yield method. The Company is amortizing these amounts over the life of the related loans.
A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest income. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. These policies are applied consistently across our loan portfolio.
In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.
Allowance for Credit Losses on Loans: The allowance for credit losses on loans is established 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. No allowance for credit loss is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. Loans that share common risk characteristics are evaluated collectively using a loss-rate, or cohort methodology to estimate its current expected credit losses on loans. The cohort method identifies and captures the balances of pooled loans with similar risk characteristics, as of a point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over their remaining lives. This method encompasses loan balances for as long as the loans are outstanding.
Management’s estimate of the allowance for credit losses on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the loss estimation process. Factors considered by management include economic conditions including reasonable and supportable forecasts of economic 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. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
Loans that do not share common risk characteristics with other loans are evaluated individually and are not included in the collective analysis. The allowance for credit losses on loans that are individually evaluated may be estimated based on their expected cash flows, or, in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated costs to sell. Additional disclosures related to loans and the allowance for credit losses on loans are reflected in note 5.
Reserve for Unfunded Commitments: The Company records a reserve, reported in other liabilities, for expected credit losses on commitments to extend credit that are not unconditionally cancelable by the Company. The reserve for unfunded commitments is measured based on the principles utilized in estimating the allowance for credit losses on loans and an estimate of the amount of unfunded commitments expected to be advanced. Changes in the reserve for unfunded commitments are recorded through the provision for credit losses. The reserve totaled $417 thousand at June 30, 2023 and $65 thousand at December 31, 2022. The
initial adjustment for the adoption of ASC 326 was an increase in the reserve of $406 thousand and the Company recorded a provision of $(7) and $(52) thousand for the three and six months ended June 30, 2023, respectively.
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 replaces 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. Prior to 2023, the vesting period for outside directors was typically less than nine months. 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, 2023, there was $1.1 million of unrecognized compensation cost related to nonvested restricted stock.
The following table presents restricted stock activity for the six months ended June 30, 2023 and 2022:
Shares
WeightedAverageGrant DateFair Value
Nonvested, beginning of period
38,780
33.47
31,738
30.70
Granted
37,941
36.60
25,048
34.24
Vested
(12,749
32.33
(12,468
30.00
Forfeited
(810
29.69
Nonvested, end of period
63,972
35.55
43,508
33.53
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, 2023 and 2022. During 2023 and 2022, there were no potentially dilutive securities outstanding.
Average number of common shares outstanding used to calculate basic and diluted earnings per share
3,526,934
3,479,591
3,524,695
3,476,001
NOTE 4. Securities
On January 1, 2023, the Company adopted ASC 326, which made changes to accounting for available for sale debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell a security prior to maturity. In addition, ASC 326 requires financial assets measured at amortized cost to measure an expected credit loss under the CECL methodology that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. All securities information presented as of June 30, 2023 is in accordance with ASC 326. All securities information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.
Amortized costs and fair values of securities available for sale at June 30, 2023 and December 31, 2022 were as follows:
AmortizedCost
GrossUnrealizedGains
GrossUnrealized(Losses)
Fair Value
(in thousands)
Obligations of U.S. government corporations and agencies
9,494
(791
8,703
Mortgage-backed securities
146,696
(22,757
123,939
Obligations of states and political subdivisions
6,589
(358
6,231
Subordinated debt
4,750
(687
167,529
(24,593
9,993
(858
9,135
153,289
(24,136
129,153
7,027
(422
6,607
(489
4,261
175,059
(25,905
The amortized cost and estimated fair value of securities at June 30, 2023, by the earlier of contractual maturity or expected maturity, are shown below. The Company has elected to exclude accrued interest receivable, totaling $408 thousand at June 30, 2023, from the amortized cost basis of securities. 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
868
860
Due after one year through five years
5,275
4,940
Due after five years through ten years
21,536
19,320
Due after ten years
139,850
117,816
During the six months ended June 30, 2023 and 2022, the Company sold no available for sale securities.
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, 2023 and December 31, 2022 were as follows:
Less than 12 months
12 months or more
GrossUnrealizedLosses
660
8,043
757
791
1,434
74
122,505
22,683
22,757
1,839
26
4,392
1,076
174
2,487
513
3,563
687
5,009
308
137,427
24,285
142,436
24,593
Gross Unrealized Losses
6,140
543
2,994
9,134
858
31,771
4,052
97,382
20,084
24,136
6,065
422
2,431
319
1,080
170
3,511
489
46,407
5,336
101,456
20,569
147,863
25,905
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 105 debt securities with a fair value below the amortized cost basis, totaling $142.4 million of aggregate fair value as of June 30, 2023. The Company concluded that a credit loss does not exist in its securities portfolio at June 30, 2023, and no impairment loss has been recognized based on the fact that (1) changes in fair value were caused primarily by 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 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 $14.1 million at June 30, 2023 were pledged as security for trust accounts.
The composition of restricted investments at June 30, 2023 and December 31, 2022 was as follows:
Federal Reserve Bank Stock
344
944
Federal Home Loan Bank Stock
8,093
8,149
Community Bankers’ Bank Stock
140
NOTE 5. Loans and Allowance for Credit Losses on Loans
The composition of loans at June 30, 2023 and December 31, 2022 was as follows:
December 31,
Mortgage real estate loans:
Construction & Secured by Farmland
95,433
89,651
HELOCs
44,333
43,588
Residential First Lien - Investor
117,265
111,074
Residential First Lien - Owner Occupied
142,417
125,088
Residential Junior Liens
11,869
11,417
Commercial - Owner Occupied
243,610
232,115
Commercial - Non-Owner Occupied & Multifamily
350,210
315,326
Commercial and industrial loans:
SBA PPP loans
63
Other commercial and industrial loans
100,759
99,571
Marine loans
299,304
230,874
Consumer loans
43,642
44,841
Overdrafts
218
Other loans
13,805
12,503
Total loans
1,463,018
1,316,340
Net deferred loan costs and premiums
7,952
7,443
At June 30, 2023, the Company was servicing $257.3 million of marine loans for other financial institutions which are not included in the table above. Also excluded from the table above are net servicing assets of $705 thousand at June 30, 2023, 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.
