Annual Statements Open main menu

EAGLE FINANCIAL SERVICES INC - Quarter Report: 2023 September (Form 10-Q)

10-Q

 

 

 

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 September 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 November 2, 2023 was 3,520,894.

 


 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

Consolidated Balance Sheets at September 30, 2023 and December 31, 2022

1

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022

2

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022

3

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022

4

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 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

37

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

59

Item 4.

Controls and Procedures

59

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

60

Item 1A.

Risk Factors

60

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 3.

Defaults Upon Senior Securities

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

61

 

 


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EAGLE FINANCIAL SERVICES, INC.

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

 

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

14,154

 

 

$

16,629

 

Interest-bearing deposits with other institutions

 

 

49,085

 

 

 

49,902

 

Federal funds sold

 

 

78,799

 

 

 

363

 

Total cash and cash equivalents

 

$

142,038

 

 

$

66,894

 

Securities available for sale, at fair value, amortized cost of $163,806 and $175,059, respectively

 

 

133,976

 

 

 

149,156

 

Restricted investments, at cost

 

 

8,583

 

 

 

9,233

 

Loans held for sale

 

 

3,564

 

 

 

153

 

Loans

 

 

1,440,985

 

 

 

1,323,783

 

Allowance for credit losses

 

 

(14,573

)

 

 

(11,218

)

Net Loans

 

$

1,426,412

 

 

$

1,312,565

 

Bank premises and equipment, net

 

 

18,421

 

 

 

18,064

 

Other real estate owned, net of allowance

 

 

 

 

 

108

 

Bank owned life insurance

 

 

24,404

 

 

 

23,862

 

Other assets

 

 

44,072

 

 

 

36,682

 

Total assets

 

$

1,801,470

 

 

$

1,616,717

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest bearing demand deposits

 

$

430,910

 

 

$

478,750

 

Savings and interest bearing demand deposits

 

 

656,111

 

 

 

627,431

 

Time deposits

 

 

411,359

 

 

 

157,894

 

Total deposits

 

$

1,498,380

 

 

$

1,264,075

 

Federal funds purchased

 

 

 

 

 

32,980

 

Federal Home Loan Bank advances, short-term

 

 

 

 

 

175,000

 

Federal Home Loan Bank advances, long-term

 

 

145,000

 

 

 

 

Subordinated debt, net of unamortized issuance costs

 

 

29,428

 

 

 

29,377

 

Other liabilities

 

 

27,479

 

 

 

13,556

 

Total liabilities

 

$

1,700,287

 

 

$

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, 3,520,894 including 57,014 shares of unvested restricted stock; issued and outstanding 2022, 3,490,171 including 38,780 shares of unvested restricted stock

 

 

8,660

 

 

 

8,629

 

Surplus

 

 

13,970

 

 

 

13,268

 

Retained earnings

 

 

102,106

 

 

 

100,278

 

Accumulated other comprehensive (loss)

 

 

(23,553

)

 

 

(20,446

)

Total shareholders’ equity

 

$

101,183

 

 

$

101,729

 

Total liabilities and shareholders’ equity

 

$

1,801,470

 

 

$

1,616,717

 

 

See Notes to Consolidated Financial Statements

 


TABLE OF CONTENTS

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Income (Unaudited)

(dollars in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Interest and Dividend Income

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

20,179

 

 

$

13,282

 

 

$

56,100

 

 

$

35,565

 

Interest and dividends on securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable interest income

 

 

781

 

 

 

851

 

 

 

2,370

 

 

 

2,477

 

Interest income exempt from federal income taxes

 

 

3

 

 

 

59

 

 

 

12

 

 

 

217

 

Dividends

 

 

147

 

 

 

22

 

 

 

366

 

 

 

49

 

Interest on deposits in banks

 

 

1,030

 

 

 

143

 

 

 

2,176

 

 

 

199

 

Interest on federal funds sold

 

 

51

 

 

 

9

 

 

 

89

 

 

 

15

 

Total interest and dividend income

 

$

22,191

 

 

$

14,366

 

 

$

61,113

 

 

$

38,522

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

$

6,978

 

 

$

714

 

 

$

15,972

 

 

$

1,467

 

Interest on federal funds purchased

 

 

 

 

 

11

 

 

 

70

 

 

 

19

 

Interest on Federal Home Loan Bank advances

 

 

1,943

 

 

 

404

 

 

 

6,006

 

 

 

404

 

Interest on subordinated debt

 

 

354

 

 

 

338

 

 

 

1,063

 

 

 

675

 

Total interest expense

 

$

9,275

 

 

$

1,467

 

 

$

23,111

 

 

$

2,565

 

Net interest income

 

$

12,916

 

 

$

12,899

 

 

$

38,002

 

 

$

35,957

 

Provision for Credit Losses

 

 

216

 

 

 

 

 

 

1,283

 

 

 

900

 

Net interest income after provision for credit losses

 

$

12,700

 

 

$

12,899

 

 

$

36,719

 

 

$

35,057

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

$

1,190

 

 

$

1,094

 

 

$

3,611

 

 

$

3,077

 

Service charges on deposit accounts

 

 

460

 

 

 

432

 

 

 

1,343

 

 

 

1,195

 

Other service charges and fees

 

 

1,252

 

 

 

1,061

 

 

 

3,434

 

 

 

2,999

 

Gain on the sale of marine finance assets

 

 

463

 

 

 

 

 

 

463

 

 

 

 

Gain (loss) on the sale of bank premises and equipment

 

 

7

 

 

 

8

 

 

 

14

 

 

 

(3

)

(Loss) on sale of securities

 

 

 

 

 

(737

)

 

 

 

 

 

(737

)

Gain on sale of loans

 

 

265

 

 

 

568

 

 

 

913

 

 

 

1,544

 

Bank owned life insurance income

 

 

184

 

 

 

138

 

 

 

542

 

 

 

495

 

Other operating income

 

 

388

 

 

 

600

 

 

 

772

 

 

 

1,686

 

Total noninterest income

 

$

4,209

 

 

$

3,164

 

 

$

11,092

 

 

$

10,256

 

Noninterest Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

7,598

 

 

$

6,938

 

 

$

22,457

 

 

$

18,873

 

Occupancy expenses

 

 

570

 

 

 

528

 

 

 

1,621

 

 

 

1,562

 

Equipment expenses

 

 

341

 

 

 

299

 

 

 

979

 

 

 

814

 

Advertising and marketing expenses

 

 

228

 

 

 

181

 

 

 

866

 

 

 

438

 

Stationery and supplies

 

 

69

 

 

 

34

 

 

 

147

 

 

 

135

 

ATM network fees

 

 

426

 

 

 

381

 

 

 

1,142

 

 

 

977

 

Other real estate owned expense

 

 

 

 

 

 

 

 

5

 

 

 

 

(Gain) on other real estate owned

 

 

 

 

 

 

 

 

(7

)

 

 

 

FDIC assessment

 

 

495

 

 

 

116

 

 

 

1,107

 

 

 

430

 

Computer software expense

 

 

396

 

 

 

252

 

 

 

987

 

 

 

690

 

Bank franchise tax

 

 

340

 

 

 

234

 

 

 

916

 

 

 

653

 

Professional fees

 

 

497

 

 

 

270

 

 

 

1,963

 

 

 

1,610

 

Data processing fees

 

 

542

 

 

 

427

 

 

 

1,422

 

 

 

1,386

 

Other operating expenses

 

 

2,631

 

 

 

1,398

 

 

 

5,869

 

 

 

3,941

 

Total noninterest expenses

 

$

14,133

 

 

$

11,058

 

 

$

39,474

 

 

$

31,509

 

Income before income taxes

 

$

2,776

 

 

$

5,005

 

 

$

8,337

 

 

$

13,804

 

Income Tax Expense

 

 

457

 

 

 

923

 

 

 

1,375

 

 

 

2,480

 

Net income

 

$

2,319

 

 

$

4,082

 

 

$

6,962

 

 

$

11,324

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share, basic

 

$

0.66

 

 

$

1.17

 

 

$

1.98

 

 

$

3.25

 

Net income per common share, diluted

 

$

0.66

 

 

$

1.17

 

 

$

1.98

 

 

$

3.25

 

 

See Notes to Consolidated Financial Statements

2


TABLE OF CONTENTS

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(dollars in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net income

 

$

2,319

 

 

$

4,082

 

 

$

6,962

 

 

$

11,324

 

Other comprehensive (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) on available for sale securities net of reclassification adjustments, and net of deferred income tax of $(1,100) and $(1,189) for the three months ended and $(825) and ($5,603) for the nine months ended, respectively

 

 

(4,137

)

 

 

(4,475

)

 

 

(3,102

)

 

 

(21,076

)

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 nine months ended , respectively

 

 

 

 

 

 

 

 

(5

)

 

 

 

Total other comprehensive (loss)

 

 

(4,137

)

 

 

(4,475

)

 

 

(3,107

)

 

 

(21,076

)

Total comprehensive income (loss)

 

$

(1,818

)

 

$

(393

)

 

$

3,855

 

 

$

(9,752

)

 

See Notes to Consolidated Financial Statements

3


TABLE OF CONTENTS

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars in thousands, except per share amounts)

 

 

 

Common Stock

 

 

Surplus

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total

 

December 31, 2021

 

$

8,556

 

 

$

12,115

 

 

$

89,764

 

 

$

(155

)

 

$

110,280

 

Net income

 

 

 

 

 

 

 

 

3,250

 

 

 

 

 

 

3,250

 

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

(10,628

)

 

 

(10,628

)

Vesting of restricted stock awards, stock incentive plan (12,468 shares)

 

 

31

 

 

 

(31

)

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

195

 

 

 

 

 

 

 

 

 

195

 

Issuance of common stock, dividend investment plan (2,782 shares)

 

 

7

 

 

 

90

 

 

 

 

 

 

 

 

 

97

 

Repurchase and retirement of common stock (3,411 shares)

 

 

(8

)

 

 

(109

)

 

 

 

 

 

 

 

 

(117

)

Dividends declared ($0.28 per share)

 

 

 

 

 

 

 

 

(974

)

 

 

 

 

 

(974

)

March 31, 2022

 

$

8,586

 

 

$

12,260

 

 

$

92,040

 

 

$

(10,783

)

 

$

102,103

 

Net income

 

 

 

 

 

 

 

 

3,992

 

 

 

 

 

 

3,992

 

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

(5,973

)

 

 

(5,973

)

Stock-based compensation expense

 

 

 

 

 

222

 

 

 

 

 

 

 

 

 

222

 

Issuance of common stock, employee benefit plan (3,451 shares)

 

 

8

 

 

 

112

 

 

 

 

 

 

 

 

 

120

 

Dividends declared ($0.28 per share)

 

 

 

 

 

 

 

 

(974

)

 

 

 

 

 

(974

)

June 30, 2022

 

$

8,594

 

 

$

12,594

 

 

$

95,058

 

 

$

(16,756

)

 

$

99,490

 

Net income

 

 

 

 

 

 

 

 

4,082

 

 

 

 

 

 

4,082

 

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

(4,475

)

 

 

(4,475

)

Stock-based compensation expense

 

 

 

 

 

329

 

 

 

 

 

 

 

 

 

329

 

Issuance of common stock, dividend investment plan (2,800 shares)

 

 

7

 

 

 

94

 

 

 

 

 

 

 

 

 

101

 

Issuance of common stock, employee benefit plan (614 shares)

 

 

2

 

 

 

20

 

 

 

 

 

 

 

 

 

22

 

Repurchase and retirement of common stock (1,031 shares)

 

 

(3

)

 

 

(34

)

 

 

 

 

 

 

 

 

(37

)

Dividends declared ($0.29 per share)

 

 

 

 

 

 

 

 

(1,012

)

 

 

 

 

 

(1,012

)

September 30, 2022

 

$

8,600

 

 

$

13,003

 

 

$

98,128

 

 

$

(21,231

)

 

$

98,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

$

8,629

 

 

$

13,268

 

 

$

100,278

 

 

$

(20,446

)

 

$

101,729

 

Cumulative effect adjustment for CECL

 

 

 

 

 

 

 

 

(1,961

)

 

 

 

 

 

(1,961

)

Net income

 

 

 

 

 

 

 

 

2,585

 

 

 

 

 

 

2,585

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

2,975

 

 

 

2,975

 

Vesting of restricted stock awards, stock incentive plan (12,749 shares)

 

 

31

 

 

 

(31

)

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

317

 

 

 

 

 

 

 

 

 

317

 

Repurchase and retirement of common stock (3,590 shares)

 

 

(9

)

 

 

(119

)

 

 

 

 

 

 

 

 

(128

)

Dividends declared ($0.30 per share)

 

 

 

 

 

 

 

 

(1,057

)

 

 

 

 

 

(1,057

)

March 31, 2023

 

$

8,651

 

 

$

13,435

 

 

$

99,845

 

 

$

(17,471

)

 

$

104,460

 

Net income

 

 

 

 

 

 

 

 

2,058

 

 

 

 

 

 

2,058

 

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

(1,945

)

 

 

(1,945

)

Stock-based compensation expense

 

 

 

 

 

323

 

 

 

 

 

 

 

 

 

323

 

Issuance of common stock, employee benefit plan (3,803 shares)

 

 

10

 

 

 

123

 

 

 

 

 

 

 

 

 

133

 

Dividends declared ($0.30 per share)

 

 

 

 

 

 

 

 

(1,059

)

 

 

 

 

 

(1,059

)

June 30, 2023

 

$

8,661

 

 

$

13,881

 

 

$

100,844

 

 

$

(19,416

)

 

$

103,970

 

Net income

 

 

 

 

 

 

 

 

2,319

 

 

 

 

 

 

2,319

 

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

(4,137

)

 

 

(4,137

)

Stock-based compensation expense

 

 

 

 

 

263

 

 

 

 

 

 

 

 

 

263

 

Vesting of restricted stock awards, stock incentive plan (4,553 shares)

 

 

11

 

 

 

(11

)

 

 

 

 

 

 

 

 

 

Repurchase and retirement of common stock (4,941 shares)

 

 

(12

)

 

 

(163

)

 

 

 

 

 

 

 

 

(175

)

Dividends declared ($0.30 per share)

 

 

 

 

 

 

 

 

(1,057

)

 

 

 

 

 

(1,057

)

September 30, 2023

 

$

8,660

 

 

$

13,970

 

 

$

102,106

 

 

$

(23,553

)

 

$

101,183

 

 

See Notes to Consolidated Financial Statements

4


TABLE OF CONTENTS

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2023

 

 

2022

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

6,962

 

 

$

11,324

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

745

 

 

 

734

 

Amortization of other assets

 

 

613

 

 

 

525

 

Origination of loans held for sale

 

 

(27,627

)

 

 

(13,244

)

Proceeds from sale of loans held for sale

 

 

24,805

 

 

 

14,515

 

Net (gain) on sales of loans

 

 

(913

)

 

 

(1,544

)

Provision for credit losses

 

 

1,283

 

 

 

900

 

(Gain) on other real estate owned

 

 

(7

)

 

 

 

(Gain) on the sale of marine finance assets

 

 

(463

)

 

 

 

(Gain) loss on the sale and disposal of premises and equipment

 

 

(14

)

 

 

3

 

Loss on the sale of securities

 

 

 

 

 

737

 

Amortization of subordinated debt issuance costs

 

