Eagle Financial Services, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Eagle is a Virginia bank holding company operating through Bank of Clarke County, a community bank serving Northern Virginia, the Shenandoah Valley and Frederick, Maryland. The filing was signed March 30, 2022.
Financial performance
| Metric | 2021 | 2020 |
|---|---|---|
| Total assets | $1.303 billion | $1.130 billion |
| Net loans | $976.9 million | $829.2 million |
| Total deposits | $1.177 billion | $1.013 billion |
| Net interest income | $41.0 million | $35.6 million |
| Net income | $11.0 million | $11.2 million |
| Basic and diluted EPS | $3.20 | $3.27 |
| Net interest margin | 3.60% | 3.76% |
| Return on average assets / equity | 0.90% / 10.28% | 1.11% / 11.03% |
Net revenue (net interest income plus noninterest income) increased 18.9% to $50.8 million. Net interest income rose 15.1%, reflecting growth in earning assets and lower deposit costs; lower asset yields partly offset those gains. Noninterest income increased 32.0% to $11.3 million, including $1.7 million of gains on loan sales. Noninterest expense rose 29.2% to $38.0 million, including higher staffing and infrastructure costs and approximately $2.0 million of professional fees management expected to be one-time. The efficiency ratio worsened to 72.14% from 67.59%.
Operating cash flow was $14.2 million, versus $11.0 million in 2020. Investing cash outflow was $191.0 million, largely reflecting loan growth and securities purchases; financing cash inflow was $160.9 million, principally from deposit growth. Cash and cash equivalents declined to $64.1 million from $79.9 million.
Balance sheet, credit and capital
- Assets grew 15.3%; loans grew 17.9% and deposits 16.2%. Loan growth was concentrated in commercial real estate and consumer installment lending, including marine loans. The net-loans-to-deposits ratio increased to 83.0% from 81.9%.
- Real-estate-secured loans were $754.8 million, or 76.6% of the loan portfolio. The allowance for loan losses was $8.8 million, or 0.89% of loans. Nonperforming assets declined to $2.8 million from $5.4 million; nonaccrual loans were $2.7 million, or 0.28% of loans.
- Shareholders’ equity was $110.3 million; equity/assets was 8.46%, down from 9.30%. The Bank reported a 10.44% Tier 1 risk-based capital ratio, an 11.30% total risk-based capital ratio and an 8.84% Tier 1 leverage ratio, and was categorized as well capitalized. It elected the community bank leverage ratio framework as of year-end.
- The Bank had no outstanding Federal Home Loan Bank borrowings at year-end and reported $244.3 million of remaining FHLB borrowing availability. Liquid assets were $365.1 million, or 30.61% of total liabilities. Estimated uninsured deposits were $356.3 million.
Material changes, outlook and risks
- Despite higher net interest income and fee income, net income fell 1.4% as expenses increased faster than revenue. The fourth quarter recorded net income of $2.3 million and EPS of $0.66, compared with $2.5 million and $0.74 in fourth-quarter 2020.
- The Bank originated 1,372 PPP loans totaling $132.1 million across two program rounds; $15.9 million remained outstanding at year-end. All loans previously granted COVID-related payment deferrals had resumed payments by year-end.
- Management provided no numerical earnings or growth guidance. It cautioned that net interest income and margin could decline further as earning assets reprice faster than interest-bearing liabilities. Interest-rate simulations estimated a 6.50% decline in first-year net interest income under a 100-basis-point rate decrease and a 1.08% increase under a 100-basis-point increase.
- Key risks include real-estate and local-market credit concentration, loan-loss estimate uncertainty, interest-rate exposure, competition, pandemic-related economic and operational disruption, cybersecurity, and transition from LIBOR. CECL was expected to become effective for the Company January 1, 2023; management had not yet reasonably estimated its financial impact.
- Available-for-sale securities shifted from a $4.1 million unrealized gain at 2020 year-end to a $218,000 unrealized loss at 2021 year-end, primarily attributed to interest-rate movements. This reduced accumulated other comprehensive income.
- The independent auditor issued an unqualified opinion on the financial statements. The allowance for loan losses’ qualitative factors were identified as a critical audit matter. Management reported effective disclosure controls and internal control over financial reporting, with no material weaknesses; the auditor did not attest to internal control.
Important facts for investors to verify
- Whether expense growth, especially staffing and professional fees, moderates and improves the efficiency ratio.
- Loan growth and marine-lending expansion, including portfolio concentration, underwriting performance and emerging credit deterioration.
- Deposit mix, uninsured deposit levels, liquidity availability and the Bank’s capital cushion as assets continue to grow.
- Interest-rate sensitivity and the effect of repricing on net interest income and securities values.
- Remaining PPP balances and fee recognition, CECL adoption effects, and any subsequent costs or exposures tied to the identified one-time professional fees.