12
Changes in the allowance for credit losses on loans for the three and six months ended June 30, 2023 and 2022 were as follows:
Balance, beginning
13,950
9,315
11,218
8,787
Cumulative effect adjustment for adoption of ASC 326
2,077
410
1,119
Recoveries added to the allowance
203
213
224
248
Credit losses charged to the allowance
(52
(41
(127
(88
Balance, ending
14,511
9,847
Nonaccrual and past due loans by class at June 30, 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
98
95,335
40
44,293
76
37
142,304
169
243,576
1,311
348,899
238
241
100,518
430
298,874
212
105
235
552
43,090
1,911
803
2,819
1,460,199
13
Nonaccruals with No Allowance for Credit Losses
Nonaccrual with an Allowance for Credit Losses
NonaccrualLoans
16
1,111
118
18
3,106
3,109
Nonaccrual and past due loans by class at December 31, 2022 were as follows:
90 or MoreDays PastDue
90 or MorePast DueStillAccruing
89,550
397
149
43,439
155
39
261
124,827
175
15
73
88
99,483
318
374
44,467
442
531
973
1,315,367
2,162
14
The allowance for credit losses on loans by segment at June 30, 2023 and December 31, 2022 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
2,714
1,735
2,221
2,222
1,555
299
472
(1,840
1,933
3,584
(1,102
(285
(123
(90
Charge-Offs
(21
(106
Recoveries
Provision
25
333
496
(151
376
48
Ending balance
903
4,010
6,301
978
1,646
231
Ending balance: Individually evaluated
Ending balance: collectively evaluated
975
14,508
Loans:
315,884
593,820
100,822
14,113
Ending balance individually evaluated
1,193
1,328
3,052
Ending balance collectively evaluated
314,691
592,492
100,819
1,459,966
As of and For the Year Ended
2,794
1,671
1,729
1,294
789
291
(300
(79
(271
(659
197
109
44
1,260
(89
(815
295
766
439
1,830
Ending balance: Individually evaluated for impairment
100
Ending balance: collectively evaluated for impairment
1,708
2,149
11,118
291,167
547,441
99,645
12,721
Ending balance individually evaluated for impairment
1,044
3,719
1,695
141
22
6,621
Ending balance collectively evaluated for impairment
88,607
287,448
545,746
99,504
44,819
1,309,719
The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment:
Real Estate Collateral
Other Collateral
82
2,619
433
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, 2023.
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 anallysis is performed on a quarterly basis. The following table presents risk ratings by loan portfolio segment and origination year (for 2023 only). 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. 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, 2023 and December 31, 2022 was as follows:
Term Loan Amortized Cost Basis by Origination Year
2021
2020
2019
Prior
Revolving Loans Amortized Cost Basis
Revolving Loans Converted to Term
19,554
24,071
19,562
5,478
3,515
5,750
17,205
95,135
5,627
5,899
Current period gross charge-offs
44,317
10,655
27,335
33,180
12,040
5,304
26,381
114,895
394
234
631
1,259
27,729
34,525
12,671
21,933
29,514
24,254
36,812
4,417
23,952
140,899
652
866
25,470
930
3,075
3,631
1,581
667
1,945
11,829
1,985
18,864
74,703
41,305
28,100
16,460
54,660
3,431
237,523
1,056
957
565
3,676
2,393
2,411
44,754
29,057
17,558
55,243
34,992
111,601
62,627
75,287
17,488
38,433
1,175
341,603
4,204
2,406
7,296
115,805
63,158
77,693
39,899
10,073
33,564
11,686
5,392
3,129
2,404
27,414
93,662
2,522
3,164
1,406
7,094
12,595
36,728
5,395
3,131
28,820
78,488
138,775
38,712
680
42,649
2,035
15,112
6,645
9,270
1,916
61
8,603
21
106
9,947
177
2,744
850
Total by Risk Category
19
197,600
467,697
241,842
174,651
52,896
156,330
145,661
1,436,677
7,762
1,821
4,143
1,100
1,372
20,126
3,504
2,384
6,215
200,430
475,459
247,167
178,797
53,996
160,086
147,083
Total current period gross charge-offs
124
127
As of
INTERNAL RISK RATING GRADES
SpecialMention
Substandard
Doubtful
Loss
Commercial - Non Real Estate:
Commercial & Industrial
247,061
526
72
247,659
Commercial Real Estate:
Owner Occupied
212,074
20,020
Non-owner occupied
257,625
16,189
1,706
275,520
Construction and Farm land:
Residential
11,235
11,256
69,427
8,815
78,395
Residential:
Equity Lines
43,124
154
Single family
251,247
5,972
951
258,170
Multifamily
39,806
All other loans
1,144,320
43,170
11,740
1,199,230
Performing
Nonperforming
Consumer Credit Exposure by Payment Activity
116,908
202
20
NOTE 6. Restructurings for Borrowers Experiencing Financial Difficulty
The Company adopted the amendments in ASU 2022-02, which eliminated accounting guidance on TDR loans for creditors and requires enhanced disclosures for loan modifications to borrowers experiencing financial difficulty that we made on or after January 1, 2023.