 

51

 

 

 

33

 

Stock-based compensation expense

 

 

903

 

 

 

746

 

Premium amortization on securities, net

 

 

266

 

 

 

460

 

Bank owned life insurance income

 

 

(542

)

 

 

(495

)

Changes in assets and liabilities:

 

 

 

 

 

 

(Increase) in other assets

 

 

(5,472

)

 

 

(10,691

)

Increase in other liabilities

 

 

12,297

 

 

 

1,108

 

Net cash provided by operating activities

 

$

12,887

 

 

$

5,111

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Proceeds from maturities, calls, and principal payments of securities available for sale

 

$

10,987

 

 

$

24,135

 

Proceeds from the sale of securities available for sale

 

 

 

 

 

10,813

 

Purchases of securities available for sale

 

 

 

 

 

(26,813

)

Proceeds from the sale of restricted investments

 

 

4,975

 

 

 

 

Purchases of restricted investments

 

 

(4,326

)

 

 

(3,559

)

Purchases of bank premises and equipment

 

 

(1,127

)

 

 

(493

)

Proceeds from the sale of bank premises and equipment

 

 

39

 

 

 

33

 

Proceeds from the sale of other real estate owned

 

 

115

 

 

 

 

Changes in collateral posted with other financial institutions, net

 

 

 

 

 

(700

)

Proceeds from sale of marine finance business

 

 

53,537

 

 

 

 

Proceeds from sales of loans

 

 

49,325

 

 

 

97,814

 

Origination of loans net of principal collected

 

 

(218,755

)

 

 

(312,421

)

Funding of capital commitments related to other investments

 

 

(495

)

 

 

(485

)

Net cash (used in) investing activities

 

$

(105,725

)

 

$

(211,676

)

Cash Flows from Financing Activities

 

 

 

 

 

 

Net (decrease) increase in noninterest bearing demand deposits, savings, and interest bearing demand deposits

 

$

(19,160

)

 

$

69,614

 

Net increase in time deposits

 

 

253,465

 

 

 

7,265

 

Net (decrease) in federal funds purchased

 

 

(32,980

)

 

 

 

Net (decrease) increase in short-term Federal Home Loan Bank advances

 

 

(175,000

)

 

 

75,000

 

Advances of long-term Federal Home Loan Bank advances

 

 

145,000

 

 

 

 

Issuance of subordinated debt, net of issuance costs

 

 

 

 

 

29,327

 

Issuance of common stock, employee benefit plan

 

 

133

 

 

 

142

 

Repurchase and retirement of common stock

 

 

(303

)

 

 

(154

)

Cash dividends paid

 

 

(3,173

)

 

 

(2,762

)

Net cash provided by financing activities

 

$

167,982

 

 

$

178,432

 

Increase (decrease) in cash and cash equivalents

 

$

75,144

 

 

$

(28,133

)

Cash and Cash Equivalents

 

 

 

 

 

 

Beginning

 

 

66,894

 

 

 

64,068

 

Ending

 

$

142,038

 

 

$

35,935

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

Interest

 

$

22,016

 

 

$

1,436

 

Income taxes

 

$

1,706

 

 

$

2,541

 

Supplemental Schedule of Noncash Investing and Financing Activities:

 

 

 

 

 

 

Unrealized (loss) on securities available for sale

 

$

(3,927

)

 

$

(26,679

)

Minimum postretirement liability adjustment

 

$

(8

)

 

$

 

Repossessed assets acquired in settlement of loans

 

$

304

 

 

$

 

Issuance of common stock, dividend investment plan

 

$

 

 

$

198

 

Sales of securities available for sale settled subsequent to quarter end

 

$

 

 

$

4,557

 

 

See Notes to Consolidated Financial Statements

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EAGLE FINANCIAL SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2023

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 September 30, 2023 and December 31, 2022, the results of operations and the changes in shareholders' equity for the three and nine months ended September 30, 2023 and 2022, and cash flows for the nine months ended September 30, 2023 and 2022. The results of operations for the three and nine months ended September 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.
 

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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 $396 thousand at September 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 $4.4 million at September 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.
 

 

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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 September 30, 2023 and $65 thousand at December 31, 2022.

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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 $(0) and $(54) thousand for the three and nine months ended September 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 replaced the 2014 Stock Incentive Plan.

The Company periodically grants restricted stock to its directors, executive officers and certain non-executive officers. Restricted stock provides grantees with rights to shares of common stock upon completion of a service period or achievement of Company performance measures. During the restriction period, all shares are considered outstanding and dividends are paid to the grantee. Outside directors are periodically granted restricted shares which vest over a period of one year. 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 September 30, 2023, there was $759 thousand of unrecognized compensation cost related to nonvested restricted stock.

The following table presents restricted stock activity for the nine months ended September 30, 2023 and 2022:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

 

Shares

 

 

Weighted
Average
Grant Date
Fair Value

 

 

Shares

 

 

Weighted
Average
Grant Date
Fair Value

 

Nonvested, beginning of period

 

 

38,780

 

 

$

33.47

 

 

 

31,738

 

 

$

30.70

 

Granted

 

 

37,941

 

 

 

36.60

 

 

 

31,648

 

 

 

34.40

 

Vested

 

 

(17,302

)

 

 

33.29

 

 

 

(12,468

)

 

 

30.00

 

Forfeited

 

 

(2,405

)

 

 

36.80

 

 

 

(810

)

 

 

29.69

 

Nonvested, end of period

 

 

57,014

 

 

$

35.57

 

 

 

50,108

 

 

$

33.72

 

 

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 nine months ended September 30, 2023 and 2022. During 2023 and 2022, there were no potentially dilutive securities outstanding.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Average number of common shares outstanding used to calculate basic and diluted earnings per share

 

 

3,526,943

 

 

 

3,487,555

 

 

 

3,524,441

 

 

 

3,479,876

 

 

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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 September 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 September 30, 2023 and December 31, 2022 were as follows:

 

 

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
(Losses)

 

 

Fair Value

 

 

 

September 30, 2023

 

 

 

(in thousands)

 

Obligations of U.S. government corporations and agencies

 

$

9,259

 

 

$

 

 

$

(1,011

)

 

$

8,248

 

Mortgage-backed securities

 

 

143,206

 

 

 

 

 

 

(27,616

)

 

 

115,590

 

Obligations of states and political subdivisions

 

 

6,591

 

 

 

 

 

 

(423

)

 

 

6,168

 

Subordinated debt

 

 

4,750

 

 

 

 

 

 

(780

)

 

 

3,970

 

 

 

$

163,806

 

 

$

 

 

$

(29,830

)

 

$

133,976

 

 

 

 

December 31, 2022

 

 

 

(in thousands)

 

Obligations of U.S. government corporations and agencies

 

$

9,993

 

 

$

 

 

$

(858

)

 

$

9,135

 

Mortgage-backed securities

 

 

153,289

 

 

 

 

 

 

(24,136

)

 

 

129,153

 

Obligations of states and political subdivisions

 

 

7,027

 

 

 

2

 

 

 

(422

)

 

 

6,607

 

Subordinated debt

 

 

4,750

 

 

 

 

 

 

(489

)

 

 

4,261

 

 

 

$

175,059

 

 

$

2

 

 

$

(25,905

)

 

$

149,156

 

 

The amortized cost and estimated fair value of securities at September 30, 2023, by the earlier of contractual maturity or expected maturity, are shown below. The Company has elected to exclude accrued interest receivable, totaling $396 thousand at September 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

 

 

Fair Value

 

 

 

(in thousands)

 

Due in one year or less

 

$

1,667

 

 

$

1,646

 

Due after one year through five years

 

 

5,124

 

 

 

4,705

 

Due after five years through ten years

 

 

20,776

 

 

 

18,124

 

Due after ten years

 

 

136,239

 

 

 

109,501

 

 

 

$

163,806

 

 

$

133,976

 

 

During the nine months ended September 30, 2023, the Company sold no available for sale securities. During the nine months ended September 30, 2022, the Company sold $15.4 million of available for sale securities recognizing $6 thousand in gross gains and $743 thousand in gross losses.

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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 September 30, 2023 and December 31, 2022 were as follows:

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Fair Value

 

 

Gross
Unrealized
Losses

 

 

Fair Value

 

 

Gross
Unrealized
Losses

 

 

Fair Value

 

 

Gross
Unrealized
Losses

 

 

 

September 30, 2023

 

 

 

(in thousands)

 

Obligations of U.S. government corporations and agencies

 

$

 

 

$

 

 

$

8,248

 

 

$

1,011

 

 

$

8,248

 

 

$

1,011

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

115,590

 

 

 

27,616

 

 

 

115,590

 

 

 

27,616

 

Obligations of states and political subdivisions

 

 

485

 

 

 

16

 

 

 

5,283

 

 

 

407

 

 

 

5,768

 

 

 

423

 

Subordinated debt

 

 

218

 

 

 

32

 

 

 

3,252

 

 

 

748

 

 

 

3,470

 

 

 

780

 

 

 

$

703

 

 

$

48

 

 

$

132,373

 

 

$

29,782

 

 

$

133,076

 

 

$

29,830

 

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Fair Value

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

Gross Unrealized Losses

 

 

 

December 31, 2022

 

 

 

(in thousands)

 

Obligations of U.S. government corporations and agencies

 

$

6,140

 

 

$

543

 

 

$

2,994

 

 

$

315

 

 

$

9,134

 

 

$

858

 

Mortgage-backed securities

 

 

31,771

 

 

 

4,052

 

 

 

97,382

 

 

 

20,084

 

 

 

129,153

 

 

 

24,136

 

Obligations of states and political subdivisions

 

 

6,065

 

 

 

422

 

 

 

 

 

 

 

 

 

6,065

 

 

 

422

 

Subordinated debt

 

 

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 104 debt securities with a fair value below the amortized cost basis, totaling $133.1 million of aggregate fair value as of September 30, 2023. The Company concluded that a credit loss does not exist in its securities portfolio at September 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.

 

 

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TABLE OF CONTENTS

 

Securities having a carrying value of $13.8 million at September 30, 2023 were pledged as security for trust accounts.

The composition of restricted investments at September 30, 2023 and December 31, 2022 was as follows:

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Federal Reserve Bank Stock

 

$

344

 

 

$

944

 

Federal Home Loan Bank Stock

 

 

8,099

 

 

 

8,149

 

Community Bankers’ Bank Stock

 

 

140

 

 

 

140

 

 

 

$

8,583

 

 

$

9,233

 

 

NOTE 5. Loans and Allowance for Credit Losses on Loans

The composition of loans at September 30, 2023 and December 31, 2022 was as follows:

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Mortgage real estate loans:

 

 

 

 

 

 

   Construction & Secured by Farmland

 

$

80,012

 

 

$

89,651

 

   HELOCs

 

 

44,719

 

 

 

43,588

 

   Residential First Lien - Investor

 

 

120,547

 

 

 

111,074

 

   Residential First Lien - Owner Occupied

 

 

162,919

 

 

 

125,088

 

   Residential Junior Liens

 

 

12,284

 

 

 

11,417

 

   Commercial - Owner Occupied

 

 

244,088

 

 

 

232,115

 

   Commercial - Non-Owner Occupied & Multifamily

 

 

355,122

 

 

 

315,326

 

Commercial and industrial loans:

 

 

 

 

 

 

   SBA PPP loans

 

 

57

 

 

 

74

 

   Other commercial and industrial loans

 

 

96,830

 

 

 

99,571

 

Marine loans

 

 

260,518

 

 

 

230,874

 

Consumer loans

 

 

42,538

 

 

 

44,841

 

Overdrafts

 

 

207

 

 

 

218

 

Other loans

 

 

13,089

 

 

 

12,503

 

Total loans

 

$

1,432,930

 

 

$

1,316,340

 

Net deferred loan costs and premiums

 

 

8,055

 

 

 

7,443

 

Allowance for credit losses

 

 

(14,573

)

 

 

(11,218

)

 

$

1,426,412

 

 

$

1,312,565

 

 

At September 30, 2023, the Company was servicing $5.2 million of loans for other financial institutions which are not included in the table above. Also excluded from the table above are net servicing assets of $83 thousand at September 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.

On August 23, 2023, the Company completed the sale of certain assets of its marine finance division to an unrelated third-party. Under the Sale Agreements, the Company sold its interest in marine floor plan loans, the servicing rights associated with marine loans that had been sold to outside investors prior to August 23, 2023, and other assets that were not individually significant. Refer to Note 16 for additional information related to this transaction.

 

 

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TABLE OF CONTENTS

Changes in the allowance for credit losses on loans for the three and nine months ended September 30, 2023 and 2022 were as follows:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

Balance, beginning

 

$

14,511

 

 

$

9,847

 

 

$

11,218

 

 

$

8,787

 

Cumulative effect adjustment for adoption of ASC 326

 

 

 

 

 

 

 

 

2,077

 

 

 

 

Provision for credit losses

 

 

218

 

 

 

 

 

 

1,337

 

 

 

900

 

Recoveries added to the allowance

 

 

31

 

 

 

976

 

 

 

255

 

 

 

1,224

 

Credit losses charged to the allowance

 

 

(187

)

 

 

(81

)

 

 

(314

)

 

 

(169

)

Balance, ending

 

$

14,573

 

 

$

10,742

 

 

$

14,573

 

 

$

10,742

 

 

Nonaccrual and past due loans by class at September 30, 2023 were as follows:

 

 

 

September 30, 2023

 

 

 

(in thousands)

 

 

 

30 - 59
Days
Past Due

 

 

60 - 89
Days
Past Due

 

 

90 or More
Days
Past Due

 

 

Total Past
Due

 

 

Current

 

 

Total Loans

 

 

90 or More
Days Past
Due Still
Accruing

 

Mortgage real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction & Secured by Farmland

 

$

 

 

$

 

 

$

 

 

$

 

 

$

80,012

 

 

$

80,012

 

 

$

 

HELOCs

 

 

124

 

 

 

 

 

 

 

 

 

124

 

 

 

44,595

 

 

 

44,719

 

 

 

 

Residential First Lien - Investor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

120,547

 

 

 

120,547

 

 

 

 

Residential First Lien - Owner Occupied

 

 

114

 

 

 

48

 

 

 

36

 

 

 

198

 

 

 

162,721

 

 

 

162,919

 

 

 

 

Residential Junior Liens

 

 

9

 

 

 

 

 

 

 

 

 

9

 

 

 

12,275

 

 

 

12,284

 

 

 

 

Commercial - Owner Occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

244,088

 

 

 

244,088

 

 

 

 

Commercial - Non-Owner Occupied & Multifamily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

355,122

 

 

 

355,122

 

 

 

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA PPP loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

57

 

 

 

57

 

 

 

 

Other commercial and industrial loans

 

 

 

 

 

90

 

 

 

234

 

 

 

324

 

 

 

96,506

 

 

 

96,830

 

 

 

 

Marine loans

 

 

 

 

 

5

 

 

 

367

 

 

 

372

 

 

 

260,146

 

 

 

260,518

 

 

 

 

Consumer loans

 

 

261

 

 

 

86

 

 

 

66

 

 

 

413

 

 

 

42,125

 

 

 

42,538

 

 

 

66

 

Overdrafts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

207

 

 

 

207

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,089

 

 

 

13,089

 

 

 

 

Total

 

$

508

 

 

$

229

 

 

