EAGLE FINANCIAL SERVICES INC quarterly report, Q1 FY2021

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Eagle Financial Services, Inc. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020 unless noted. The unaudited consolidated results include the Company and its wholly owned Bank of Clarke County subsidiary. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.

Business context and financial performance

The Company operates a community commercial bank, gathering deposits and lending primarily to local businesses and consumers, including through commercial and residential real estate, commercial and industrial, and consumer loans.

  • Net income was $2.862 million, up 17.2% from $2.441 million in Q1 2020. Basic and diluted EPS were $0.84, versus $0.71.
  • Interest and dividend income was $10.016 million, up 10.0%. Interest expense fell 55.8% to $0.487 million; net interest income rose 19.0% to $9.529 million.
  • Net interest margin declined to 3.62% from 3.86%. Average earning assets grew to $1.073 billion from $841.1 million, while their average yield fell to 3.81% from 4.39%. Lower deposit rates helped reduce funding costs.
  • Provision for loan losses was $0.599 million, compared with a $0.097 million recovery in Q1 2020. Management attributed the current-quarter provision mainly to loan growth.
  • Noninterest income increased 43.6% to $2.427 million. Noninterest expense rose 15.1% to $7.916 million. The reported efficiency ratio improved to 66.25% from 71.77%.
  • Annualized ROA was 1.02% versus 1.10%; annualized ROE was 11.04% versus 10.02%. The effective tax rate was 16.83% versus 16.30%.

Financial position, cash flow, and capital

  • Total assets were $1.185 billion, up $54.8 million from year-end. Cash and cash equivalents were $87.2 million, compared with $79.9 million at year-end.
  • Loans were $875.0 million, up 4.6% from year-end; growth excluding SBA Paycheck Protection Program (PPP) loans was $33.7 million, or 4.46%. Available-for-sale securities were $173.8 million, up $8.8 million.
  • Deposits were $1.068 billion, up $54.9 million, or 5.42%. Management said growth partly reflected PPP proceeds deposited by borrowers; deposit growth excluding 2021 PPP proceeds was $24.4 million.
  • Shareholders’ equity was $105.1 million, nearly unchanged from year-end; equity was 8.87% of assets versus 9.08%. The decline in accumulated other comprehensive income reflected unrealized securities losses.
  • Operating cash flow was $3.881 million, compared with $1.897 million in Q1 2020. Investing activities used $50.716 million, chiefly reflecting net loan growth and securities purchases; financing activities provided $54.065 million, mainly from deposit growth. Cash and cash equivalents increased $7.230 million during the quarter.
  • The Bank reported regulatory capital ratios above well-capitalized requirements: Tier 1 risk-based capital 11.82%, total risk-based capital 12.75%, and Tier 1 leverage 8.77%. It did not opt into the Community Bank Leverage Ratio framework.
  • The filing does not show borrowings as a balance-sheet liability line item. It reports $4.091 million of operating lease liabilities and states the Company had not borrowed through the PPP Liquidity Facility.

Material changes and notable items

  • Loan growth was concentrated in commercial and industrial lending, including marine lending, and consumer installment loans. Commercial and industrial loans increased 15.25% from year-end; consumer installment loans increased 42.98%.
  • The allowance for loan losses rose to $7.756 million from $7.096 million. It was 0.89% of loans, or 0.98% excluding outstanding PPP loans, compared with 0.85% and 0.94%, respectively, at year-end. Nonaccrual loans were approximately $4.3 million; nonperforming assets were 0.55% of loans and OREO, down from 0.64%.
  • The Company had approved 1,268 PPP loans totaling $126.5 million; $86.3 million remained outstanding at March 31. Of 256 pandemic-related payment deferrals with current balances of about $127.5 million, 253 loans totaling about $127.4 million had resumed payments. Management cautioned that pandemic effects on borrowers, operations, and estimates remain uncertain.
  • Noninterest income included a one-time fiduciary fee related to a real estate transaction, a $76,000 securities-sale gain, and $105,000 of bank-owned life insurance income. Other service charges benefited from greater secondary-market loan activity and ATM fees. Deposit service charges declined, mainly due to lower overdraft charges.
  • Unrealized gains on available-for-sale securities declined: net unrealized gain was $1.4 million at quarter-end versus $4.2 million at year-end. Management attributed unrealized losses primarily to market interest rates and conditions, not issuer credit concerns, and considered them temporary; securities remain exposed to market and interest-rate risks.

Outlook, risks, and contingencies

The filing gives no specific earnings or financial guidance. Management said continued low interest rates and a flat yield curve could pressure net interest income and margin. It also noted that pandemic effects could require future increases in the loan-loss allowance and could affect liquidity and capital, including the ability to pay dividends.

  • Key stated risks include COVID-19 and customer repayment capacity; credit quality and collateral values; interest-rate changes and interest-rate risk; economic conditions in the Bank’s market; competition; technology and operational disruption; and the ability to manage growth, costs, and key personnel.
  • The Company had 18 troubled debt restructurings totaling $3.4 million at March 31, versus 17 totaling $3.3 million at year-end. The filing reports two TDR loans totaling $126,000 in nonaccrual status in Note 6, while MD&A separately describes three restructured loans totaling $825,000 in nonaccrual status. These disclosures do not provide a clear reconciliation.
  • Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors or off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2021.

Important facts for investors to verify

  • Whether loan growth, especially commercial and industrial, marine, and consumer lending, is being matched by stable credit performance and adequate loss reserves.
  • How PPP loan forgiveness, associated fees, and borrower deposit balances affect future loan balances, revenue, and funding.
  • Whether margin pressure persists as low-yield PPP loans and replacement securities weigh on asset yields, and whether deposit costs can decline further.
  • The durability of earnings growth given one-time fiduciary income, securities gains, BOLI income, and higher compensation and other operating costs.
  • The reconciliation of TDR/nonaccrual disclosures, continued performance of modified loans, and the effects of pandemic-related uncertainty on credit quality.
  • Changes in securities valuations, capital ratios, liquidity, and dividend capacity; the reported quarter-end capital ratios are for the Bank.