The following table presents the amortized cost of loans that were modified during the six months ended June 30, 2023 by loan portfolio segment:
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, 2023. The financial effects of the term extensions during the period added a weighted average of 1.0 years to the life of loans which reduced the payment amounts for the borrowers.
There were no loans to borrowers experiencing financial difficulty that were modified during the three months ended June 30, 2023.
Prior to the adoption of ASU 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulting in granting a concession to a borrower experiencing financial dificulties as a TDR.
During the three and six months ended June 30, 2022, the Company classified five loans as troubled debt restructurings.
Number of Contracts
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
Construction and Farmland:
639
Single Family
539
557
1,363
1,381
Number ofContracts
Pre-Modification OutstandingRecorded Investment
Post-Modification OutstandingRecorded Investment
There were no payment defaults during the three and six months ended June 30, 2022 for TDRs that were restructured within the preceding twelve-month period.
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, 2023 and December 31, 2022 was as follows:
Savings and interest bearing demand deposits:
NOW accounts
194,239
167,197
Money market accounts
301,251
220,498
Regular savings accounts
150,344
239,736
Time deposits:
Balances of less than $250,000
246,589
87,531
Balances of $250,000 and more
132,365
70,363
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
4,817
4,978
Right-of-use assets
4,577
4,766
Weighted average remaining lease term
14 years
Weighted average discount rate
3.06
3.04
Lease Cost
Operating lease cost
132
267
264
Short-term lease cost
Total lease cost
274
272
Cash paid for amounts included in the measurement of lease liabilities
117
116
232
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities is as follows:
Lease payments due
Twelve months ending June 30, 2024
476
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
Thereafter
3,952
Total undiscounted cash flows
6,158
Discount
(1,341
23
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.
24
The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at June 30, 2023 and December 31, 2022:
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
1,166
Total assets at fair value
144,102
Liabilities:
Total liabilities at fair value
U.S. treasury notes
Interest rate swap
1,017
150,173
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 three and six months ended June 30, 2023 and the year ended December 31, 2022.
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. There were no individually evaluated collateral dependent loans recorded at fair value at June 30, 2023 or December 31, 2022.
Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the property, less estimated selling costs, establishing a new costs basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically obtained by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to fair value less cost to sell. The fair value measurement of real estate held in other real estate owned is assessed in the same manner as impaired loans described above. We believe that the fair value follows the provisions of GAAP. The Company held no other real estate owned at June 30, 2023 and had a balance of $108 thousand in other real etate owned at December 31, 2022.
The following table displays quantitative information about Level 3 Fair Value Measurements for certain assets measured at fair value on a nonrecurring basis at December 31, 2022:
Quantitative information about Level 3 Fair Value Measurements
Valuation Technique(s)
Unobservable Input
Range
Weighted Average (1)
Other real estate owned
Discounted contract price
Discount for selling costs
6%
6 %
(1) Unobservable inputs were weighted by the relative fair values of the instruments.
The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis at December 31, 2022:
Carrying value at
Quoted Pricesin ActiveMarketsfor IdenticalAssets
Nonfinancial Assets:
The carrying value and fair value of the Company’s financial instruments at June 30, 2023 and December 31, 2022 were as follows:
CarryingValueas of
Quoted Pricesin ActiveMarkets forIdenticalAssets
Fair Valueas of
Financial assets:
Cash and short-term investments
Securities
Restricted Investments
Loans, net
1,385,597
Accrued interest receivable
4,565
Financial liabilities:
Deposits
1,455,090
25,499
144,125
25,587
Accrued interest payable
2,263
Carrying Valueas of
1,260,149
3,902
1,262,859
174,705
26,101
926
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
(17,485
(10,802
Other comprehensive (loss) before reclassifications
(2,462
(7,561
Reclassifications
Tax effect of current period changes
517
1,588
Current period changes net of taxes
June 30
(19,430
(16,775
January 1
(20,465
(174
Other comprehensive income (loss) before reclassifications
1,302
(275
(272
4,414
For the three and six months ended June 30, 2023 and 2022, there were no reclassifications out of accumulated other comprehensive income (loss).
29
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, 2023 and 2022 and the year ended December 31, 2022:
Year Ended
Transfer from loans
Gain on foreclosures
Sales
(108
Valuation adjustments
The major classifications of other real estate owned in the consolidated balance sheets at December 31, 2022 were as follows:
Construction and Farmland
Residential Real Estate
Commercial Real Estate
Subtotal
Less valuation allowance
There were no consumer mortgage collateralized by residential real estate in the process of foreclosure at June 30, 2023 and December 31, 2022.
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.
At June 30, 2023 and December 31, 2022, the balance of the investment for qualified affordable housing projects was $2.1 million and $2.3 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, 2023 and December 31, 2022.
During each of the three months ended June 30, 2023 and June 30, 2022, the Company recognized amortization expense of $54 thousand and $57 thousand, respectively. The Company recognized amortization expenses of $158 thousand and $114 thousand for the six months ended June 30, 2023 and 2022. The amortization expense was included in Other operating expenses on the Consolidated Statements of Income.
Total estimated credits to be received during 2023 are $357 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, 2023 and 2022, were $180 thousand.
30
NOTE 13. Recent Accounting Pronouncements and Other Authoritative Guidance
In March 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. 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 ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.
Recently Adopted Accounting Developments
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. ASU 2016-13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on loans, as well as an adjustment to the Company’s reserve for unfunded loan commitments, was $2.5 million. The adjustment net of tax recorded to shareholders’ equity totaled $2.0 million.
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU 2022-02 was effective for the Company on January 1, 2023.