$

703

 

 

$

1,440

 

 

$

1,431,490

 

 

$

1,432,930

 

 

$

66

 

 

13


TABLE OF CONTENTS

 

 

 

September 30, 2023

 

 

 

(in thousands)

 

 

 

Nonaccruals with No Allowance for Credit Losses

 

 

Nonaccrual with an Allowance for Credit Losses

 

 

Nonaccrual
Loans

 

Mortgage real estate loans:

 

 

 

 

 

 

 

 

 

Construction & Secured by Farmland

 

$

97

 

 

$

 

 

$

97

 

HELOCs

 

 

15

 

 

 

 

 

 

15

 

Residential First Lien - Investor

 

 

1,093

 

 

 

 

 

 

1,093

 

Residential First Lien - Owner Occupied

 

 

115

 

 

 

 

 

 

115

 

Residential Junior Liens

 

 

3

 

 

 

 

 

 

3

 

Commercial - Owner Occupied

 

 

27

 

 

 

 

 

 

27

 

Commercial - Non-Owner Occupied & Multifamily

 

 

3,656

 

 

 

 

 

 

3,656

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

SBA PPP loans

 

 

 

 

 

 

 

 

 

Other commercial and industrial loans

 

 

12

 

 

 

312

 

 

 

324

 

Marine loans

 

 

367

 

 

 

 

 

 

367

 

Consumer loans

 

 

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

Total

 

$

5,385

 

 

$

312

 

 

$

5,697

 

 

Nonaccrual and past due loans by class at December 31, 2022 were as follows:

 

 

 

December 31, 2022

 

 

 

(in thousands)

 

 

 

30 - 59
Days
Past Due

 

 

60 - 89
Days
Past Due

 

 

90 or More
Days Past
Due

 

 

Total Past
Due

 

 

Current

 

 

Total Loans

 

 

90 or More
Past Due
Still
Accruing

 

 

Nonaccrual
Loans

 

Mortgage real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction & Secured by Farmland

 

$

 

 

$

 

 

$

101

 

 

$

101

 

 

$

89,550

 

 

$

89,651

 

 

$

 

 

$

397

 

HELOCs

 

 

149

 

 

 

 

 

 

 

 

 

149

 

 

 

43,439

 

 

 

43,588

 

 

 

 

 

 

155

 

Residential First Lien - Investor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

111,074

 

 

 

111,074

 

 

 

 

 

 

 

Residential First Lien - Owner Occupied

 

 

222

 

 

 

 

 

 

39

 

 

 

261

 

 

 

124,827

 

 

 

125,088

 

 

 

 

 

 

175

 

Residential Junior Liens

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,417

 

 

 

11,417

 

 

 

 

 

 

6

 

Commercial - Owner Occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

232,115

 

 

 

232,115

 

 

 

 

 

 

 

Commercial - Non-Owner Occupied & Multifamily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

315,326

 

 

 

315,326

 

 

 

 

 

 

1,356

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA PPP loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74

 

 

 

74

 

 

 

 

 

 

 

Other commercial and industrial loans

 

 

15

 

 

 

 

 

 

73

 

 

 

88

 

 

 

99,483

 

 

 

99,571

 

 

 

 

 

 

73

 

Marine loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

230,874

 

 

 

230,874

 

 

 

 

 

 

 

Consumer loans

 

 

56

 

 

 

 

 

 

318

 

 

 

374

 

 

 

44,467

 

 

 

44,841

 

 

 

318

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

218

 

 

 

218

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,503

 

 

 

12,503

 

 

 

 

 

 

 

Total

 

$

442

 

 

$

 

 

$

531

 

 

$

973

 

 

$

1,315,367

 

 

$

1,316,340

 

 

$

318

 

 

$

2,162

 

 

14


TABLE OF CONTENTS

The allowance for credit losses on loans by segment at September 30, 2023 and December 31, 2022 was as follows:

 

 

 

As of and For the Nine Months Ended

 

 

 

September 30, 2023

 

 

 

(in thousands)

 

 

 

Construction
and Farmland

 

 

Residential
Real Estate

 

 

Commercial
Real Estate &
MultiFamily

 

 

Commercial

 

 

Marine

 

 

Consumer

 

 

All Other
Loans

 

 

Unallocated

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,714

 

 

$

1,735

 

 

$

2,221

 

 

$

2,222

 

 

$

1,555

 

 

$

299

 

 

$

472

 

 

$

 

 

$

11,218

 

Cumulative effect adjustment for adoption of ASC 326

 

$

(1,840

)

 

$

1,933

 

 

$

3,584

 

 

$

(1,102

)

 

$

(285

)

 

$

(123

)

 

$

(90

)

 

$

 

 

$

2,077

 

Charge-Offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(126

)

 

 

(38

)

 

 

(150

)

 

 

 

 

 

(314

)

Recoveries

 

 

5

 

 

 

14

 

 

 

 

 

 

13

 

 

 

 

 

 

45

 

 

 

178

 

 

 

 

 

 

255

 

Provision

 

 

(134

)

 

 

765

 

 

 

496

 

 

 

92

 

 

 

289

 

 

 

48

 

 

 

(28

)

 

 

(191

)

 

 

1,337

 

Ending balance

 

$

745

 

 

$

4,447

 

 

$

6,301

 

 

$

1,225

 

 

$

1,433

 

 

$

231

 

 

$

382

 

 

$

(191

)

 

$

14,573

 

Ending balance: Individually evaluated

 

$

 

 

$

 

 

$

 

 

$

312

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

312

 

Ending balance: collectively evaluated

 

$

745

 

 

$

4,447

 

 

$

6,301

 

 

$

913

 

 

$

1,433

 

 

$

231

 

 

$

382

 

 

$

(191

)

 

$

14,261

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

80,012

 

 

$

340,469

 

 

$

599,210

 

 

$

96,887

 

 

$

260,518

 

 

$

42,538

 

 

$

13,296

 

 

$

 

 

$

1,432,930

 

Ending balance individually evaluated

 

$

96

 

 

$

1,172

 

 

$

3,672

 

 

$

312

 

 

$

430

 

 

$

 

 

$

 

 

$

 

 

$

5,682

 

Ending balance collectively evaluated

 

$

79,916

 

 

$

339,297

 

 

$

595,538

 

 

$

96,575

 

 

$

260,088

 

 

$

42,538

 

 

$

13,296

 

 

$

 

 

$

1,427,248

 

 

 

 

As of and For the Year Ended

 

 

 

December 31, 2022

 

 

 

(in thousands)

 

 

 

Construction
and Farmland

 

 

Residential
Real Estate

 

 

Commercial
Real Estate &
MultiFamily

 

 

Commercial

 

 

Marine

 

 

Consumer

 

 

All Other
Loans

 

 

Unallocated

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,794

 

 

$

1,671

 

 

$

1,729

 

 

$

1,294

 

 

$

789

 

 

$

219

 

 

$

291

 

 

$

 

 

$

8,787

 

Charge-Offs

 

 

 

 

 

(9

)

 

 

 

 

 

(300

)

 

 

 

 

 

(79

)

 

 

(271

)

 

 

 

 

 

(659

)

Recoveries

 

 

9

 

 

 

888

 

 

 

197

 

 

 

109

 

 

 

 

 

 

44

 

 

 

13

 

 

 

 

 

 

1,260

 

Provision

 

 

(89

)

 

 

(815

)

 

 

295

 

 

 

1,119

 

 

 

766

 

 

 

115

 

 

 

439

 

 

 

 

 

 

1,830

 

Ending balance

 

$

2,714

 

 

$

1,735

 

 

$

2,221

 

 

$

2,222

 

 

$

1,555

 

 

$

299

 

 

$

472

 

 

$

 

 

$

11,218

 

Ending balance: Individually evaluated for impairment

 

$

 

 

$

27

 

 

$

 

 

$

73

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

100

 

Ending balance: collectively evaluated for impairment

 

$

2,714

 

 

$

1,708

 

 

$

2,221

 

 

$

2,149

 

 

$

1,555

 

 

$

299

 

 

$

472

 

 

$

 

 

$

11,118

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

89,651

 

 

$

291,167

 

 

$

547,441

 

 

$

99,645

 

 

$

230,874

 

 

$

44,841

 

 

$

12,721

 

 

$

 

 

$

1,316,340

 

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

 

 

$

230,874

 

 

$

44,819

 

 

$

12,721

 

 

$

 

 

$

1,309,719

 

 

 

15


TABLE OF CONTENTS

The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment:

 

 

 

September 30, 2023

 

 

 

(in thousands)

 

(in thousands)

 

Real Estate Collateral

 

 

Other Collateral

 

 

Total

 

Mortgage real estate loans:

 

 

 

 

 

 

 

 

 

Construction & Secured by Farmland

 

$

96

 

 

$

 

 

$

96

 

HELOCs

 

 

 

 

 

 

 

 

 

Residential First Lien - Investor

 

 

1,093

 

 

 

 

 

 

1,093

 

Residential First Lien - Owner Occupied

 

 

79

 

 

 

 

 

 

79

 

Residential Junior Liens

 

 

 

 

 

 

 

 

 

Commercial - Owner Occupied

 

 

16

 

 

 

 

 

 

16

 

Commercial - Non-Owner Occupied & Multifamily

 

 

3,656

 

 

 

 

 

 

3,656

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

SBA PPP loans

 

 

 

 

 

 

 

 

 

Other commercial and industrial loans

 

 

 

 

 

312

 

 

 

312

 

Marine loans

 

 

 

 

 

430

 

 

 

430

 

Consumer loans

 

 

 

 

 

 

 

 

 

Overdrafts

 

 

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

$

4,940

 

 

$

742

 

 

$

5,682

 

 

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 September 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.

 

 

Substandard loans exhibit well defined weaknesses resulting in a higher probability of default. The borrowers exhibit adverse financial trends and a diminishing ability or willingness to service debt.

 

 

Doubtful loans exhibit all of the characteristics inherent in substandard loans; however given the severity of weaknesses, the collection of 100% of the principal is unlikely under current conditions.

 

 

Loss loans are considered uncollectible over a reasonable period of time and of such little value that its continuance as a bankable asset is not warranted.


 

 

 

16


TABLE OF CONTENTS

Credit quality information by class at September 30, 2023 and December 31, 2022 was as follows:

 

17


TABLE OF CONTENTS

 

 

September 30, 2023

 

 

 

 

Term Loan Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolving Loans Amortized Cost Basis

 

 

Revolving Loans Converted to Term

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction & Secured by Farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

26,098

 

 

$

23,622

 

 

$

6,921

 

 

$

5,418

 

 

$

2,423

 

 

$

3,682

 

 

$

7,532

 

 

$

 

 

$

75,696

 

 

Special Mention

 

 

 

 

 

1,179

 

 

 

985

 

 

 

 

 

 

1,048

 

 

 

821

 

 

 

 

 

 

 

 

 

4,033

 

 

Classified

 

 

 

 

 

 

 

 

 

 

 

147

 

 

 

 

 

 

136

 

 

 

 

 

 

 

 

 

283

 

 

Total

 

$

26,098

 

 

$

24,801

 

 

$

7,906

 

 

$

5,565

 

 

$

3,471

 

 

$

4,639

 

 

$

7,532

 

 

$

 

 

$

80,012

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

HELOCs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

44,654

 

 

$

 

 

$

44,654

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49

 

 

 

 

 

 

49

 

 

Classified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 

 

 

 

 

 

16

 

 

Total

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

44,719

 

 

$

 

 

$

44,719

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Residential First Lien - Investor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

16,530

 

 

$

26,717

 

 

$

32,126

 

 

$

11,375

 

 

$

4,754

 

 

$

24,517

 

 

$

 

 

$

 

 

$

116,019

 

 

Special Mention

 

 

 

 

 

1,670

 

 

 

233

 

 

 

626

 

 

 

 

 

 

907

 

 

 

 

 

 

 

 

 

3,436

 

 

Classified

 

 

 

 

 

 

 

 

1,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,092

 

 

Total

 

$

16,530

 

 

$

28,387

 

 

$

33,451

 

 

$

12,001

 

 

$

4,754

 

 

$

25,424

 

 

$

 

 

$

 

 

$

120,547

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Residential First Lien - Owner Occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

43,193

 

 

$

31,810

 

 

$

24,017

 

 

$

36,231

 

 

$

4,040

 

 

$

22,299

 

 

$

 

 

$

 

 

$

161,590

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

472

 

 

 

 

 

 

 

 

 

472

 

 

Classified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

857

 

 

 

 

 

 

 

 

 

857

 

 

Total

 

$

43,193

 

 

$

31,810

 

 

$

24,017

 

 

$

36,231

 

 

$

4,040

 

 

$

23,628

 

 

$

 

 

$

 

 

$

162,919

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Residential Junior Liens

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

1,766

 

 

$

2,969

 

 

$

3,499

 

 

$

1,515

 

 

$

653

 

 

$

1,844

 

 

$

 

 

$

 

 

$

12,246

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38

 

 

 

 

 

 

 

 

 

38

 

 

Total

 

$

1,766

 

 

$

2,969

 

 

$

3,499

 

 

$

1,515

 

 

$

653

 

 

$

1,882

 

 

$

 

 

$

 

 

$

12,284

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Commercial - Owner Occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

26,226

 

 

$

68,359

 

 

$

42,515

 

 

$

26,101

 

 

$

16,245

 

 

$

51,463

 

 

$

2,670

 

 

$

 

 

$

233,579

 

 

Special Mention

 

 

 

 

 

1,882

 

 

 

67

 

 

 

2,161

 

 

 

1,087

 

 

 

1,422

 

 

 

 

 

 

 

 

 

6,619

 

 

Classified

 

 

 

 

 

 

 

 

3,362

 

 

 

501

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

3,890

 

 

Total

 

$

26,226

 

 

$

70,241

 

 

$

45,944

 

 

$

28,763

 

 

$

17,332

 

 

$

52,912

 

 

$

2,670

 

 

$

 

 

$

244,088

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

18


TABLE OF CONTENTS

Commercial - Non-Owner Occupied & Multifamily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

52,459

 

 

$

93,832

 

 

$

66,232

 

 

$

74,303

 

 

$

17,044

 

 

$

44,118

 

 

$

1,196

 

 

$

 

 

$

349,184

 

 

Special Mention

 

 

 

 

 

 

 

 

2,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,282

 

 

Classified

 

 

 

 

 

 

 

 

 

 

 

2,368

 

 

 

 

 

 

1,288

 

 

 

 

 

 

 

 

 

3,656

 

 

Total

 

$

52,459

 

 

$

93,832

 

 

$

68,514

 

 

$

76,671

 

 

$

17,044

 

 

$

45,406

 

 

$

1,196

 

 

$

 

 

$

355,122

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA PPP loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

 

 

$

 

 

$

57

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

57

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 

 

$

 

 

$

57

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

57

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Other commercial and industrial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

13,637

 

 

$

28,991

 

 

$

9,264

 

 

$

2,182

 

 

$

2,870

 

 

$

4,130

 

 

$

31,256

 

 

$

 

 

$

92,330

 

 

Special Mention

 

 

1,529

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

10

 

 

 

2,636

 

 

 

 

 

 

4,176

 

 

Classified

 

 

231

 

 

 

81

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

324

 

 

Total

 

$

15,397

 

 

$

29,072

 

 

$

9,264

 

