Eagle Financial Services, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Eagle Financial Services is a bank holding company whose wholly owned Bank of Clarke County provides commercial banking services. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018 for operating results and cash flows; balance-sheet comparisons are with December 31, 2018. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / December 31, 2018 |
|---|---|---|
| Net interest income | $7.624 million | $7.049 million, Q1 2018 |
| Net income | $2.571 million; $0.74 per basic and diluted share | $2.539 million; $0.73 per share, Q1 2018 |
| Total assets | $808.7 million | $799.6 million |
| Loans | $619.2 million | $606.8 million |
| Deposits | $707.4 million | $703.1 million |
| Shareholders’ equity | $91.2 million | $87.6 million |
| Cash and cash equivalents | $12.2 million | $18.4 million |
| Federal funds purchased | $0.355 million | $1.871 million |
- Total interest and dividend income rose 15% to $8.6 million; interest expense rose 127% to $969,000, largely reflecting higher deposit rates and interest-bearing deposit balances.
- Net interest margin increased to 4.14% from 4.04%. Average earning assets grew $39.5 million, and their average yield increased 38 basis points.
- Noninterest income was $1.844 million, up 2%. Noninterest expense increased 11% to $6.231 million. The efficiency ratio improved to 65.99% from 67.48%.
- Annualized return on average assets was 1.32% versus 1.37%; return on average equity was 11.74% versus 12.40%.
- Net cash provided by operating activities was $2.025 million, versus cash used of $8.585 million in Q1 2018. Investing activities used $10.221 million and financing activities provided $2.058 million. Cash and cash equivalents fell $6.138 million during the quarter.
- Reported liquid assets were $248.8 million, or 34.67% of total liabilities. The Bank reported regulatory capital ratios above well-capitalized thresholds; its total risk-based capital ratio was 14.66% and Tier 1 leverage ratio was 10.91%.
Material changes and credit quality
- Loans increased $12.4 million, or 2.04%, during the quarter; deposits increased $4.3 million, or 0.62%. Growth was concentrated in residential real estate and construction and land development loans. The gross-loans-to-deposits ratio rose to 87.53% from 86.31%.
- Nonaccrual loans rose to $3.3 million from $2.1 million, and nonperforming assets as a share of loans and OREO increased to 0.55% from 0.37%. Total past-due loans increased $3.0 million, mainly from residential real estate loans; none were 90 days past due and still accruing at quarter-end.
- The allowance for loan losses was $5.685 million, 0.92% of loans, compared with $5.456 million and 0.90% at year-end. The quarter recorded $35,000 of net recoveries. Management stated that the allowance was adequate, while noting that economic conditions could increase delinquencies, nonperforming loans, or OREO.
- Available-for-sale securities were $144.0 million, little changed from year-end. Their net unrealized position improved from a $2.0 million loss to a $120,000 gain, contributing to $1.690 million of other comprehensive income for the quarter. Management attributed unrealized losses primarily to interest-rate changes, not issuer credit concerns, and considered them temporary.
Outlook, risks, and unusual items
- The filing provides no numerical earnings or growth guidance. Management cautioned that net interest income and margin could decline if interest-bearing liabilities reprice faster than earning assets as rates change.
- Key disclosed risks include borrower repayment and collateral values, economic and interest-rate changes, competition, managing growth and capital, retaining key personnel, technology issues, and regulatory changes. Management reported no material change to the risk factors in the 2018 Form 10-K.
- Q1 2018 comparisons included a $397,000 gain on foreclosure of residential property and $130,000 of related OREO expense; neither recurred in Q1 2019. Q1 2019 also included a $120,000 gain on disposal of bank premises and equipment, increased professional fees tied partly to the search for a new CEO, and higher data-processing costs following migration to a service-bureau platform.
- The company adopted the new lease standard on January 1, 2019, recognizing a $3.8 million right-of-use asset and lease liability. The filing says it was assessing the impact of the expected credit-loss standard (CECL), effective for the company in 2020.
- There were no material pending legal proceedings or material changes to off-balance-sheet arrangements. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether rising deposit costs continue to outpace loan and securities yield increases, and how that affects net interest margin.
- Whether past-due and nonaccrual loans continue to rise, especially in residential real estate, and whether allowance coverage remains appropriate.
- Loan and deposit growth, the loan-to-deposit ratio, and liquidity as cash balances decline.
- The sustainability of operating expenses and fee income, including service-bureau costs, fiduciary revenue, and secondary-market loan fees.
- The effect of CECL adoption on the allowance and capital, and any developments associated with the CEO transition and the lease commitment.