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 plans on using 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 $589 thousand at June 30, 2023.
The Company had $170.0 million in total borrowings with the FHLB at June 30, 2023 with $25.0 million being short-term borrowings and $145.0 million being long-term borrowings. The interest rate on the short-term borrowings with the FHLB was 5.26%. 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. The Company had $175.0 million in outstanding borrowings with the FHLB at December 31, 2022. The Company had a $80.6 million irrevocable letter of credit at June 30, 2023 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 table summarize key elements of the Company's derivative instruments at June 30, 2023 and December 31, 2022.
Notional Amount
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower
22,849
Matched interest rate swaps with counterparty
23,141
32
NOTE 16. Business Segments
The Company has two reportable operating segments: community banking and marine lending. 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 and gains on sales of loans.
Financial information of the parent company and the Bank of Clarke Wealth Management Division 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 wealth management division's net recenues are comprised primarily of income from offering wealth management services and insurance products through third-party service providers.
The following table provides income and asset information as of June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 2023 and June 30, 2022, 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.
33
Community Banking
Marine Lending
All Other
Eliminations
Consolidated
Interest Income
16,459
3,905
6,085
1,482
Net Interest Income
10,374
2,423
(355
Gain on sales of loans
122
Other noninterest income
2,031
(129
3,165
Net Revenue
12,527
2,364
908
15,799
446
(43
Noninterest expense
10,756
1,358
841
Income (loss) before taxes
1,325
1,049
67
Income tax expense (benefit)
220
Net Income (loss)
1,176
829
53
Other data:
Capital expenditures
490
509
Depreciation and amortization
49
364
11,051
1,596
35
338
10,696
1,561
(338
121
377
2,239
51
1,061
3,351
13,056
1,989
723
15,768
186
9,008
662
3,874
1,141
(135
676
240
(28
3,198
901
(107
77
273
47
371
31,700
7,222
10,452
2,675
21,248
4,547
(709
336
312
3,721
93
6,235
25,305
4,952
1,712
31,969
952
21,116
2,640
1,585
3,237
2,197
461
2,807
1,736
480
927
21,457
2,699
671
89
20,786
2,610
252
724
4,099
1,982
6,116
25,137
3,369
1,644
30,150
590
17,557
1,287
1,607
6,990
1,772
1,177
372
5,813
1,400
408
646
79
818
Total assets at June 30, 2023
1,467,487
307,420
1,809
Total assets at December 31, 2022
1,377,461
237,595
1,661
NOTE 17. Employee Stock Ownership Plan
During the second quarter, the Company’s employee stock ownership plan was terminated. As part of the termination process, which is ongoing, and as required by applicable law, participants have been offered the opportunity to direct the Company to repurchase of shares of Company stock distributed from the plan.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion is to focus on the 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 Item 8, Financial Statements and Supplementary Data, of the 2022 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, 2023, the Company had total assets of $1.78 billion, net loans of $1.46 billion, total deposits of $1.46 billion, and shareholders’ equity of $104.0 million. The Company’s net income was $4.6 million for the six months ended June 30, 2023.
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 Bank 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. This is accomplished by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through its trust department, sales of investments through Eagle Investment Services, 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 Category I officers, 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 (Category I) is assigned to the Bank’s President / Chief Executive Officer, Chief Revenue Officer and Chief Credit Officer (approval authority only). Two officers in Category I 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; and the three Category I Officers can combine to approve loan requests to borrowers with credit exposure up to $15.0 million on a secured basis and $9.0 million unsecured. Officers in Category II, III, IV, V, VI and VII have lesser authorities and with approval of a Category I officer may extend loans to borrowers with exposure of $5.0 million on a secured basis and $3.0 million unsecured. Officers in Categories I through VII 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 Director Loan 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. Refer to the Marine Lending section below for discussion of additional commercial and industrial lending.
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.
Refer to the Marine Lending section below for discussion of additional consumer lending.
The Bank’s marine lending unit includes originated retail loans, which are classified as commercial and industrial loans or consumer loans, depending on the borrower, and dealer floorplan loans, which are classified as commercial and industrial loans. The Company’s relationships are limited to well established dealers of global premium brand manufacturers. The Company’s top three manufacturer customers have been in business between 30 and 100 years. The Company primarily has secured agreements with premium manufacturers to support dealer floor plan loans which may reduce the Company’s credit exposure to the dealer, despite its underwriting of each respective dealer. The Company has developed incentive retail pricing programs with the dealers to drive retail dealer flow. Retail loans are generally limited to premium manufacturers with established relationships with the Company which have a vested interest in the secondary market pricing of their respective brand due to the limited inventory available for resale. Consequently, while not contractually committed, manufacturers will often support secondary resale values which can have the effect of reducing losses from non-performing retail marine loans. Retail borrowers generally have very high credit scores, substantial down payments, substantial net worth, personal liquidity, and excess cash flow.
CRITICAL ACCOUNTING POLICIES
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The financial information contained within these statements is, to a significant extent, based on measurements of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change.
Allowance for Credit Losses on Loans
The Company establishes the allowance for credit losses through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. The measurement of the allowance for credit losses is based in part on forecasts of unemployment, inflation, as well as the consumer price index, and may also consider other factors, which we believe to be indicative of risk factors related to collectability. Management also assesses the risk of credit losses arising from changes in economic conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances; lending policy and procedures; credit administration and lending staff; loan review; concentrations of credit and the value of underlying collateral in determining the recorded balance of the allowance for credit losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the allowance, we consider a range of possible assumptions and outcomes related to the various factors identified above. Refer to Note 1 of the interim consolidated financial information contained in Item 1 of this quarterly report on Form 10-Q for additional detail concerning the determination of the allowance for credit losses on loans.