 

$

2,185

 

 

$

2,871

 

 

$

4,140

 

 

$

33,901

 

 

$

 

 

$

96,830

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Marine loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

90,224

 

 

$

132,659

 

 

$

36,594

 

 

$

674

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

260,151

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified

 

 

367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

367

 

 

Total

 

$

90,591

 

 

$

132,659

 

 

$

36,594

 

 

$

674

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

260,518

 

 

Current period gross charge-offs

 

$

 

 

$

126

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

126

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

2,542

 

 

$

14,375

 

 

$

6,416

 

 

$

9,032

 

 

$

1,810

 

 

$

37

 

 

$

8,326

 

 

$

 

 

$

42,538

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,542

 

 

$

14,375

 

 

$

6,416

 

 

$

9,032

 

 

$

1,810

 

 

$

37

 

 

$

8,326

 

 

$

 

 

$

42,538

 

 

Current period gross charge-offs

 

$

 

 

$

3

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

35

 

 

$

 

 

$

38

 

 

Overdrafts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified

 

 

207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

207

 

 

Total

 

$

207

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

207

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

150

 

 

$

 

 

$

150

 

 

Other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

72

 

 

$

10,173

 

 

$

30

 

 

$

9

 

 

$

 

 

$

2,685

 

 

$

120

 

 

$

 

 

$

13,089

 

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

72

 

 

$

10,173

 

 

$

30

 

 

$

9

 

 

$

 

 

$

2,685

 

 

$

120

 

 

$

 

 

$

13,089

 

 

Current period gross charge-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Total by Risk Category

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19


TABLE OF CONTENTS

Pass

 

$

272,747

 

 

$

433,507

 

 

$

227,671

 

 

$

166,840

 

 

$

49,839

 

 

$

154,775

 

 

$

95,754

 

 

$

 

 

$

1,401,133

 

 

Special Mention

 

 

1,529

 

 

 

4,731

 

 

 

3,567

 

 

 

2,787

 

 

 

2,136

 

 

 

3,632

 

 

 

2,685

 

 

 

 

 

 

21,067

 

 

Classified

 

 

805

 

 

 

81

 

 

 

4,454

 

 

 

3,019

 

 

 

 

 

 

2,346

 

 

 

25

 

 

 

 

 

 

10,730

 

 

Total

 

$

275,081

 

 

$

438,319

 

 

$

235,692

 

 

$

172,646

 

 

$

51,975

 

 

$

160,753

 

 

$

98,464

 

 

$

 

 

$

1,432,930

 

 

Total current period gross charge-offs

 

$

 

 

$

129

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

185

 

 

$

 

 

$

314

 

 

 

 

 

As of

 

 

 

December 31, 2022

 

 

 

(in thousands)

 

INTERNAL RISK RATING GRADES

 

Pass

 

 

Special
Mention

 

 

Substandard

 

 

Doubtful

 

 

Loss

 

 

Total

 

Commercial - Non Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

247,061

 

 

$

526

 

 

$

72

 

 

$

 

 

$

 

 

$

247,659

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner Occupied

 

 

212,074

 

 

 

20,020

 

 

 

21

 

 

 

 

 

 

 

 

 

232,115

 

Non-owner occupied

 

 

257,625

 

 

 

16,189

 

 

 

1,706

 

 

 

 

 

 

 

 

 

275,520

 

Construction and Farm land:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

11,235

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

11,256

 

Commercial

 

 

69,427

 

 

 

153

 

 

 

8,815

 

 

 

 

 

 

 

 

 

78,395

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Lines

 

 

43,124

 

 

 

310

 

 

 

154

 

 

 

 

 

 

 

 

 

43,588

 

Single family

 

 

251,247

 

 

 

5,972

 

 

 

951

 

 

 

 

 

 

 

 

 

258,170

 

Multifamily

 

 

39,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39,806

 

All other loans

 

 

12,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,721

 

Total

 

$

1,144,320

 

 

$

43,170

 

 

$

11,740

 

 

$

 

 

$

 

 

$

1,199,230

 

 

 

 

Performing

 

 

Nonperforming

 

Consumer Credit Exposure by Payment Activity

 

$

116,908

 

 

$

202

 

 

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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 nine months ended September 30, 2023 by loan portfolio segment:

 

 

September 30, 2023

 

 

 

(in thousands)

 

 

 

Term Extension

 

 

Total

 

 

% of Total Class of Loans

 

Mortgage real estate loans:

 

 

 

 

 

 

 

 

 

Residential First Lien - Owner Occupied

 

$

355

 

 

$

355

 

 

 

0.22

%

Total

 

$

355

 

 

$

355

 

 

 

 

None of the loans that were modified defaulted during the nine months ended September 30, 2023 and the loans remain current with contractual payments as of September 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 September 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 difficulties as a TDR.

During the three and nine months ended September 30, 2022, the Company classified five and 11 loans, respectively as troubled debt restructurings.

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Three Months Ended

 

 

September 30, 2022

 

 

(in thousands)

 

 

Number of Contracts

 

 

Pre-Modification Outstanding Recorded Investment

 

 

Post-Modification Outstanding Recorded Investment

 

Consumer:

 

 

 

 

 

 

 

 

Installment

 

1

 

 

$

20

 

 

$

21

 

Residential:

 

 

 

 

 

 

 

 

Single Family

 

4

 

 

 

894

 

 

 

894

 

Total

 

5

 

 

$

914

 

 

$

915

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 2022

 

 

(in thousands)

 

 

Number of
Contracts

 

 

Pre-Modification Outstanding
Recorded Investment

 

 

Post-Modification Outstanding
Recorded Investment

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

Owner Occupied

 

1

 

 

$

185

 

 

$

185

 

Non-Owner Occupied

 

1

 

 

 

161

 

 

 

161

 

Construction and Farmland:

 

 

 

 

 

 

 

 

Commercial

 

1

 

 

 

639

 

 

 

639

 

Consumer:

 

 

 

 

 

 

 

 

Installment

 

1

 

 

 

20

 

 

 

21

 

Residential:

 

 

 

 

 

 

 

 

Single family

 

7

 

 

 

1,433

 

 

 

1,451

 

Total

 

11

 

 

$

2,438

 

 

$

2,457

 

There were no payment defaults during the three and nine months ended September 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 September 30, 2023 and December 31, 2022 was as follows:

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(in thousands)

 

Noninterest bearing demand deposits

 

$

430,910

 

 

$

478,750

 

Savings and interest bearing demand deposits:

 

 

 

 

 

 

NOW accounts

 

$

188,330

 

 

$

167,197

 

Money market accounts

 

 

325,712

 

 

 

220,498

 

Regular savings accounts

 

 

142,069

 

 

 

239,736

 

 

$

656,111

 

 

$

627,431

 

Time deposits:

 

 

 

 

 

 

Balances of less than $250,000

 

$

265,856

 

 

$

87,531

 

Balances of $250,000 and more

 

 

145,503

 

 

 

70,363

 

 

$

411,359

 

 

$

157,894

 

 

$

1,498,380

 

 

$

1,264,075

 

 

 

 

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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:

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

 

 

 

 

Lease liabilities

 

$

4,736

 

 

$

4,978

 

 

 

 

 

 

 

Right-of-use assets

 

$

4,482

 

 

$

4,766

 

 

 

 

 

 

 

Weighted average remaining lease term

 

14 years

 

 

14 years

 

 

 

 

 

 

 

Weighted average discount rate

 

 

3.08

%

 

 

3.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Lease Cost

 

September 30, 2023

 

 

September 30, 2022

 

 

September 30, 2023

 

 

September 30, 2022

 

Operating lease cost

 

$

132

 

 

$

132

 

 

$

396

 

 

$

396

 

Short-term lease cost

 

 

4

 

 

 

3

 

 

 

11

 

 

 

11

 

Total lease cost

 

$

136

 

 

$

135

 

 

$

407

 

 

$

407

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

$

118

 

 

$

116

 

 

$

354

 

 

$

348

 

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liabilities is as follows:

 

(dollars in thousands)

 

As of

 

Lease payments due

 

September 30, 2023

 

Twelve months ending September 30, 2024

 

$

478

 

Twelve months ending September 30, 2025

 

 

497

 

Twelve months ending September 30, 2026

 

 

428

 

Twelve months ending September 30, 2027

 

 

390

 

Twelve months ending September 30, 2028

 

 

394

 

Thereafter

 

 

3,853

 

Total undiscounted cash flows

 

$

6,040

 

Discount

 

 

(1,304

)

Lease liabilities

 

$

4,736

 

 

 

 

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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.

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TABLE OF CONTENTS

The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at September 30, 2023 and December 31, 2022:

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

September 30, 2023

 

 

 

 

 

 

Using

 

 

 

Balance as of

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

September 30, 2023

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government corporations and agencies

 

$

8,248

 

 

$

 

 

$

8,248

 

 

$

 

Mortgage-backed securities

 

 

115,590

 

 

 

 

 

 

115,590

 

 

 

 

Obligations of states and political subdivisions

 

 

6,168

 

 

 

 

 

 

6,168

 

 

 

 

Subordinated debt

 

 

3,970

 

 

 

 

 

 

3,970

 

 

 

 

Derivative:

 

 

 

 

 

 

 

 

 

 

 

 

      Interest rate swaps

 

 

1,828

 

 

 

 

 

 

1,828

 

 

 

 

Total assets at fair value

 

$

135,804

 

 

$

 

 

$

135,804

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

      Interest rate swaps

 

$

1,828

 

 

$

 

 

$

1,828

 

 

$

 

Total liabilities at fair value

 

$

1,828

 

 

$

 

 

$

1,828

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

Balance as of

 

 

Quoted Prices
in Active
Markets for
Identical Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

December 31, 2022

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

      Obligations of U.S. government corporations and agencies

 

$

9,135

 

 

$

 

 

$

9,135

 

 

$

 

Mortgage-backed securities

 

 

129,153

 

 

 

 

 

 

129,153

 

 

 

 

Obligations of states and political subdivisions

 

 

6,607

 

 

 

 

 

 

6,607

 

 

 

 

Subordinated debt

 

 

4,261

 

 

 

 

 

 

4,261

 

 

 

 

Derivative:

 

 

 

 

 

 

 

 

 

 

 

 

      Interest rate swap

 

 

1,017

 

 

 

 

 

 

1,017

 

 

 

 

Total assets at fair value

 

$

150,173

 

 

$

 

 

$

150,173

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

      Interest rate swap

 

 

1,017

 

 

 

 

 

 

1,017

 

 

 

 

Total liabilities at fair value

 

$

1,017

 

 

$

 

 

$

1,017

 

 

$

 

 

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.

 

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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 nine months ended September 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 September 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 September 30, 2023 and had a balance of $108 thousand in other real estate 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

 

 

December 31, 2022

 

 

Valuation Technique(s)

 

Unobservable Input

 

Range

 

Weighted Average (1)

Assets:

 

 

 

 

 

 

 

 

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.

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TABLE OF CONTENTS

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

 

 

 

 

 

 

December 31, 2022

 

 

 

Balance as of

 

 

Quoted Prices
in Active
Markets
for Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

December 31, 2022

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

(in thousands)

 

Nonfinancial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

$

108

 

 

$

 

 

$

108

 

 

$

 

 

 

The carrying value and fair value of the Company’s financial instruments at September 30, 2023 and December 31, 2022 were as follows:

 

 

 

Fair Value Measurements at

 

 

 

September 30, 2023

 

 

 

Using

 

 

 

Carrying
Value
as of

 

 

Quoted Prices
in Active
Markets for
Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

Fair Value
as of

 

 

 

September 30, 2023

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

September 30, 2023

 

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

142,038

 

 

$

142,038

 

 

$

 

 

$

 

 

$

142,038

 

Securities

 

 

133,976

 

 

 

 

 

 

133,976

 

 

 

 

 

 

133,976

 

Restricted Investments

 

 

8,583

 

 

 

 

 

 

8,583

 

 

 

 

 

 

8,583

 

Loans held for sale

 

 

3,564

 

 

 

 

 

 

3,564

 

 

 

 

 

 

3,564

 

Loans, net

 

 

1,426,412

 

 

 

 

 

 

 

 

 

1,356,742

 

 

 

1,356,742

 

Bank owned life insurance

 

 

24,404

 

 

 

 

 

 

24,404

 

 

 

 

 

 

24,404

 

Accrued interest receivable

 

 

4,794

 

 

 

 

 

 

4,794

 

 

 

 

 

 

4,794

 

Interest rate swaps

 

 

1,828

 

 

 

 

 

 

1,828

 

 

 

 

 

 

1,828

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,498,380

 

 

$

 

 

$

1,495,212

 

 

$

 

 

$

1,495,212

 

Federal Home Loan Bank advances, long-term

 

 

145,000

 

 

 

 

 

 

144,125

 

 

 

 

 

 

144,125

 

Subordinated debt, net of unamortized issuance costs

 

 

29,428

 

 

 

 

 

 

25,602

 

 

 

 

 

 

25,602

 

Accrued interest payable

 

 

1,970

 

 

 

 

 

 

1,970

 

 

 

 

 

 

1,970

 

Interest rate swaps

 

 

1,828

 

 

 

 

 

 

1,828

 

 

 

 

 

 

1,828

 

 

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TABLE OF CONTENTS

 

 

 

Fair Value Measurements at

 

 

 

December 31, 2022

 

 

 

Using

 

 

 

Carrying Value
as of

 

 

Quoted Prices
in Active
Markets for
Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

Fair Value
as of

 

 

 

December 31, 2022

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

December 31, 2022

 

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

66,894

 

 

$

66,894

 

 

$

 

 

$

 

 

$

66,894

 

Securities

 

 

149,156

 

 

 

 

 

 

149,156

 

 

 

 

 

 

149,156

 

Restricted Investments

 

 

9,233

 

 

 

 

 

 

9,233

 

 

 

 

 

 

9,233

 

Loans held for sale

 

 

153

 

 

 

 

 

 

153

 

 

 

 

 

 

153

 

Loans, net

 

 

1,312,565

 

 

 

 

 

 

 

 

 

1,260,149

 

 

 

1,260,149

 

Bank owned life insurance

 

 

23,862

 

 

 

 

 

 

23,862

 

 

 

 

 

 

23,862

 

Accrued interest receivable

 

 

3,902

 

 

 

 

 

 

3,902

 

 

 

 

 

 

3,902

 

Interest rate swap

 

 

1,017

 

 

 

 

 

 

1,017

 

 

 

 

 

 

1,017

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,264,075

 

 

$

 

 

$

1,262,859

 

 

$

 

 

$

1,262,859

 

Federal funds purchased

 

 

32,980

 

 

 

 

 

 

32,980

 

 

 

 

 

 

32,980

 

Federal Home Loan Bank advances, short-term

 

 

175,000

 

 

 

 

 

 

174,705

 

 

 

 

 

 

174,705

 

Subordinated debt, net of unamortized issuance costs

 

 

29,377

 

 

 

 

 

 

26,101

 

 

 

 

 

 

26,101

 

Accrued interest payable

 

 

926

 

 

 

 

 

 

926

 

 

 

 

 

 

926

 

Interest rate swap

 

 

1,017

 

 

 

 

 

 

1,017

 

 

 

 

 

 

1,017

 

 

 

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TABLE OF CONTENTS

 

 

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:

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

 

