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Economy, Business and Finance

Eagle Financial Services Inc.

11/13/2025 | Press release | Distributed by Public on 11/13/2025 14:21

Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

Management's Discussion and Analysis ofFinancial Condition and Results of Operations

The purpose of this discussion is to focus on certain information relevant to the Company's financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company's Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2024, and in conjunction with the Unaudited Consolidated Financial Statements and notes thereto presented in Part I, Item 1, Financial Statements, of this Form 10-Q. Operating results for the three and nine months ended September 30, 2025 are not necessarily indicative of the results for the full-year ending December 31, 2025 or any future period.

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 mortgage-backed securities, 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.

The Company strives to be an outstanding financial institution in its market by building solid sustainable relationships with its customers, employees, communities, and shareholders.

At September 30, 2025, the Company had total assets of $1.93 billion, net loans of $1.45 billion, total deposits of $1.66 billion, and shareholders' equity of $185.6 million.

During the first quarter of 2025 the Company executed a balance sheet repositioning of its investment securities portfolio, selling available for sale securities with an amortized cost balance of $99.2 million resulting in a net realized pre-tax loss of $12.4 million and reinvesting $66.0 million into purchases of available for sale securities. Additionally, the Company completed an underwritten public offering of 1,796,875 shares of its common stock at a public offering price of $32.00 per share. Net proceeds from the offering were $53.5 million.

CRITICAL ACCOUNTING ESTIMATES

The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which requires us to make estimates and assumptions. Actual results could differ from those estimates. The accounting estimate with the greatest uncertainty and susceptibility to significant near-term change for the Company is the allowance for credit losses on loans.

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.

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NON-GAAP FINANCIAL MEASURES

This report refers to certain financial measures that are computed under a basis other than GAAP ("non-GAAP"). The Company uses certain non-GAAP financial measures, including non-GAAP net income, non-GAAP noninterest income, non-GAAP earnings per share, non-GAAP return on average equity and average assets, tax-equivalent net interest income and efficiency ratio, to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. Non-GAAP measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.

The realized loss on the sale of the available for sale securities, which resulted from the balance sheet repositioning transactions during the first quarter of 2025, significantly impacted the Company's operating results and certain performance metrics and ratios. The following table reconciles the GAAP reported measure to the adjusted non-GAAP measure to show the impact of the loss on sales of securities during the three and nine months ended September 30, 2025.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands except for per share data)	2025			2024			2025			2024
GAAP Net income	$	5,584		$	3,424		$	3,880		$	9,157
Adjustments to net income:
Loss on sales of securities		-			-			12,425			-
Tax effect of adjustments to net income		-			-			(2,609	)		-
Non-GAAP Net income	$	5,584		$	3,424		$	13,696		$	9,157

GAAP Noninterest income	$	5,165		$	5,251		$	1,528		$	13,036
Adjustments to noninterest income:
Loss on sales of securities		-			-			12,425			-
Non-GAAP Noninterest income	$	5,165		$	5,251		$	13,953		$	13,036

Earnings per share, basic and diluted (GAAP)	$	1.04		$	0.97		$	0.76		$	2.58
Effect of adjustments to net income		-			-			1.92			-
Non-GAAP Earnings per share, basic and diluted	$	1.04		$	0.97		$	2.68		$	2.58

Annualized return on average equity		12.20	%		11.99	%		3.14	%		11.16	%
Effect of adjustments to net income		-	%		-	%		7.94	%		-	%
Non-GAAP Annualized return on average equity		12.20	%		11.99	%		11.08	%		11.16	%

Annualized return on average assets		1.10	%		0.75	%		0.27	%		0.69	%
Effect of adjustments to net income		-	%		-	%		0.67	%		-	%
Non-GAAP Annualized return on average assets		1.10	%		0.75	%		0.94	%		0.69	%

For additional information and calculations of tax-equivalent net interest income and efficiency ratio, see the sections entitled "Tax-Equivalent Net Interest Income" and "Efficiency Ratio" below.