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, 2023 was $4.6 million, a decrease of 35.89% or $2.6 million when compared to the same period in 2022. Net income for the three months ended June 30, 2023 was $2.1 million, a decrease of 48.45% or $1.9 million when compared to the same period in 2022. Earnings per share, basic and diluted were $1.32 and $2.08 for the six months ended June 30, 2023 and 2022, respectively. Earnings per share, basic and diluted were $0.58 and $1.14 for the three months ended June 30, 2023 and 2022, 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, 2023 and 2022 was 0.55% and 1.08%, 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, 2023 and 2022 was 9.01% and 13.91%, respectively.
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 $25.1 million and $23.1 million for the six months ended June 30, 2023 and 2022, respectively, which represents an increase of $2.0 million or 8.80%. Net interest income was $12.4 million and $11.9 million for the three months ended June 30, 2023 and 2022 respectively, which represents an increase of $523 thousand or 4.39%. Net interest income increased due to the increase in the average balance of the loan portfolio along with the rising interest rate environment. Average interest earning assets increased $347.1 million or 27.18% when comparing the six months ended June 30, 2022 to the six months ended June 30, 2023 while the average yield on earning assets increased by 101 basis points over that same period.
Total interest income was $38.9 million and $24.2 million for the six months ended June 30, 2023 and 2022, respectively, which represents an increase of $14.7 million or 61.13%. Total interest income was $20.4 million and $12.6 million for the three months ended June 30, 2023 and 2022, respectively, which represents an increase of $7.8 million or 61.02%. The increase in interest income was driven by an increase in the average balance of the loan portfolio along with the rising interest rate environment. Total interest expense was $13.8 million and $1.1 million for the six months ended June 30, 2023 and 2022, respectively, which represents an increase of $12.7 million or 1,160.11%. Total interest expense was $7.9 million and $728 thousand for the three months ended June 30, 2023 and 2022, respectively, which represents an increase of $7.2 million or 988.19% . The current rising interest rate environment, along with the growth of higher-paying deposit accounts, have been the main drivers for the increase interest expense. The increase in interest expense can also be attributed to the 2022 subordinated debt issuance, currently paying a 4.50% fixed rate issued, on March 31, 2022 along with four Federal Home Loan Bank advances of $145.0 million maturing from July 2023 through March 2026. Federal Home Loan Bank advances that were outstanding during the six months ended June 30, 2023 had fixed rates ranging from of 4.20% to 5.26%.
The net interest margin was 3.12% and 3.66% for the six months ended June 30, 2023 and 2022, respectively. The net interest margin was 2.99% and 3.70% for the three months ended June 30, 2023 and 2022, 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 2023 and 2022.
42
Net interest margin may experience some decline due to additional deposit pricing pressure as interest rates continue to increase and increased competition for new deposits is experienced. These combined factors may also result in the Company having to borrow additional wholesale funding to fund asset growth which is more expensive than deposits.
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, 2023 and 2022 (dollars in thousands):
Average
Income/
Yield/
Balance
Expense
Rate (3)
Securities:
Taxable
155,347
921
2.38
177,539
864
1.95
Tax-Exempt (1)
510
4.11
11,227
95
3.38
Total Securities
155,857
2.39
188,766
2.04
1,425,873
18,659
5.25
1,068,464
11,643
4.37
Non-accrual
2,608
2,470
9,810
119
4.86
2,697
3.79
1,438,291
18,778
5.24
1,073,631
11,669
4.36
Federal funds sold and interest-bearing deposits in other banks
80,251
684
3.42
34,138
45
0.53
Total earning assets (2)
1,674,399
20,389
4.88
1,296,535
12,673
3.93
Allowance for loan losses
(14,201
(9,536
Total non-earning assets
73,702
90,318
1,733,900
1,377,317
Liabilities and Shareholders' Equity:
Interest-bearing deposits:
240,401
1,247
174,111
0.21
254,136
1,093
1.72
267,571
150
0.22
Savings accounts
153,659
46
0.12
182,095
0.06
$250,000 and more
99,903
3.57
63,913
60
0.38
Less than $250,000
224,041
2,261
4.05
58,003
54
0.37
Total interest-bearing deposits
972,140
2.28
745,693
2,876
1.11
Federal Home Loan Bank advances
172,198
4.73
29,400
4.83
29,332
4.62
Total interest-bearing liabilities
1,173,916
2.71
777,901
Noninterest-bearing liabilities:
Demand deposits
440,728
485,979
Other Liabilities
15,212
12,468
1,629,856
1,276,348
Shareholders' equity
104,044
100,969
Total liabilities and shareholders' equity
12,467
11,945
Net interest spread
2.17
3.55
Interest expense as a percent of average earning assets
1.90
0.23
Net interest margin
2.99
3.70
43
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, 2023 and 2022 (dollars in thousands):
156,208
1,808
2.33
181,858
1,653
1.83
527
4.14
12,032
200
3.35
156,735
1,819
2.34
193,890
1,853
1.93
1,390,761
35,735
5.18
1,038,503
22,242
4.32
2,352
2,528
9,702
2,724
52
1,402,815
35,970
5.17
1,043,755
22,294
4.31
Federal funds sold andiInterest-bearing deposits in other banks
64,602
1,184
39,369
62
0.32
1,624,152
38,973
4.84
1,277,014
24,209
3.83
(13,816
(9,256
85,716
87,731
1,696,052
1,355,489
238,317
2,301
169,690
256,096
1,934
1.52
262,673
294
160,195
99
0.13
178,733
55
88,901
1,455
3.30
64,480
176,344
3,205
3.66
58,047
919,853
1.97
733,623
5,648
2.50
1,446
170,939
4.79
29,391
14,909
4.56
1,125,831
2.48
749,978
0.30
451,437
479,464
14,892
21,031
1,592,160
1,250,473
103,892
105,016
23,111
2.36
3.53
0.17
3.12
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
1,610
984
3,001
1,873
Interest Expense - Deposits
Interest Expense - Other Borrowings
2,387
345
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
Tax-Equivalent Net Interest Income
The tax-equivalent yield on earning assets increased from 3.83% to 4.84% for the six months ended June 30, 2022 compared to the same six month period in 2023. For those same time periods, the tax-equivalent yield on securities increased 41 basis points. The tax equivalent yield on loans increased 86 basis points from 4.31% for the six months ended June 30, 2022 to 5.17% for the same time period in 2023. The increase in the tax-equivalent yield on earning assets for the six months ended June 30, 2023 resulted mostly from the increase in the tax-equivalent yield on loans. The increase in the yield on loans as compared to the corresponding period in 2022 was primarily due to the current rising interest rate environment.