Unrealized
Gains and
Losses on
Available
for Sale
Securities

 

 

Change in
Benefit
Obligations
and Plan
Assets for
the Post
Retirement
Benefit
Plan

 

 

Total

 

 

Unrealized
Gains and
Losses on
Available
for Sale
Securities

 

 

Change in
Benefit
Obligations
and Plan
Assets for
the Post
Retirement
Benefit
Plan

 

 

Total

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

July 1

 

$

(19,430

)

 

$

14

 

 

$

(19,416

)

 

$

(16,775

)

 

$

19

 

 

$

(16,756

)

Other comprehensive (loss) before reclassifications

 

 

(5,237

)

 

 

 

 

 

(5,237

)

 

 

(6,401

)

 

 

 

 

 

(6,401

)

Reclassifications

 

 

 

 

 

 

 

 

 

 

 

737

 

 

 

 

 

 

737

 

Tax effect of current period changes

 

 

1,100

 

 

 

 

 

 

1,100

 

 

 

1,189

 

 

 

 

 

 

1,189

 

Current period changes net of taxes

 

 

(4,137

)

 

 

 

 

 

(4,137

)

 

 

(4,475

)

 

 

 

 

 

(4,475

)

September 30

 

$

(23,567

)

 

$

14

 

 

$

(23,553

)

 

$

(21,250

)

 

$

19

 

 

$

(21,231

)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

 

Unrealized
Gains and
Losses on
Available
for Sale
Securities

 

 

Change in
Benefit
Obligations
and Plan
Assets for
the Post
Retirement
Benefit
Plan

 

 

Total

 

 

Unrealized
Gains and
Losses on
Available
for Sale
Securities

 

 

Change in
Benefit
Obligations
and Plan
Assets for
the Post
Retirement
Benefit
Plan

 

 

Total

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

January 1

 

$

(20,465

)

 

$

19

 

 

$

(20,446

)

 

$

(174

)

 

$

19

 

 

$

(155

)

Other comprehensive income (loss) before reclassifications

 

 

(3,927

)

 

 

(8

)

 

 

(3,935

)

 

 

(27,416

)

 

 

 

 

 

(27,416

)

Reclassifications

 

 

 

 

 

 

 

 

 

 

 

737

 

 

 

 

 

 

737

 

Tax effect of current period changes

 

 

825

 

 

 

3

 

 

 

828

 

 

 

5,603

 

 

 

 

 

 

5,603

 

Current period changes net of taxes

 

 

(3,102

)

 

 

(5

)

 

 

(3,107

)

 

 

(21,076

)

 

 

 

 

 

(21,076

)

September 30

 

$

(23,567

)

 

$

14

 

 

$

(23,553

)

 

$

(21,250

)

 

$

19

 

 

$

(21,231

)

 

For the three and nine months ended September 30, 2023 there were no reclassifications out of accumulated other comprehensive income (loss). For the three and nine months ended September 30, 2022, $(737) thousand was reclassified out of accumulated other comprehensive income (loss) and appeared as loss on sale of securities in the Consolidated Statements of Income. For the three and nine months ended September 30, 2022, the tax related to these reclassifications was $155 thousand, which is included in income tax expense in the Consolidated Statements of Income.

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NOTE 11. Other Real Estate Owned

The following table is a summary of other real estate owned (“OREO”) activity for the nine months ended September 30, 2023 and 2022 and the year ended December 31, 2022:

 

 

 

Nine Months Ended

 

 

Year Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

December 31,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2022

 

 

 

(in thousands)

 

Balance, beginning

 

$

108

 

 

$

 

 

$

 

Transfer from loans

 

 

 

 

 

108

 

 

 

 

Gain on foreclosures

 

 

 

 

 

 

 

 

 

Sales

 

 

(108

)

 

 

 

 

 

 

Valuation adjustments

 

 

 

 

 

 

 

 

 

Balance, ending

 

$

 

 

$

108

 

 

$

 

 

The major classifications of other real estate owned in the consolidated balance sheets at December 31, 2022 were as follows:

 

 

 

December 31, 2022

 

 

(in thousands)

 

Construction and Farmland

 

$

 

Residential Real Estate

 

 

108

 

Commercial Real Estate

 

 

 

Subtotal

 

$

108

 

Less valuation allowance

 

 

 

Total

 

$

108

 

 

There were no consumer mortgage collateralized by residential real estate in the process of foreclosure at September 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 September 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 September 30, 2023 and December 31, 2022.

During each of the three months ended September 30, 2023 and September 30, 2022, the Company recognized amortization expense of $54 thousand and $82 thousand, respectively. The Company recognized amortization expenses of $211 thousand and $196 thousand for the nine months ended September 30, 2023 and 2022, respectively. The amortization expense was included in Other operating expenses on the Consolidated Statements of Income.

Total estimated credits to be received during 2023 are $355 thousand based on the most recent quarterly estimates received from the funds. Total tax credits and other tax benefits recognized during the nine months ended September 30, 2023 and 2022, were $268 thousand and $269 thousand, respectively.

 

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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.

In July 2023, the FASB issued ASU 2023-03, "Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718)". This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 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.
 

 

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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 $572 thousand at September 30, 2023.

The Company had $145.0 million in total borrowings with the FHLB at September 30, 2023, with zero being short-term borrowings and $145.0 million being long-term borrowings. The interest rates on the long-term borrowings with the FHLB ranged from 4.43% to 4.83%, with a weighted average rate of 4.65%. Of the long-term FHLB borrowings, $50.0 million is due in 2024, $55.0 million is due in 2025 and $40.0 million is due in 2026. The Company had $175.0 million in short-term outstanding borrowings with the FHLB at December 31, 2022. The Company had a $80.6 million irrevocable letter of credit at September 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 September 30, 2023 and December 31, 2022.

 

 

September 30, 2023

 

 

 

Notional Amount

 

 

Assets

 

 

Liabilities

 

 

 

(in thousands)

 

Customer-related interest rate swap contracts:

 

 

 

 

 

 

 

 

 

Matched interest rate swaps with borrower

 

$

41,284

 

 

$

1,781

 

 

$

47

 

Matched interest rate swaps with counterparty

 

 

41,284

 

 

 

47

 

 

 

1,781

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

Notional Amount

 

 

Assets

 

 

Liabilities

 

 

 

(in thousands)

 

Customer-related interest rate swap contracts:

 

 

 

 

 

 

 

 

 

Matched interest rate swaps with borrower

 

$

23,141

 

 

$

1,017

 

 

$

 

Matched interest rate swaps with counterparty

 

 

23,141

 

 

 

 

 

 

1,017

 

 

 

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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.

On August 23, 2023, the Company completed a sale of specific assets from its marine lending segment. As part of the sale, the Company sold its interest in marine vessel floor plan loans totaling $52.8 million, its rights to service loans that had been sold to secondary market investors prior to the date of sale (valued at $595.4 thousand on balance sheet prior to sale), and other assets that were not individually significant. The Company received total consideration, net of selling expenses, of $53.5 million and recognized a gain of $463 thousand. The assets sold as well as their related revenues and contribution to earnings did not constitute a significant portion of the Company's assets or operating results for the year-to-date period ending September 30, 2023. Subsequent to the sale of these assets, the Company retained ownership of its marine vessel retail loans which continue to constitute a significant portion of the Company's assets, revenues, and earnings. The Company expects to cease accepting new marine lending business and hold the retained outstanding loans until they are ultimately repaid.

Financial information of the parent company 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 revenues 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 September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and September 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. Subsequent to the third quarter of 2023 and going forward, the Company expects it will continue to evaluate its business segments and internal reporting structure, including the production of discrete financial information to the chief operating decision-maker.

33


TABLE OF CONTENTS

 

 

Three Months Ended

 

 

 

September 30, 2023

 

 

 

Community Banking

 

 

Marine Lending

 

 

All Other

 

 

Eliminations

 

 

Consolidated

 

 

 

(in thousands)

 

Interest Income

 

$

17,779

 

 

$

4,412

 

 

$

 

 

$

 

 

$

22,191

 

Interest Expense

 

 

7,563

 

 

 

1,358

 

 

 

354

 

 

 

 

 

 

9,275

 

Net Interest Income (Expense)

 

 

10,216

 

 

 

3,054

 

 

 

(354

)

 

 

 

 

 

12,916

 

Gain on sales of loans

 

 

253

 

 

 

12

 

 

 

 

 

 

 

 

 

265

 

Other noninterest income

 

 

1,741

 

 

 

1,013

 

 

 

1,190

 

 

 

 

 

 

3,944

 

Net Revenue

 

 

12,210

 

 

 

4,079

 

 

 

836

 

 

 

 

 

 

17,125

 

Provision for credit losses

 

 

453

 

 

 

(237

)

 

 

 

 

 

 

 

 

216

 

Noninterest expense

 

 

11,131

 

 

 

2,285

 

 

 

717

 

 

 

 

 

 

14,133

 

Income before taxes

 

 

626

 

 

 

2,031

 

 

 

119

 

 

 

 

 

 

2,776

 

Income tax expense

 

 

2

 

 

 

427

 

 

 

28

 

 

 

 

 

 

457

 

Net Income

 

$

624

 

 

$

1,604

 

 

$

91

 

 

$

 

 

$

2,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

1,120

 

 

$

 

 

$

 

 

$

 

 

$

1,120

 

Depreciation and amortization

 

 

715

 

 

 

32

 

 

 

48

 

 

 

 

 

 

795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30, 2022

 

 

 

Community Banking

 

 

Marine Lending

 

 

All Other

 

 

Eliminations

 

 

Consolidated

 

 

 

(in thousands)

 

Interest Income

 

$

12,449

 

 

$

1,917

 

 

$

 

 

$

 

 

$

14,366

 

Interest Expense

 

 

1,042

 

 

 

88

 

 

 

337

 

 

 

 

 

 

1,467

 

Net Interest Income (Expense)

 

 

11,407

 

 

 

1,829

 

 

 

(337

)

 

 

 

 

 

12,899

 

Gain on sales of loans

 

 

216

 

 

 

352

 

 

 

 

 

 

 

 

 

568

 

Other noninterest income

 

 

1,476

 

 

 

25

 

 

 

1,095

 

 

 

 

 

 

2,596

 

Net Revenue

 

 

13,099

 

 

 

2,206

 

 

 

758

 

 

 

 

 

 

16,063

 

Provision for credit losses

 

 

(202

)

 

 

202

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

9,243

 

 

 

1,155

 

 

 

660

 

 

 

 

 

 

11,058

 

Income before taxes

 

 

4,058

 

 

 

849

 

 

 

98

 

 

 

 

 

 

5,005

 

Income tax expense

 

 

724

 

 

 

178

 

 

 

21

 

 

 

 

 

 

923

 

Net Income

 

$

3,334

 

 

$

671

 

 

$

77

 

 

$

 

 

$

4,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

 

 

$

162

 

 

$

 

 

$

 

 

$

162

 

Depreciation and amortization

 

 

699

 

 

 

64

 

 

 

49

 

 

 

 

 

 

812

 

 

34


TABLE OF CONTENTS

 

 

Nine Months Ended

 

 

 

September 30, 2023

 

 

 

Community Banking

 

 

Marine Lending

 

 

All Other

 

 

Eliminations

 

 

Consolidated

 

 

 

(in thousands)

 

Interest Income

 

$

49,479

 

 

$

11,634

 

 

$

 

 

$

 

 

$

61,113

 

Interest Expense

 

 

18,015

 

 

 

4,033

 

 

 

1,063

 

 

 

 

 

 

23,111

 

Net Interest Income (Expense)

 

 

31,464

 

 

 

7,601

 

 

 

(1,063

)

 

 

 

 

 

38,002

 

Gain on sales of loans

 

 

589

 

 

 

324

 

 

 

 

 

 

 

 

 

913

 

Other noninterest income

 

 

5,462

 

 

 

1,106

 

 

 

3,611

 

 

 

 

 

 

10,179

 

Net Revenue

 

 

37,515

 

 

 

9,031

 

 

 

2,548

 

 

 

 

 

 

49,094

 

Provision for credit losses

 

 

1,405

 

 

 

(122

)

 

 

 

 

 

 

 

 

1,283

 

Noninterest expense

 

 

32,247

 

 

 

4,925

 

 

 

2,302

 

 

 

 

 

 

39,474

 

Income before taxes

 

 

3,863

 

 

 

4,228

 

 

 

246

 

 

 

 

 

 

8,337

 

Income tax expense

 

 

435

 

 

 

888

 

 

 

52

 

 

 

 

 

 

1,375

 

Net Income

 

$

3,428

 

 

$

3,340

 

 

$

194

 

 

$

 

 

$

6,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

1,091

 

 

$

36

 

 

$

 

 

$

 

 

$

1,127

 

Depreciation and amortization

 

 

989

 

 

 

224

 

 

 

145

 

 

 

 

 

 

1,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2022

 

 

 

Community Banking

 

 

Marine Lending

 

 

All Other

 

 

Eliminations

 

 

Consolidated

 

 

 

(in thousands)

 

Interest Income

 

$

33,906

 

 

$

4,616

 

 

$

 

 

$

 

 

$

38,522

 

Interest Expense

 

 

1,713

 

 

 

177

 

 

 

675

 

 

 

 

 

 

2,565

 

Net Interest Income (Expense)

 

 

32,193

 

 

 

4,439

 

 

 

(675

)

 

 

 

 

 

35,957

 

Gain on sales of loans

 

 

468

 

 

 

1,076

 

 

 

 

 

 

 

 

 

1,544

 

Other noninterest income

 

 

5,575

 

 

 

60

 

 

 

3,077

 

 

 

 

 

 

8,712

 

Net Revenue

 

 

38,236

 

 

 

5,575

 

 

 

2,402

 

 

 

 

 

 

46,213

 

Provision for credit losses

 

 

388

 

 

 

512

 

 

 

 

 

 

 

 

 

900

 

Noninterest expense

 

 

26,800

 

 

 

2,442

 

 

 

2,267

 

 

 

 

 

 

31,509

 

Income before taxes

 

 

11,048

 

 

 

2,621

 

 

 

135

 

 

 

 

 

 

13,804

 

Income tax expense

 

 

1,902

 

 

 

550

 

 

 

28

 

 

 

 

 

 

2,480

 

Net Income

 

$

9,146

 

 

$

2,071

 

 

$

107

 

 

$

 

 

$

11,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

307

 

 

$

170

 

 

$

16

 

 

$

 

 

$

493

 

Depreciation and amortization

 

 

974

 

 

 

157

 

 

 

128

 

 

 

 

 

 

1,259

 

 

 

 

Community Banking

 

 

Marine Lending

 

 

All Other

 

 

Eliminations

 

 

Consolidated

 

Total assets at September 30, 2023

 

$

1,530,922

 

 

$

268,704

 

 

$

1,844

 

 

$

 

 

$

1,801,470

 

Total assets at December 31, 2022

 

$

1,377,461

 

 

$

237,595

 

 

$

1,661

 

 

$

 

 

$

1,616,717

 

 

 

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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. Through September 30, 2023, 3,772 shares were repurchased and retired and 82,606 shares moved to participant accounts.

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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 September 30, 2023, the Company had total assets of $1.80 billion, net loans of $1.43 billion, total deposits of $1.50 billion, and shareholders’ equity of $101.2 million. The Company’s net income was $7.0 million for the nine months ended September 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.

