Eagle Financial Services, Inc. — 2019 Form 10-K
Business and period. This annual report covers the fiscal year ended December 31, 2019. Eagle Financial Services is a Virginia bank holding company operating through Bank of Clarke County, a community bank serving northern Virginia and the Shenandoah Valley. The Bank offers commercial, consumer and mortgage lending, deposit services, and trust and investment services.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Net income | $9.76 million | $9.00 million |
| Diluted earnings per share | $2.84 | $2.60 |
| Net interest income | $31.22 million | $29.41 million |
| Noninterest income | $7.76 million | $6.88 million |
| Noninterest expense | $26.78 million | $25.20 million |
| Net interest margin | 4.02% | 4.07% |
| Return on average assets / equity | 1.18% / 10.60% | 1.16% / 10.67% |
- Interest and dividend income rose 11.1%, while interest expense increased 68.6%, reflecting asset and deposit growth and higher deposit pricing. Net interest income increased 6.1%; margin narrowed 5 basis points.
- Assets grew 9.7% to $877.3 million. Net loans rose 6.4% to $639.8 million; deposits increased 9.7% to $771.5 million. Shareholders’ equity was $96.3 million, or 10.98% of assets.
- Net cash provided by operating activities was $11.35 million, versus cash used of $1.52 million in 2018. Investing activities used $57.98 million, principally reflecting loan growth and securities purchases; financing activities provided $61.94 million, mainly from deposit growth. Cash and cash equivalents ended at $33.66 million.
- Year-end borrowings were nil; the Bank had no Federal Home Loan Bank advances outstanding. It reported $28 million in unused federal funds lines, an additional $5 million line, and $231.8 million of remaining FHLB availability. Management said liquidity was sufficient to meet depositor and customer credit needs.
- Bank regulatory capital ratios remained above well-capitalized thresholds: common equity Tier 1 13.65%, total risk-based capital 14.40%, and Tier 1 leverage 10.61%. The Bank was classified as well capitalized.
Material changes and notable items
- Net income increased 8.4%. Growth in net interest income and fee income contributed; higher noninterest expense and loan-loss provision partly offset the gains.
- Other service charges and fees rose 17.3%, including higher brokerage commissions, ATM fees, and secondary-market loan fees. Noninterest expense increased 6.3%, including higher salary, data-processing, and ATM-network costs.
- The loan-loss provision was $629,000, down from $777,000. Net charge-offs increased to $1.11 million from net recoveries of $268,000 in 2018, including an $850,000 commercial charge-off. The allowance was $4.97 million, 0.77% of loans, compared with 0.90% a year earlier.
- Nonperforming assets declined to $2.37 million from $2.92 million; there were no loans 90 days past due and still accruing at year-end. Real-estate-secured loans were 89.5% of the loan portfolio.
- Management cited approximately $370,000 of one-time hiring and relocation costs associated with the new CEO and other hires; Brandon C. Lorey became President and CEO in July 2019. The company also accrued and paid $150,000 under a former executive’s separation agreement.
- Available-for-sale securities increased to $165.0 million, and their net unrealized position improved from a $2.0 million loss in 2018 to a $1.8 million gain in 2019. Management attributed unrealized losses to interest-rate changes and said it did not intend, and was unlikely to be required, to sell affected securities before recovery.
- Cash dividends declared rose to $1.00 per share from $0.94. The Company repurchased 53,988 shares during 2019 at an average $32.79 per share.
Outlook, risks and contingencies
- The filing provides no numerical earnings or growth guidance. Management’s stated strategy is to grow local lending and core deposits while managing pricing, expenses, asset quality, and interest-rate exposure.
- Interest-rate sensitivity modeling estimated a 2.59% decline in 12-month net interest income under a 100-basis-point rate decrease and a 2.89% decline under a 400-basis-point increase. Economic value of equity was estimated to decline 19.2% under a 100-basis-point decrease; these model results depend on assumptions about repricing, prepayments, and deposit behavior.
- Principal disclosed risks include local economic and real-estate conditions, the concentration in real-estate-secured lending, borrower credit quality and allowance estimates, deposit competition and funding costs, interest-rate changes, cybersecurity and operational disruptions, regulation, and the ability to manage growth and retain key personnel.
- Off-balance-sheet credit exposure included $19.9 million of commitments to extend credit, $121.6 million of unused lines of credit, and $6.1 million of letters of credit. Management did not anticipate material losses from these commitments. Operating lease liabilities were $3.68 million.
- The Company expected to adopt the CECL credit-loss standard in 2023 and said its financial impact could not yet be reasonably estimated; adoption may require higher reserves. Management reported no material pending legal proceedings. The independent auditor issued unqualified opinions on the financial statements and internal control; management reported effective disclosure controls and internal control over financial reporting, with no identified material weaknesses.
Investor verification points
- Review the $850,000 commercial charge-off, the increase in net charge-offs, and whether the $4.97 million allowance remains adequate as loans grow.
- Examine real-estate and commercial real-estate concentrations, local market conditions, and changes in criticized or impaired credits.
- Track deposit pricing and mix, given the sharp rise in interest expense and modest decline in net interest margin.
- Assess the assumptions behind interest-rate simulations and securities valuations, particularly the modeled exposure to falling rates.
- Confirm the timing and estimated capital and earnings effects of CECL adoption, and monitor growth in off-balance-sheet commitments.
- Reconcile any data discrepancies in the filing’s selected financial data with the audited statements; the audited income statement reports 2018 noninterest income of $6.879 million.