The average rate on interest bearing liabilities increased from 0.30% to 2.48% for the six months ended June 30, 2022 compared to the same six month period in 2023, respectively. The average rate on interest bearing deposits increased 176 basis points during the period. The current rising interest rate environment, along with the growth of higher-cost deposit accounts, have been the main drivers for the increased in the average rate on interest bearing deposits. The cost of interest bearing liabilities was also higher in the second quarter of 2023, due to four Federal Home Loan Bank advances of $145.0 million maturing from July 2023 through March 2026 with varying fixed rates ranging from of 4.43% to 5.26%.
The provision for credit losses is based upon management’s estimate of the amount required to maintain an adequate allowance for credit losses as discussed within the Critical Accounting Policies section above and in Note 1 of our interim financial information. The Company's provision for credit losses in 2023 consisted 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, 2023 and 2022 was $1.1 million and $900 thousand, respectively. The provision for loan losses for the three months ended June 30, 2023 and 2022 was $403 thousand and $360 thousand, respectively. The provision for credit losses for the three months ended June 30, 2023 and 2022 resulted mostly from loan growth during the quarters.
Total noninterest income for the six months ended June 30, 2023 and 2022 was $6.9 million and $7.1 million, respectively and for the three months ended June 30, 2023 and 2022 was $3.4 million and $3.8 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, 2023 and 2022, 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
201
244
Gain (loss) on disposal of bank premises and equipment
NM
(306
(61
)%
(328
(34
0
(570
(81
(702
(65
(492
(13
(209
(3
NM - Not Meaningful
Wealth management fee income increased from 2023 to 2022. 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 seen an increase during the three and six months ended June 30, 2023 when compared to the three and six months ended June 30, 2022.
Services charges on deposit accounts increased during the three and six months ended June 30, 2023 when compared to the same periods in 2022. This increase is mainly due to increases in overdraft charges. Overdraft charges can fluctuate based on changes in customer activity.
Other service charges and fees increased during the three and six months ended June 30, 2023 when compared to the same periods in 2022.. This increase can be attributed to increased ATM fee income. ATM fee income can fluctuate based on ATM usage by non-customers.
Gain on sale of loans decreased during the three and six months ended June 30, 2023 when compared to the same periods in 2022. During the first two quarters of 2023, the Company sold $5.2 million in mortgage loans on the secondary market and $41.5 million of loans from the commercial and consumer loan portfolios. These loan sales resulted in gains of $192 thousand and $648 thousand during the three and six months ended June 30, 2023, respectively. During the first two quarters of 2022, the Company sold $9.4 million in mortgage loans on the secondary market and $68.4 million of marine loans from the commercial and consumer loan portfolios. These loan sales resulted in gains of $498 thousand and $976 thousand during the three and six months ended June 30, 2022.
Other operating income decreased for the three and six months ended June 30, 2023 when compared to the same period in 2022. This decrease can be mainly attributed to cash distributions received during the first half of 2022 from investments in Small Business Investment Companies, that were not received during the first half of 2023.
Total noninterest expenses increased $4.9 million or 23.91% for the six months ended June 30, 2023 compared to the same period in 2022. Total noninterest expenses increased $2.4 million or 23.05% for the three months ended June 30, 2023 compared to the same period in 2022. The following table presents the components of noninterest expense for the three and six months ended June 30, 2023 and 2022, which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.
1,578
2,924
196
381
148
Stationary and supplies
(10
(15
(23
209
298
92
157
(14
126
(1
(0
260
695
2,427
4,890
The Company’s growth has had an impact on noninterest expenses. Total assets have grown by $374.2 million or 26.68% from June 30, 2022 to June 30, 2023. This growth has required investments to be made in the Company’s infrastructure, causing increases in salaries and employee benefits, equipment expenses, advertising and marketing expenses and computer software expense. In addition, increases in asset size and capital levels have impacted the FDIC assessment and bank franchise tax amounts.
Salaries and employee benefits increased during the three and six months ended June 30, 2023 over 2022. Annual pay increases, newly hired employees, increasing insurance costs and enhanced employee incentive plans have attributed to these increases. The number of full-time equivalent employees has increased from 227 at June 30, 2022 to 275 at June 30, 2023.
ATM network fees increased during the three and six months ended June 30, 2023 over 2022. This is due mainly to fluctuations in customer usage.
A decrease in professional fees was noted between the three months ended June 30, 2022 and June 30, 2023. The Company experienced higher legal expenses during the second quarter of 2022 primarily from the expansion of the Bank's wealth management business line and the build out of the marine lending division.