 

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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.

 

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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.

 

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Consumer Lending

The Bank offers various secured and unsecured consumer loans, which include personal installment loans, personal lines of credit, automobile loans, and credit card loans. The Bank 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.

 

Marine Lending

Through August 22, 2023, the Bank’s marine lending unit included originated retail loans, classified as commercial and industrial loans or consumer loans, depending on the borrower, and dealer floor plan loans, classified as commercial and industrial loans. The Company’s relationships were limited to well established dealers of global premium brand manufacturers with the top three manufacturer customers in business between 30 and 100 years. Retail loans were generally limited to premium manufacturers with established relationships with the Company which have a vested interest in the secondary market pricing of their respective brand due to the limited inventory available for resale. Consequently, while not contractually committed, manufacturers will often support secondary resale values which can have the effect of reducing losses from non-performing retail marine loans. Retail borrowers generally have very high credit scores, substantial down payments, substantial net worth, personal liquidity, and excess cash flow. See additional discussion under the heading "Business Segments" in Item 2 as well as Note 16 of the financial statements.

 

 

 

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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.

 

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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:

difficult market conditions in our industry;
effects of soundness of other financial institutions;
potential impact on us of existing and future legislation and regulations;
the ability to successfully manage growth or implement growth strategies if the Bank is unable to identify attractive markets, locations or opportunities to expand in the future or if the Bank is unable to successfully integrate new branches, business lines or other growth opportunities into its existing operations;
competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;
the successful management of interest rate risk;
risks inherent in making loans such as repayment risks and fluctuating collateral values;
changes in general economic and business conditions in the Bank’s market area;
reliance on the Bank’s management team, including the ability to attract and retain key personnel;
changes in interest rates and interest rate policies;
maintaining capital levels adequate to support growth;
maintaining cost controls and asset qualities as new branches are opened or acquired;
demand, development and acceptance of new products and services;
deposit flows;
the cost and availability of secondary funding sources;
problems with technology utilized by the Bank;
changing trends in customer profiles and behavior;
geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;
the Company's potential exposure to fraud, negligence, computer theft, and cyber-crime;
changes in accounting policies and banking and other law and regulations; and
other factors described in Item 1A., "Risk Factors," in the Company's 2022 Form 10-K.

Because of these uncertainties, actual future results may be materially different from the results indicated by these forward looking statements. In addition, past results of operations do not necessarily indicate future results.

 

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RESULTS OF OPERATIONS

Net Income

Net income for the nine months ended September 30, 2023 was $7.0 million, a decrease of 38.52% or $4.4 million when compared to the same period in 2022. Net income for the three months ended September 30, 2023 was $2.3 million, a decrease of 43.19% or $1.8 million when compared to the same period in 2022. Earnings per share, basic and diluted were $1.98 and $3.25 for the nine months ended September 30, 2023 and 2022, respectively. Earnings per share, basic and diluted were $0.66 and $1.17 for the three months ended September 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 nine months ended September 30, 2023 and 2022 was 0.54% and 1.09%, 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 nine months ended September 30, 2023 and 2022 was 8.96% and 14.63%, respectively.

Net Interest Income

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. Net interest income was $38.0 million and $36.0 million for the nine months ended September 30, 2023 and 2022, respectively, which represents an increase of $2.0 million or 5.69%. Net interest income was $12.9 million for the three months ended September 30, 2023 and 2022, increasing $17 thousand. 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 $356.1 million or 27.15% when comparing the nine months ended September 30, 2022 to the nine months ended September 30, 2023 while the average yield on earning assets increased by 97 basis points over that same period.

Total interest income was $61.1 million and $38.5 million for the nine months ended September 30, 2023 and 2022, respectively, which represents an increase of $22.6 million or 58.64%. Total interest income was $22.2 million and $14.4 million for the three months ended September 30, 2023 and 2022, respectively, which represents an increase of $7.8 million or 54.47%. 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 $23.1 million and $2.6 million for the nine months ended September 30, 2023 and 2022, respectively, which represents an increase of $20.5 million or 801.01%. Total interest expense was $9.3 million and $1.5 million for the three months ended September 30, 2023 and 2022, respectively, which represents an increase of $7.8 million or 532.24% . 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 and the increased usage of Federal Home Loan Bank advances during 2023, with fixed rates ranging from 4.20% to 5.47%. The average balance of Federal Home Loan Bank advances was $168.3 million with an average rate of 4.77% during the nine months ended September 30, 2023, compared to an average balance of $22.5 million with an average rate of 2.40% during the same nine month period in 2022. At September 30, 2023, $145.0 million advances were outstanding, maturing from October 2024 through March 2026.

 

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The net interest margin was 3.05% and 3.68% for the nine months ended September 30, 2023 and 2022, respectively. The net interest margin was 2.93% and 3.72% for the three months ended September 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.

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 September 30, 2023 and 2022 (dollars in thousands):

 

 

 

September 30, 2023

 

 

September 30, 2022

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

 

 

Interest

 

 

Average

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

Assets:

 

Balance

 

 

Expense

 

 

Rate (2)

 

 

Balance

 

 

Expense

 

 

Rate (2)

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

148,549

 

 

$

928

 

 

 

2.48

%

 

$

172,848

 

 

$

873

 

 

 

2.00

%

Tax-Exempt (1)

 

 

490

 

 

 

4

 

 

 

4.10

%

 

 

8,745

 

 

 

75

 

 

 

3.38

%

Total Securities

 

$

149,039

 

 

$

932

 

 

 

2.48

%

 

$

181,593

 

 

$

948

 

 

 

2.07

%

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,458,347

 

 

 

20,077

 

 

 

5.46

%

 

 

1,160,966

 

 

 

13,222

 

 

 

4.52

%

Non-accrual

 

 

3,639

 

 

 

 

 

 

%

 

 

2,038

 

 

 

 

 

 

%

Tax-Exempt (1)

 

 

10,403

 

 

 

129

 

 

 

4.94

%

 

 

7,649

 

 

 

76

 

 

 

3.94

%

Total Loans

 

$

1,472,389

 

 

$

20,206

 

 

 

5.44

%

 

$

1,170,653

 

 

$

13,298

 

 

 

4.51

%

Federal funds sold and interest-bearing deposits in other banks

 

 

132,432

 

 

 

1,081

 

 

 

3.24

%

 

 

27,817

 

 

 

152

 

 

 

2.17

%

Total earning assets

 

$

1,753,860

 

 

$

22,219

 

 

 

5.03

%

 

$

1,380,063

 

 

$

14,398

 

 

 

4.14

%

Allowance for loan losses

 

 

(14,642

)

 

 

 

 

 

 

 

 

(10,218

)

 

 

 

 

 

 

Total non-earning assets

 

 

52,307

 

 

 

 

 

 

 

 

 

90,501

 

 

 

 

 

 

 

Total assets

 

$

1,791,525

 

 

 

 

 

 

 

 

$

1,460,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

241,033

 

 

$

1,354

 

 

 

2.23

%

 

$

178,669

 

 

$

170

 

 

 

0.38

%

Money market accounts

 

 

260,692

 

 

 

1,260

 

 

 

1.92

%

 

 

276,851

 

 

 

283

 

 

 

0.41

%

Savings accounts

 

 

145,673

 

 

 

44

 

 

 

0.12

%

 

 

183,774

 

 

 

35

 

 

 

0.08

%

Time deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$250,000 and more

 

 

137,487

 

 

 

1,543

 

 

 

4.45

%

 

 

57,901

 

 

 

144

 

 

 

0.98

%

Less than $250,000

 

 

257,257

 

 

 

2,777

 

 

 

4.28

%

 

 

59,979

 

 

 

82

 

 

 

0.54

%

Total interest-bearing deposits

 

$

1,042,142

 

 

$

6,978

 

 

 

2.66

%

 

$

757,174

 

 

$

714

 

 

 

0.37

%

Federal funds purchased

 

 

 

 

 

 

 

 

%

 

 

1,949

 

 

 

11

 

 

 

2.27

%

Federal Home Loan Bank advances

 

 

162,935

 

 

 

1,943

 

 

 

4.73

%

 

 

66,848

 

 

 

404

 

 

 

2.40

%

Subordinated debt

 

 

29,416

 

 

 

354

 

 

 

4.78

%

 

 

29,349

 

 

 

338

 

 

 

4.56

%

Total interest-bearing liabilities

 

$

1,234,493

 

 

$

9,275

 

 

 

2.98

%

 

$

855,320

 

 

$

1,467

 

 

 

0.68

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

434,807

 

 

 

 

 

 

 

 

 

487,761

 

 

 

 

 

 

 

Other Liabilities

 

 

18,505

 

 

 

 

 

 

 

 

 

14,462

 

 

 

 

 

 

 

Total liabilities

 

$

1,687,805

 

 

 

 

 

 

 

 

$

1,357,543

 

 

 

 

 

 

 

Shareholders' equity

 

 

103,720

 

 

 

 

 

 

 

 

 

102,803

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

1,791,525

 

 

 

 

 

 

 

 

$

1,460,346

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

12,944

 

 

 

 

 

 

 

 

$

12,931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

2.05

%

 

 

 

 

 

 

 

 

3.46

%

Interest expense as a percent of average earning assets

 

 

 

 

 

 

 

 

2.10

%

 

 

 

 

 

 

 

 

0.42

%

Net interest margin

 

 

 

 

 

 

 

 

2.93

%

 

 

 

 

 

 

 

 

3.72

%

 

(1)
Income and yields are reported on a tax-equivalent basis using a federal tax rate of 21%.
(2)
Annualized.

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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 nine months ended September 30, 2023 and 2022 (dollars in thousands):

 

 

 

September 30, 2023

 

 

September 30, 2022

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

 

 

Interest

 

 

Average

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

Assets:

 

Balance

 

 

Expense

 

 

Rate (2)

 

 

Balance

 

 

Expense

 

 

Rate (2)

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

153,627

 

 

$

2,736

 

 

 

2.38

%

 

$

178,821

 

 

$

2,526

 

 

 

1.89

%

Tax-Exempt (1)

 

 

515

 

 

 

15

 

 

 

4.13

%

 

 

10,924

 

 

 

274

 

 

 

3.36

%

Total Securities

 

$

154,142

 

 

$

2,751

 

 

 

2.39

%

 

$

189,745

 

 

$

2,800

 

 

 

1.97

%

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,413,520

 

 

 

55,812

 

 

 

5.28

%

 

 

1,079,773

 

 

 

35,465

 

 

 

4.39

%

Non-accrual

 

 

2,786

 

 

 

 

 

 

%

 

 

2,363

 

 

 

 

 

 

%

Tax-Exempt (1)

 

 

9,938

 

 

 

364

 

 

 

4.90

%

 

 

4,384

 

 

 

127

 

 

 

3.88

%

Total Loans

 

$

1,426,244

 

 

$

56,176

 

 

 

5.27

%

 

$

1,086,520

 

 

$

35,592

 

 

 

4.38

%

Federal funds sold and Interest-bearing deposits in other banks

 

 

87,470

 

 

 

2,265

 

 

 

3.46

%

 

 

35,476

 

 

 

214

 

 

 

0.81

%

Total earning assets

 

$

1,667,856

 

 

$

61,192

 

 

 

4.91

%

 

$

1,311,741

 

 

$

38,606

 

 

 

3.94

%

Allowance for loan losses

 

 

(14,094

)

 

 

 

 

 

 

 

 

(9,580

)

 

 

 

 

 

 

Total non-earning assets

 

 

74,464

 

 

 

 

 

 

 

 

 

88,664

 

 

 

 

 

 

 

Total assets

 

$

1,728,226

 

 

 

 

 

 

 

 

$

1,390,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

239,232

 

 

$

3,656

 

 

 

2.04

%

 

$

172,716

 

 

$

345

 

 

 

0.27

%

Money market accounts

 

 

257,645

 

 

 

3,193

 

 

 

1.66

%

 

 

267,451

 

 

 

577

 

 

 

0.29

%

Savings accounts

 

 

155,301

 

 

 

143

 

 

 

0.12

%

 

 

180,432

 

 

 

90

 

 

 

0.07

%

Time deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$250,000 and more

 

 

105,275

 

 

 

2,998

 

 

 

3.81

%

 

 

62,263

 

 

 

264

 

 

 

0.57

%

Less than $250,000

 

 

203,611

 

 

 

5,982

 

 

 

3.93

%

 

 

58,698

 

 

 

191

 

 

 

0.44

%

Total interest-bearing deposits

 

$

961,064

 

 

$

15,972

 

 

 

2.22

%

 

$

741,560

 

 

$

1,467

 

 

 

0.26

%

Federal funds purchased

 

 

3,745

 

 

 

70

 

 

 

2.50

%

 

 

1,616

 

 

 

19

 

 

 

1.58

%

Federal Home Loan Bank advances

 

 

168,242

 

 

 

6,006

 

 

 

4.77

%

 

 

22,527

 

 

 

404

 

 

 

2.40

%

Subordinated debt

 

 

29,400

 

 

 

1,063

 

 

 

4.83

%

 

 

19,776

 

 

 

675

 

 

 

4.56

%

Total interest-bearing liabilities

 

$

1,162,451

 

 

$

23,111

 

 

 

2.66

%

 

$

785,479

 

 

$

2,565

 

 

 

0.44

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

445,833

 

 

 

 

 

 

 

 

 

479,464

 

 

 

 

 

 

 

Other Liabilities

 

 

16,108

 

 

 

 

 

 

 

 

 

20,866

 

 

 

 

 

 

 

Total liabilities

 

$

1,624,392

 

 

 

 

 

 

 

 

$

1,285,809

 

 

 

 

 

 

 

Shareholders' equity

 

 

103,834

 

 

 

 

 

 

 

 

 

105,016

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

1,728,226

 

 

 

 

 

 

 

 

$

1,390,825

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

38,081

 

 

 

 

 

 

 

 

$

36,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

2.25

%

 

 

 

 

 

 

 

 

3.50

%

Interest expense as a percent of average earning assets

 

 

 

 

 

 

 

 

1.85

%

 

 

 

 

 

 

 

 

0.26

%

Net interest margin

 

 

 

 

 

 

 

 

3.05

%

 

 

 

 

 

 

 

 

3.68

%

(1)
Income and yields are reported on a tax-equivalent basis using a federal tax rate of 21%.
(2)
Annualized.

45


TABLE OF CONTENTS

The following table reconciles tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

 

(in thousands)

 

GAAP Financial Measurements:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income - Loans

 

$

20,179

 

 

$

13,282

 

 

$

56,100

 

 

$

35,565

 

Interest Income - Securities and Other Interest-Earnings Assets

 

 

2,012

 

 

 

1,084

 

 

 

5,013

 

 

 

2,957

 

Interest Expense - Deposits

 

 

6,978

 

 

 

714

 

 

 

15,972

 

 

 

1,467

 

Interest Expense - Other Borrowings

 

 

2,297

 

 

 

753

 

 

 

7,139

 

 

 

1,098

 

Total Net Interest Income

 

$

12,916

 

 

$

12,899

 

 

$

38,002

 

 

$

35,957

 

Non-GAAP Financial Measurements:

 

 

 

 

 

 

 

 

 

 

 

 

Add: Tax Benefit on Tax-Exempt Interest Income - Loans (1)

 

$

27

 

 

$

16

 

 

$

76

 

 

$

26

 

Add: Tax Benefit on Tax-Exempt Interest Income - Securities (1)

 

 

1

 

 

 

16

 

 

 

3

 

 

 

58

 

Total Tax Benefit on Tax-Exempt Interest Income

 

$

28

 

 

$

32

 

 

$

79

 

 

$

84

 

Tax-Equivalent Net Interest Income

 

$

12,944

 

 

$

12,931

 

 

$

38,081

 

 

$

36,041

 

 

(1)
Tax benefit was calculated using the federal statutory tax rate of 21%.