For the three and six months ended June 30, 2023 other operating expenses increased over 2022. This increase is due to increased loan related expenses due to a higher volume, increased director fees and employee travel expense for training, marketing and sales meetings.
The efficiency ratio of the Company was 79.18% and 67.69% for the six months ended June 30, 2023 and 2022, respectively. The efficiency ratio of the Company was 81.91% and 66.61% for the three months ended June 30, 2023 and 2022. 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, 2023 and 2022 was as follows:
Summary of Operating Results:
Noninterest expenses
Less: (Gain) on other real estate owned
Adjusted noninterest expenses
25,348
Noninterest income
Less: Gain (loss) on the sale and disposal of premises and equipment
Adjusted noninterest income
3,350
3,860
6,876
7,103
Tax equivalent adjustment (1)
Total net interest income and noninterest income, adjusted
15,817
15,805
32,013
30,214
Efficiency ratio
81.91
66.61
79.18
67.69
Income Taxes
Income tax expense was $918 thousand and $1.6 million during the six months ended June 30, 2023 and 2022, respectively. Income tax expense was $383 thousand and $888 thousand during the three months ended June 30, 2023 and 2022, respectively. The effective tax rate was 16.51% and 17.70% for the six months ended June 30, 2023 and 2022, respectively. The effective tax rate was 15.69% and 18.20% for the three months ended June 30, 2023 and 2022, respectively. The effective tax rate is below the statutory rate of 21% due to tax-exempt income on investment securities and loans. The effective tax rate is also impacted by BOLI as well as income tax credits on qualified affordable housing project investments as discussed in Note 12 to the Consolidated Financial Statements as well as qualified rehabilitation credits.
Business Segments
The Company has two reportable operating segments: community banking and marine lending. Revenue from community banking operations consist primarily of net interest income related to investments in loans 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 and gains on sales of loans.
Financial information for the parent company and the Bank of Clarke Wealth Management Division is included in the "All Other" category. The parent company's operating results are comprised primarily of interest expense associated with subordinated debt. The wealth management division's net recenues are comprised primarily of income from offering wealth management services and insurance products through third-party service providers. Refer to Note 16 for additional information.
The following tables provide income and asset information for the three and six months ended June 30, 2023 and 2022 and as of June 30, 2023 and December 31, 2022, which are included within the Consolidated Balance Sheets and Consolidated Statements of Income.
50
FINANCIAL CONDITION
Total securities available for sale were $142.9 million at June 30, 2023, compared to $149.2 million at December 31, 2022. This represents a decrease of $6.2 million or 4.17%. The Company purchased no securities during the six months ended June 30, 2023. The Company had total maturities, calls, and principal repayments of $7.3 million during the six months ended June 30, 2023. Note 4 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio at June 30, 2023 and December 31, 2022. The Company had a net unrealized loss on available for sale securities of $24.6 million at June 30, 2023 as compared to a net unrealized loss of $25.9 million at December 31, 2022. 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, 2023 and December 31, 2022 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 $1.47 billion and $1.32 billion at June 30, 2023 and December 31, 2022, respectively. This represents an increase of $147.2 million or 11.12% during the six months ended June 30, 2023. The ratio of gross loans to deposits decreased during the six months ended June 30, 2023 from 104.72% at December 31, 2022 to 100.89% at June 30, 2023.
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, 2023 and December 31, 2022. During the six months ended June 30, 2023, $46.7 million in loans were sold. The Company sold $5.2 million in mortgage loans on the secondary market and $41.5 million of loans from the commercial and consumer loan portfolios. These loan sales resulted in net gains of $648 thousand. The growth in loans was largely due to organic loan portfolios growth as the Company expands lending types and markets.
Commercial real estate loans (including multifamily loans) were $593.8 million or 40.59% and $547.4 million or 41.59% of total loans at June 30, 2023 and December 31, 2022, respectively, representing an increase of $46.4 million or 8.47% during the six months ended June 30, 2023. Marine loans were $299.3 million or 20.46% and $230.9 million or 17.54% of total loans at June 30, 2023 and December 31, 2022, respectively, representing an increase of $68.4 million or 29.64%. Loan growth was mainly concentrated in the marine lending portfolio due to continued growth in the marine lending team and market areas. In addition to the marine lending portfolio growth, commercial real estate loans experienced an increase during the six months ended June 30, 2023 due largely to the continued growth and expansion of the Bank’s current market area.
The purpose of, and the methods for, measuring the allowance for credit losses on loans are discussed in the Critical Accounting Policies section above and in note 1 of the interim consolidated financial information. 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, 2023 and 2022 and the year ended December 31, 2022. Charged-off loans were $127 thousand and $88 thousand for the six months ended June 30, 2023 and 2022, respectively. Recoveries were $224 thousand and $248 thousand for the six months ended June 30, 2023 and 2022, respectively. This resulted in net recoveries of $97 thousand and $160 thousand for the six months ended June 30, 2023 and 2022, respectively. The annualized ratio of net recoveries to average loans was (0.01%) and (0.02%) for the six months ended June 30, 2023 and 2022, respectively. The allowance for credit losses on loans as a percentage of loans was 0.99% at June 30, 2023 and 0.85% at December 31, 2022 and 1.00% as of January 1, 2023, the date of adoption for ASC 326. The increase as compared to December 31, 2022 was attributable to the adoption of ASC 326.
Management believes that the allowance for credit losses on loans is currently adequate to absorb the current expected losses in the loan portfolio.
Nonperforming Assets and Other Assets
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
3,344
2,588
Allowance for credit losses on loans
Gross loans
Allowance for credit losses on loans to nonperforming assets
434
Allowance for credit losses on loans to total loans
0.99
0.85
Allowance for credit losses on loans to nonaccrual loans
467
519
Nonaccrual loans to total loans
0.19
Non-performing assets to period end loans and other real estate owned
0.20
Nonperforming assets increased by $756 thousand during the six months ended June 30, 2023. Nonaccrual loans were $3.1 million and $2.2 million at June 30, 2023 and December 31, 2022. There was no OREO at June 30, 2023 and $108 thousand at December 31, 2022. There were $235 thousand in loans past due 90 days or more and still accruing at June 30, 2023 and $318 thousand in loans past due 90 days or more and still accruing at December 31, 2022. The percentage of nonperforming assets to loans and OREO was 0.23% at June 30, 2023 and 0.20% at December 31, 2022, respectively.
Total past due loans, as disclosed in note 5 to the Consolidated Financial Statements, increased to $2.8 million at June 30, 2023 compared to $973 thousand at December 31, 2022. The majority of the increase in past due loans was due to one large relationship totaling $1.6 million that was past due 33 days at June 30, 2023. This relationship was not past due at December 31, 2022 and became current again subsequent to June 30, 2023.
During the six months ended June 30, 2023, one loan relationship totaling $1.1 million was placed on nonaccrual status. 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.
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 $1.46 billion and $1.26 billion at June 30, 2023 and December 31, 2022, respectively. This represents an increase of $193.9 million or 15.34% during the six months ended June 30, 2023. Note 7 to the Consolidated Financial Statements provides the composition of total deposits at June 30, 2023 and December 31, 2022. Growth in deposits has been divided between core and non-core accounts. During the first half of 2023, approximately $71.9 million or 37.1% of total deposit growth was organic growth as the Company continued to expand and grow into newer market areas. The remaining growth was attributable to brokered deposits and CDs of $250 thousand and greater. As interest rates have risen, the Company has noticed a shift in the mix of deposits away from non-interest bearing deposits and towards time deposits and, to a lesser degree, other interest bearing deposits. Time deposits increased by $221.1 million or 140.0% between December 31, 2022 and June 30, 2023, while non-interest bearing deposits have decreased $45.5 million or 9.5% and savings and interest bearing demand deposits have increased by $18.4 million or 2.9% for the same time period. Time deposits as a percentage of total deposits have increased from 12.5% at December 31, 2022, to 26.0% at June 30, 2023. The increase in time deposits is partially due to $30.0 million in brokered accounts that the Company entered into during the first quarter of 2023. At June 30, 2023, over 74% of deposits were fully FDIC insured.
CAPITAL RESOURCES
The Bank continues to be a well capitalized financial institution. Total shareholders’ equity at June 30, 2023 was $104.0 million, reflecting a percentage of total assets of 5.85%, as compared to $101.7 million and 6.29% at December 31, 2022. The reason for the increase in shareholders’ equity was due to an improvement in unrealized losses on the securities available for sale portfolio of $1.3 million or $1.0 million, net of tax, as well as net income of $4.6 million earned during the six months ended June 30, 2023. During the six months ended June 30, 2023 and 2022, the Company declared dividends of $0.60 and $0.56 per share, respectively. The Company has a Dividend Investment Plan that allows shareholders to reinvest dividends in Company stock.
At June 30, 2023, 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.
On September 17, 2019, the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio or “CBLR” framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. Under the final rule, an eligible banking organization may opt out and revert to the risk-weighting framework without restriction. As a qualifying community banking organization, the Bank elected to measure its capital adequacy under the CBLR framework. The Bank’s Tier 1 leverage ratio as of June 30, 2023 and December 31, 2022 was 8.62% and 9.19%, respectively. The Bank continues to be classified as "well capitalized" under the CBLR framework as the leverage ratio remains above 8% and the Bank has elected to use the two-quarter grace period provided under the framework. Per the CBLR framework, at the conclusion of the grace period or prior, it is the Bank's intention to either meet all qualifying criteria to remain in the CBLR framework, or to comply with the generally applicable BASEL III capital rules and the associated reporting requirements. Management continuously assesses the adequacy of the Bank’s capital with the goal to maintain a “well capitalized” classification.
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, securities classified as available for sale and loans maturing within one year. At June 30, 2023, liquid assets totaled $307.1 million as compared to $317.1 million at December 31, 2022. These amounts represented 18.36% and 20.93% of total liabilities at June 30, 2023 and December 31, 2022, 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 2022 Form 10-K.
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 2022 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, 2023 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, 2023 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, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company had no purchases of its common stock during the second quarter of 2023 pursuant to the Stock Repurchase Program. The Company authorized 150,000 shares for repurchase under the Stock Repurchase program which was renewed on June 15, 2022. The Program had start date of July 1, 2022 and an expiration date of June 30, 2023. There were 145,235 shares available for purchase at its conclusion on June 30, 2023. The Company again authorized 150,000 shares for repurchase under the Stock Repurchase program which was renewed on June 21, 2023. The Program has start date of July 1, 2023 and an expiration date of June 30, 2024.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
The following exhibits are filed with this Form 10-Q and this list includes the exhibit index:
Exhibit
No.
Description
10.1
Eagle Financial Services, Inc. 2023 Stock Incentive Plan (incorporated by reference to Appendix A of Eagle Financial Services, Inc.'s proxy statement for the 2023 annual meeting of shareholders, filed April 5, 2023).
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.
The following materials from the Eagle Financial Services, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 formatted in Inline Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss) (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) notes to Consolidated Financial Statements.
104
The cover page from the Eagle Financial Services, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 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, 2023.
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