The tax-equivalent yield on earning assets increased from 3.94% to 4.91% for the nine months ended September 30, 2022 compared to the same nine month period in 2023. For those same time periods, the tax-equivalent yield on securities increased 42 basis points. The tax equivalent yield on loans increased 89 basis points from 4.38% for the nine months ended September 30, 2022 to 5.27% for the same time period in 2023. The increase in the tax-equivalent yield on earning assets for the nine months ended September 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 0.44% to 2.66% for the nine months ended September 30, 2022 compared to the same nine month period in 2023, respectively. The average rate on interest bearing deposits increased 196 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 2023 due to increased utilization of Federal Home Loan Bank advances. The average balance of Federal Home Loan Bank advances was $168.2 million with an average rate of 4.77% during the nine months ended September 30, 2023, compared to an average balance of $22.5 million with an average rate of 2.40% during the same nine month period in 2022. At September 30, 2023, $145.0 million advances were outstanding, maturing from October 2024 through March 2026 with varying fixed rates ranging from of 4.43% to 4.83%.

 

 

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TABLE OF CONTENTS

Provision for Credit Losses

The provision for credit losses is based upon management’s estimate of the amount required to maintain an adequate allowance for credit losses as discussed within the Critical Accounting Policies section above and 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 nine months ended September 30, 2023 and 2022 was $1.3 million and $900 thousand, respectively. The provision for loan losses for the three months ended September 30, 2023 and 2022 was $216 thousand and $0, respectively. The provision for credit losses for the three and nine months ended September 30, 2023 resulted mostly from growth in residential and commercial real estate loan portfolios. There was no provision recorded in the third quarter of 2022 due to the large amount of recoveries recognized during the period, mainly from two loan relationships.

Noninterest Income

Total noninterest income for the nine months ended September 30, 2023 and 2022 was $11.1 million and $10.3 million, respectively and for the three months ended September 30, 2023 and 2022 was $4.2 million and $3.2 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 nine months ended September 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.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(dollars in thousands)

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

Wealth management fees

 

$

1,190

 

 

$

1,094

 

 

$

96

 

 

 

9

%

 

$

3,611

 

 

$

3,077

 

 

$

534

 

 

 

17

%

Service charges on deposit accounts

 

 

460

 

 

 

432

 

 

 

28

 

 

 

6

%

 

 

1,343

 

 

 

1,195

 

 

 

148

 

 

 

12

%

Other service charges and fees

 

 

1,252

 

 

 

1,061

 

 

 

191

 

 

 

18

%

 

 

3,434

 

 

 

2,999

 

 

 

435

 

 

 

15

%

(Loss) gain on sale of securities

 

 

 

 

 

(737

)

 

 

737

 

 

NM

 

 

 

 

 

 

(737

)

 

 

737

 

 

NM

 

Gain on the sale of marine finance assets

 

 

463

 

 

 

 

 

 

463

 

 

NM

 

 

 

463

 

 

 

 

 

 

463

 

 

NM

 

Gain (loss) on disposal of bank premises and equipment

 

 

7

 

 

 

8

 

 

 

(1

)

 

 

(13

)%

 

 

14

 

 

 

(3

)

 

 

17

 

 

NM

 

Gain on sale of loans

 

 

265

 

 

 

568

 

 

 

(303

)

 

 

(53

)%

 

 

913

 

 

 

1,544

 

 

 

(631

)

 

 

(41

)%

Bank owned life insurance income

 

 

184

 

 

 

138

 

 

 

46

 

 

 

33

%

 

 

542

 

 

 

495

 

 

 

47

 

 

 

9

%

Other operating income

 

 

388

 

 

 

600

 

 

 

(212

)

 

 

(35

)%

 

 

772

 

 

 

1,686

 

 

 

(914

)

 

 

(54

)%

Total noninterest income

 

$

4,209

 

 

$

3,164

 

 

$

1,045

 

 

 

33

%

 

$

11,092

 

 

$

10,256

 

 

$

836

 

 

 

8

%

 

NM - Not Meaningful

 

47


TABLE OF CONTENTS

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 nine months ended September 30, 2023 when compared to the three and nine months ended September 30, 2022 as a result of new business efforts. Fee increases and one-time fees for estates and other services have also contributed to the year over year increases in revenue.

Service charges on deposit accounts increased during the three and nine months ended September 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 nine months ended September 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 the sale of marine finance business was $463 thousand for the three and nine months ended September 30, 2023. On August 23, 2023, the Company completed the sale of certain marine finance division assets. Refer to additional discussion under the heading "Marine Lending" in Item 2 and Note 16 of the financial statements.

Gain on sale of loans decreased during the three and nine months ended September 30, 2023 when compared to the same periods in 2022. During the first three quarters of 2023, the Company sold $21.1 million in mortgage loans on the secondary market, $49.1 million of loans from the commercial and consumer loan portfolios and $3.1 million of SBA commercial loans. These loan sales resulted in gains of $265 thousand and $913 thousand during the three and nine months ended September 30, 2023, respectively. During the first three quarters of 2022, the Company sold $11.5 million in mortgage loans on the secondary market and $97.8 million of marine loans from the commercial and consumer loan portfolios. These loan sales resulted in gains of $568 thousand and $1.5 million during the three and nine months ended September 30, 2022, respectively.

Other operating income decreased for the three and nine months ended September 30, 2023 when compared to the same periods in 2022. This decrease can be mainly attributed to cash distributions received during the nine months of 2022 from investments in Small Business Investment Companies, that were not received during the nine months of 2023. The 2023 year-to-date decrease was also attributable to less loan swap fee income recognized as compared to the same period in 2022. Loan swap agreements with initial notional balances of $20.9 million and $21.2 million were entered into during the nine months ended September 30, 2023 and 2022, respectively. In 2022, the Bank also entered into a loan swap risk participation agreement for $10.0 million.

48


TABLE OF CONTENTS

Noninterest Expenses

Total noninterest expenses increased $8.0 million or 25.28% for the nine months ended September 30, 2023 compared to the same period in 2022. Total noninterest expenses increased $3.1 million or 27.81% for the three months ended September 30, 2023 compared to the same period in 2022. The following table presents the components of noninterest expense for the three and nine months ended September 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.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(dollars in thousands)

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

 

2023

 

 

2022

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

7,598

 

 

$

6,938

 

 

$

660

 

 

 

10

%

 

$

22,457

 

 

$

18,873

 

 

$

3,584

 

 

 

19

%

Occupancy expenses

 

 

570

 

 

 

528

 

 

 

42

 

 

 

8

%

 

 

1,621

 

 

 

1,562

 

 

 

59

 

 

 

4

%

Equipment expenses

 

 

341

 

 

 

299

 

 

 

42

 

 

 

14

%

 

 

979

 

 

 

814

 

 

 

165

 

 

 

20

%

Advertising and marketing expenses

 

 

228

 

 

 

181

 

 

 

47

 

 

 

26

%

 

 

866

 

 

 

438

 

 

 

428

 

 

 

98

%

Stationary and supplies

 

 

69

 

 

 

34

 

 

 

35

 

 

 

103

%

 

 

147

 

 

 

135

 

 

 

12

 

 

 

9

%

ATM network fees

 

 

426

 

 

 

381

 

 

 

45

 

 

 

12

%

 

 

1,142

 

 

 

977

 

 

 

165

 

 

 

17

%

Other real estate owned expense

 

 

 

 

 

 

 

 

 

 

NM

 

 

 

5

 

 

 

 

 

 

5

 

 

NM

 

(Gain) on other real estate owned

 

 

 

 

 

 

 

 

 

 

NM

 

 

 

(7

)

 

 

 

 

 

(7

)

 

NM

 

FDIC assessment

 

 

495

 

 

 

116

 

 

 

379

 

 

 

327

%

 

 

1,107

 

 

 

430

 

 

 

677

 

 

 

157

%

Computer software expense

 

 

396

 

 

 

252

 

 

 

144

 

 

 

57

%

 

 

987

 

 

 

690

 

 

 

297

 

 

 

43

%

Bank franchise tax

 

 

340

 

 

 

234

 

 

 

106

 

 

 

45

%

 

 

916

 

 

 

653

 

 

 

263

 

 

 

40

%

Professional fees

 

 

497

 

 

 

270

 

 

 

227

 

 

 

84

%

 

 

1,963

 

 

 

1,610

 

 

 

353

 

 

 

22

%

Data processing fees

 

 

542

 

 

 

427

 

 

 

115

 

 

 

27

%

 

 

1,422

 

 

 

1,386

 

 

 

36

 

 

 

3

%

Other operating expenses

 

 

2,631

 

 

 

1,398

 

 

 

1,233

 

 

 

88

%

 

 

5,869

 

 

 

3,941

 

 

 

1,928

 

 

 

49

%

Total noninterest expenses

 

$

14,133

 

 

$

11,058

 

 

$

3,075

 

 

 

28

%

 

$

39,474

 

 

$

31,509

 

 

$

7,965

 

 

 

25

%

 

NM - Not Meaningful

The Company’s growth has had an impact on noninterest expenses. Total assets have grown by $328.4 million or 22.29% from September 30, 2022 to September 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 nine months ended September 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 235 at September 30, 2022 to 245 at September 30, 2023. As part of the sale of the marine finance assets during the third quarter, the Company reduced its workforce associated with the marine lending division as it expects to cease accepting new marine lending business. While this will have a positive impact on salaries and employee benefits expense going forward, there was approximately $1.0 million in additional expenses recognized during the current quarter including a change in control agreement and accelerated deferred compensation expenses.

ATM network fees increased during the three and nine months ended September 30, 2023 over 2022. This is due mainly to fluctuations in customer usage.

An increase in professional fees was noted between the three and nine months ended September 30, 2023 and the same periods in 2022, largely due a significant reimbursement in the third quarter of 2022 of paid legal fees. Excluding this reimbursement, the year over year change would have been minimal.

49


TABLE OF CONTENTS

For the three and nine months ended September 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 81.08% and 66.99% for the nine months ended September 30, 2023 and 2022, respectively. The efficiency ratio of the Company was 84.71% and 65.73% for the three months ended September 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. For the three and nine months ended September 30, 2023, one-time non-interest expenses of $1.0 million related to the sale of the marine finance business are included. Excluding these expenses, the efficiency ratio for the three and nine months ended September 30, 2023 would have been 78.71% and 79.02%, respectively.

The calculation of the efficiency ratio for the three and nine months ended September 30, 2023 and 2022 was as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

 

(in thousands)

 

Summary of Operating Results:

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expenses

 

$

14,133

 

 

$

11,058

 

 

$

39,474

 

 

$

31,509

 

Less: (Gain) on other real estate owned

 

 

 

 

 

 

 

 

(7

)

 

 

 

Adjusted noninterest expenses

 

$

14,133

 

 

$

11,058

 

 

$

39,481

 

 

$

31,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

12,916

 

 

 

12,899

 

 

 

38,002

 

 

 

35,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

4,209

 

 

 

3,164

 

 

 

11,092

 

 

 

10,256

 

Less: (Loss) gain on sales of securities

 

 

 

 

 

(737

)

 

 

 

 

 

(737

)

Less: Gain on the sale of marine finance assets

 

 

463

 

 

 

 

 

 

463

 

 

 

 

Less: Gain (loss) on the sale and disposal of premises and equipment

 

 

7

 

 

 

8

 

 

 

14

 

 

 

(3

)

Adjusted noninterest income

 

$

3,739

 

 

$

3,893

 

 

$

10,615

 

 

$

10,996

 

Tax equivalent adjustment (1)

 

 

28

 

 

 

32

 

 

 

79

 

 

 

84

 

Total net interest income and noninterest income, adjusted

 

$

16,683

 

 

$

16,824

 

 

$

48,696

 

 

$

47,037

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

 

84.71

%

 

 

65.73

%

 

 

81.08

%

 

 

66.99

%

 

(1)
Includes tax-equivalent adjustments on loans and securities using the federal statutory tax rate of 21%.

 

 

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Income Taxes

Income tax expense was $1.4 million and $2.5 million during the nine months ended September 30, 2023 and 2022, respectively. Income tax expense was $457 thousand and $923 thousand during the three months ended September 30, 2023 and 2022, respectively. The effective tax rate was 16.49% and 17.97% for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rate was 16.46% and 18.44% for the three months ended September 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.

On August 23, 2023, the Company completed a sale of specific assets from its marine lending segment. As part of the sale, the Company sold its interest in marine vessel floor plan loans totaling $52.8 million, its rights to service loans that had been sold to secondary market investors prior to the date of sale (valued at $595.4 thousand on balance sheet prior to sale), and other assets that were not individually significant. The Company received total consideration, net of selling expenses, of $53.5 million and recognized a gain of $463 thousand. The assets sold as well as their related revenues and contribution to earnings did not constitute a significant portion of the Company's assets or operating results for the year-to-date period ending September 30, 2023. As part of the sale, the Company reduced its workforce associated with the marine lending division, as it expects to cease accepting new marine lending business. Subsequent to the sale of these assets, the Company retained ownership of approximately $260.5 million of marine vessel retail loans which continue to constitute a significant portion of the Company's assets, revenues, and earnings. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid.

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 revenues 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 nine months ended September 30, 2023 and 2022 and as of September 30, 2023 and December 31, 2022, which are included within the Consolidated Balance Sheets and Consolidated Statements of Income.

 

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Three Months Ended

 

 

 

September 30, 2023

 

 

 

Community Banking

 

 

Marine Lending

 

 

All Other

 

 

Eliminations

 

 

Consolidated

 

 

 

(in thousands)

 

Interest Income

 

$

17,779

 

 

$

4,412

 

 

$

 

 

$

 

 

$

22,191

 

Interest Expense

 

 

7,563

 

 

 

1,358

 

 

 

354

 

 

 

 

 

 

9,275

 

Net Interest Income (Expense)

 

 

10,216

 

 

 

3,054

 

 

 

(354

)

 

 

 

 

 

12,916

 

Gain on sales of loans

 

 

253

 

 

 

12

 

 

 

 

 

 

 

 

 

265

 

Other noninterest income

 

 

1,741

 

 

 

1,013

 

 

 

1,190

 

 

 

 

 

 

3,944

 

Net Revenue

 

 

12,210

 

 

 

4,079

 

 

 

836

 

 

 

 

 

 

17,125

 

Provision for credit losses

 

 

453

 

 

 

(237

)

 

 

 

 

 

 

 

 

216

 

Noninterest expense

 

 

11,131

 

 

 

2,285

 

 

 

717

 

 

 

 

 

 

14,133

 

Income before taxes

 

 

626

 

 

 

2,031

 

 

 

119

 

 

 

 

 

 

2,776

 

Income tax expense

 

 

2

 

 

 

427

 

 

 

28

 

 

 

 

 

 

457

 

Net Income

 

$

624

 

 

$

1,604

 

 

$

91

 

 

$

 

 

$

2,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

1,120

 

 

$

 

 

$

 

 

$

 

 

$

1,120

 

Depreciation and amortization

 

 

715

 

 

 

32

 

 

 

48

 

 

 

 

 

 

795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30, 2022

 

 

 

Community Banking

 

 

Marine Lending

 

 

All Other

 

 

Eliminations

 

 

Consolidated

 

 

 

(in thousands)

 

Interest Income

 

$

12,449

 

 

$

1,917

 

 

$

 

 

$

 

 

$

14,366

 

Interest Expense

 

 

1,042

 

 

 

88

 

 

 

337

 

 

 

 

 

 

1,467

 

Net Interest Income (Expense)

 

 

11,407

 

 

 

1,829

 

 

 

(337

)

 

 

 

 

 

12,899

 

Gain on sales of loans

 

 

216

 

 

 

352

 

 

 

 

 

 

 

 

 

568

 

Other noninterest income

 

 

1,476

 

 

 

25

 

 

 

1,095

 

 

 

 

 

 

2,596

 

Net Revenue

 

 

13,099

 

 

 

2,206

 

 

 

758

 

 

 

 

 

 

16,063

 

Provision for credit losses

 

 

(202

)

 

 

202

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

9,243

 

 

 

1,155

 

 

 

660

 

 

 

 

 

 

11,058

 

Income before taxes

 

 

4,058

 

 

 

849

 

 

 

98

 

 

 

 

 

 

5,005

 

Income tax expense

 

 

724

 

 

 

178

 

 

 

21

 

 

 

 

 

 

923

 

Net Income

 

$

3,334

 

 

$

671

 

 

$

77

 

 

$

 

 

$

4,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

 

 

$

162

 

 

$

 

 

$

 

 

$

162

 

Depreciation and amortization

 

 

699

 

 

 

64

 

 

 

49

 

 

 

 

 

 

812

 

 

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TABLE OF CONTENTS

 

 

Nine Months Ended

 

 

 

September 30, 2023

 

 

 

Community Banking

 

 

Marine Lending

 

 

All Other

 

 

Eliminations

 

 

Consolidated

 

 

 

(in thousands)

 

Interest Income

 

$

49,479

 

 

$

11,634

 

 

$

 

 

$

 

 

$

61,113

 

Interest Expense

 

 

18,015

 

 

 

4,033

 

 

 

1,063

 

 

 

 

 

 

23,111

 

Net Interest Income (Expense)

 

 

31,464

 

 

 

7,601

 

 

 

(1,063

)

 

 

 

 

 

38,002

 

Gain on sales of loans

 

 

589

 

 

 

324

 

 

 

 

 

 

 

 

 

913

 

Other noninterest income

 

 

5,462

 

 

 

1,106

 

 

 

3,611

 

 

 

 

 

 

10,179

 

Net Revenue

 

 

37,515

 

 

 

9,031

 

 

 

2,548

 

 

 

 

 

 

49,094

 

Provision for credit losses

 

 

1,405

 

 

 

(122

)

 

 

 

 

 

 

 

 

1,283

 

Noninterest expense

 

 

32,247

 

 

 

4,925

 

 

 

2,302

 

 

 

 

 

 

39,474

 

Income before taxes

 

 

3,863

 

 

 

4,228

 

 

 

246

 

 

 

 

 

 

8,337

 

Income tax expense

 

 

435

 

 

 

888

 

 

 

52

 

 

 

 

 

 

1,375

 

Net Income

 

$

3,428

 

 

$

3,340

 

 

$

194

 

 

$

 

 

$

6,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

1,091

 

 

$

36

 

 

$

 

 

$

 

 

$

1,127

 

Depreciation and amortization

 

 

989

 

 

 

224

 

 

 

145

 

 

 

 

 

 

1,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2022

 

 

 

Community Banking

 

 

Marine Lending

 

 

All Other

 

 

Eliminations

 

 

Consolidated

 

 

 

(in thousands)

 

Interest Income

 

$

33,906

 

 

$

4,616

 

 

$

 

 

$

 

 

$

38,522

 

Interest Expense

 

 

1,713

 

 

 

177

 

 

 

675

 

 

 

 

 

 

2,565

 

Net Interest Income (Expense)

 

 

32,193

 

 

 

4,439

 

 

 

(675

)

 

 

 

 

 

35,957

 

Gain on sales of loans

 

 

468

 

 

 

1,076

 

 

 

 

 

 

 

 

 

1,544

 

Other noninterest income

 

 

5,575

 

 

 

60

 

 

 

3,077

 

 

 

 

 

 

8,712

 

Net Revenue

 

 

38,236

 

 

 

5,575

 

 

 

2,402

 

 

 

 

 

 

46,213

 

Provision for credit losses

 

 

388

 

 

 

512

 

 

 

 

 

 

 

 

 

900

 

Noninterest expense

 

 

26,800

 

 

 

2,442

 

 

 

2,267

 

 

 

 

 

 

31,509

 

Income before taxes

 

 

11,048

 

 

 

2,621

 

 

 

135

 

 

 

 

 

 

13,804

 

Income tax expense

 

 

1,902

 

 

 

550

 

 

 

28

 

 

 

 

 

 

2,480

 

Net Income

 

$

9,146

 

 

$

2,071

 

 

$

107

 

 

$

 

 

$

11,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

307

 

 

$

170

 

 

$

16

 

 

$

 

 

$

493

 

Depreciation and amortization

 

 

974

 

 

 

157

 

 

 

128

 

 

 

 

 

 

1,259

 

 

 

 

Community Banking

 

 

Marine Lending

 

 

All Other

 

 

Eliminations

 

 

Consolidated

 

Total assets at September 30, 2023

 

$

1,530,922

 

 

$

268,704

 

 

$

1,844

 

 

$

 

 

$

1,801,470

 

Total assets at December 31, 2022

 

$

1,377,461

 

 

$

237,595

 

 

$

1,661

 

 

$

 

 

$

1,616,717

 

 

 

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FINANCIAL CONDITION

Securities

Total securities available for sale were $134.0 million at September 30, 2023, compared to $149.2 million at December 31, 2022. This represents a decrease of $15.2 million or 10.18%. The Company purchased no securities during the nine months ended September 30, 2023. The Company had total maturities, calls, and principal repayments of $11.0 million during the nine months ended September 30, 2023. Note 4 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio at September 30, 2023 and December 31, 2022. The Company had a net unrealized loss on available for sale securities of $29.8 million at September 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 September 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 $1.44 billion and $1.32 billion at September 30, 2023 and December 31, 2022, respectively. This represents an increase of $117.2 million or 8.85% during the nine months ended September 30, 2023. The ratio of gross loans to deposits decreased during the nine months ended September 30, 2023 from 104.72% at December 31, 2022 to 96.17% at September 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 September 30, 2023 and December 31, 2022. During the nine months ended September 30, 2023, through the normal course of business, $73.4 million in loans were sold. The Company sold $21.1 million in mortgage loans on the secondary market and $52.3 million of loans from the commercial and consumer loan portfolios. These loan sales resulted in net gains of $913 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 $599.2 million or 41.82% and $547.4 million or 41.59% of total loans at September 30, 2023 and December 31, 2022, respectively, representing an increase of $51.8 million or 9.46% during the nine months ended September 30, 2023. Commercial real estate loans experienced an increase during the nine months ended September 30, 2023 due largely to the continued growth and expansion of the Bank’s current market area.

Marine loans were $260.5 million or 18.08% and $230.9 million or 17.54% of total loans at September 30, 2023 and December 31, 2022, respectively, representing an increase of $29.6 million or 12.84%. Loan growth, through August 23, 2023 was mainly due to continued growth in the marine lending team and market areas. On August 23, 2023, the Company completed a sale of specific assets from its marine lending segment. As part of the sale, the Company sold its interest in marine vessel floor plan loans totaling $52.8 million and reduced its workforce associated with the marine lending division as it expects to cease accepting new marine lending business. Subsequent to the sale of these assets, the Company retained ownership of marine vessel retail loans, which had a balance of $260.5 million as of September 30, 2023. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid.

Allowance for Credit Losses on Loans

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

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Financial Statements shows the activity within the allowance for credit losses on loans during the three and nine months ended September 30, 2023 and 2022 and the year ended December 31, 2022. Charged-off loans were $314 thousand and $169 thousand for the nine months ended September 30, 2023 and 2022, respectively. Recoveries were $255 thousand and $1.2 million for the nine months ended September 30, 2023 and 2022, respectively. This resulted in net charge-offs of $59 thousand and net recoveries of $1.1 million for the nine months ended September 30, 2023 and 2022, respectively. The annualized ratio of net charge-offs (recoveries) to average loans was 0.01% and (0.13)% for the nine months ended September 30, 2023 and 2022, respectively. The allowance for credit losses on loans as a percentage of loans was 1.01% at September 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 mainly attributable to the adoption of ASC 326, growth in the loan portfolio and an increase nonaccrual loans.

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.

 

 

September 30, 2023

 

 

December 31, 2022

 

Nonaccrual loans

 

$

5,697

 

 

$

2,162

 

Loans past due 90 days or more and accruing interest

 

 

66

 

 

 

318

 

Other real estate owned and repossessed assets

 

 

304

 

 

 

108

 

Total nonperforming assets

 

$

6,067

 

 

$

2,588

 

 

 

 

 

 

 

Allowance for credit losses on loans

 

$

14,573

 

 

$

11,218

 

 

 

 

 

 

 

Gross loans

 

$

1,440,985

 

 

$

1,323,783

 

 

 

 

 

 

 

Allowance for credit losses on loans to nonperforming assets

 

 

240

%

 

 

433

%

 

 

 

 

 

 

Allowance for credit losses on loans to total loans

 

 

1.01

%

 

 

0.85

%

 

 

 

 

 

 

Allowance for credit losses on loans to nonaccrual loans

 

 

256

%

 

 

519

%

 

 

 

 

 

 

Nonaccrual loans to total loans

 

 

0.40

%

 

 

0.19

%

 

 

 

 

 

 

Non-performing assets to period end loans and other real estate owned

 

 

0.42

%

 

 

0.20

%

 

Nonperforming assets increased by $3.4 million during the nine months ended September 30, 2023. Nonaccrual loans were $5.7 million and $2.2 million at September 30, 2023 and December 31, 2022. There was $304 thousand in OREO and repossessed at September 30, 2023 and $108 thousand at December 31, 2022. There were $66 thousand in loans past due 90 days or more and still accruing at September 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 0.42% at September 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 $1.4 million at September 30, 2023 compared to $973 thousand at December 31, 2022. The majority of the increase in past due loans was due to a $372 thousand balance in the marine portfolio at September 30, 2023, compared to $0 at December 31, 2022. This increase was due to one loan currently in nonaccrual status and in the process of foreclosure.

During the nine months ended September 30, 2023, two loan relationships totaling $3.5 million were placed on nonaccrual status resulting from payment delinquency. No allowance reserve was required due to being fully collateralized. One relationship

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includes a $2.4 million loan on a commercial non-owner occupied property, which become delinquent in the third quarter and has since entered into a forbearance agreement. The second relationship consists of residential investor 1-4 family properties and the borrower filed for chapter 11 bankruptcy during 2023. 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.

Deposits

Total deposits were $1.50 billion and $1.26 billion at September 30, 2023 and December 31, 2022, respectively. This represents an increase of $234.3 million or 18.54% during the nine months ended September 30, 2023. Note 7 to the Consolidated Financial Statements provides the composition of total deposits at September 30, 2023 and December 31, 2022. Growth in deposits has been divided between core and non-core accounts. Through the third quarter of 2023, approximately $96.9 million or 41.37% 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 $253.5 million or 160.53% between December 31, 2022 and September 30, 2023, while non-interest bearing deposits have decreased $47.8 million or 9.99% and savings and interest bearing demand deposits have increased by $28.7 million or 4.57% for the same time period. Time deposits as a percentage of total deposits have increased from 12.49% at December 31, 2022, to 27.45% at September 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 September 30, 2023, over 75% of deposits were fully FDIC insured.

CAPITAL RESOURCES

The Bank continues to be a well capitalized financial institution. Total shareholders’ equity at September 30, 2023 was $101.2 million, reflecting a percentage of total assets of 5.62%, as compared to $101.7 million and 6.29% at December 31, 2022. The slight decrease in shareholders’ equity was primarily due to an increase in unrealized losses on the securities available for sale portfolio of $3.9 million or $3.1 million, net of tax and dividends declared of $3.2 million, offsetting net income of $7.0 million earned during the nine months ended September 30, 2023. During the nine months ended September 30, 2023 and 2022, the Company declared dividends of $0.90 and $0.85 per share, respectively. The Company has a Dividend Investment Plan that allows shareholders to reinvest dividends in Company stock.

At September 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

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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 September 30, 2023 and December 31, 2022 was 8.40% 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.

 

 

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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 September 30, 2023, liquid assets totaled $367.5 million as compared to $317.1 million at December 31, 2022. These amounts represented 21.61% and 20.93% of total liabilities at September 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.

 

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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 September 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 September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

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 following table details the Company's purchases of its common stock during the third 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 21, 2023. The Program has start date of July 1, 2023 and an expiration date of June 30, 2024.

 

 

 

Issuer Purchases of Equity Securities

 

 

 

Total Number
of Shares
Purchased

 

 

Average Price
Paid Per Share

 

 

Total Number
of Shares
Purchased as
Part of
Publicly
Announced Plan

 

 

Maximum
Number of
Shares that
may Yet Be
Purchased
Under the
Plan

 

 

 

 

 

 

 

 

 

 

 

 

150,000

 

July 1 - July 31, 2023

 

 

711

 

 

$

35.30

 

 

 

711

 

 

 

149,289

 

August 1 - August 31, 2023

 

 

4,200

 

 

 

35.34

 

 

 

4,911

 

 

 

145,089

 

September 1 - September 30, 2023

 

 

30

 

 

 

35.33

 

 

 

4,941

 

 

 

145,059

 

 

 

4,941

 

 

$

35.34

 

 

 

4,941

 

 

 

145,059

 

 

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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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

 

 

 

Asset Purchase and Servicing Rights Agreement, by and between Bank of Clarke and Axos Bank, dated as of August 23, 2023 (incorporated by reference to Exhibit 10.1 to Eagle Financial Services, Inc.’s Current Report on Form 8-K filed August 24, 2023).

 

 

 

10.2

 

 

 

Loan Purchase and Sale Agreement, by and between Bank of Clarke and Axos Bank, dated as of August 23, 2023 (exhibits omitted) (incorporated by reference to Exhibit 10.2 to Eagle Financial Services, Inc.’s Current Report on Form 8-K filed August 24, 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.

 

 

101

 

The following materials from the Eagle Financial Services, Inc. Quarterly Report on Form 10-Q for the quarter ended September 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 September 30, 2023 formatted in Inline XBRL (included with Exhibit 101).

 

 

 

 

 

 

 

 

 

 

 

 

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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 13th day of November, 2023.

Eagle Financial Services, Inc.

 

By:

 

 

/S/ BRANDON C. LOREY

 

 

 

Brandon C. Lorey

President and Chief Executive Officer

 

 

 

By:

 

 

/S/ KATHLEEN J. CHAPPELL

 

 

 

Kathleen J. Chappell

Executive Vice President, Chief Financial Officer

 

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