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FORWARD LOOKING STATEMENTS

This report contains statements that are "forward looking statements." The Company may also make forward looking statements in other documents that are filed with the Securities and Exchange Commission, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors, or employees. Forward looking statements include statements regarding our expectations, intentions, and objectives, or other expressions that predict or indicate future events and trends and which do not relate to historical matters. The words "believe," "expect," "may," "will," "should," "could," "projects," "contemplates," "anticipates," "forecasts," "intends," or other similar words or terms are intended to identify forward looking statements. You should not rely on forward looking statements, as they involve known and unknown risks, uncertainties, and other factors, some of which are beyond our control. These risks, uncertainties, and other factors may cause our actual results, performance, or achievements to be materially different than the anticipated future results, performance, or achievements expressed or implied by the forward looking statements.

Some of the factors that might cause these differences include the following:

•

difficult market conditions in our industry;

•

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;

•

the Company's ability to successfully resolve non-performing assets;

•

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 Bank's ability to manage liquidity;

•

the cost and availability of secondary funding sources;

•

effects of soundness of other financial institutions;

•

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 economic impact of duties, tariffs or other barriers or restrictions on trade, any retaliatory counter measures, or the volatility and uncertainty arising there from;

•

political developments, including government shutdowns, and other significant disruptions and changes in the funding, size, scope, and efficiencies of the federal government, its agencies and services;

•

the Company's potential exposure to fraud, negligence, computer theft, and cyber-crime;

•

potential impact on us of existing and future legislation and regulations;

•

changes in accounting policies and banking and other law and regulations; and

•

other factors described in Item 1A., "Risk Factors," in the Company's 2024 Form 10-K.

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You should carefully review all of these factors and you should be aware that there may be other factors that cause these differences. These forward looking statements were based on information, plans, and estimates at the date of this report, and we assume no obligation to update any forward looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

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RESULTS OF OPERATIONS

Summary

The following table presents a summarized consolidated statement of income and performance metrics and ratios for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands except for per share data)	2025			2024			2025			2024
Net Income:
Net interest income	$	17,199		$	13,157		$	46,233		$	37,728
Provision for credit losses		1,112			1,544			3,013			2,200
Noninterest income		5,165			5,251			1,528			13,036
Noninterest expense		14,344			12,890			40,332			37,777
Income tax expense		1,324			550			536			1,630
Net income	$	5,584		$	3,424		$	3,880		$	9,157

Earnings per share, basic and diluted	$	1.04		$	0.97		$	0.76		$	2.58

Annualized return on average equity		12.20	%		11.99	%		3.14	%		11.16	%
Annualized return on average assets		1.10	%		0.75	%		0.27	%		0.69	%

The Company's net income increased $2.2 million, or 63.1%, during the three months ended September 30, 2025, compared to the three months ended September 30, 2024 and decreased $5.3 million, or 57.6%, during the nine months ended September 30, 2025 compared to the nine months ended September 30, 2024. During the nine months ended September 30, 2025, net income was significantly impacted by a recognized loss on the sale of available for sale securities totaling $9.8 million, net of tax, while both the three and nine month periods in 2025 experienced a strong increase in net interest income over the corresponding 2024 periods.

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.

Return on average assets ("ROA") measures how efficiently the Company uses its assets to produce net income. Factors reflected within this efficiency include the Company's asset mix, funding sources, pricing, fee generation, and cost control.

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Average Balances, Income and Expenses, Yields and Rates (Tax-Equivalent Basis)

The following table shows average balance, interest, and yield/rate information, as well as net interest margin on a tax- equivalent basis for the three months ended September 30, 2025 and 2024 (dollars in thousands):


	September 30, 2025								September 30, 2024
				Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/
Assets:	Balance			Expense		Rate (2)			Balance			Expense		Rate (2)
Securities:
Taxable	$	124,891		$	1,353		4.30	%	$	137,183		$	869		2.52	%
Tax-Exempt (1)		-			-		-	%		493			5		4.03	%
Total Securities	$	124,891		$	1,353		4.30	%	$	137,676		$	874		2.53	%
Loans:
Taxable		1,423,586			20,626		5.75	%		1,461,660			21,041		5.73	%
Non-accrual		15,058			-		-	%		2,553			-		-	%
Tax-Exempt (1)		9,454			121		5.08	%		10,162			129		5.04	%
Total Loans	$	1,448,098		$	20,747		5.68	%	$	1,474,375		$	21,170		5.71	%
Federal funds sold and interest-bearing deposits in other banks		336,562			3,858		4.55	%		120,272			1,670		5.52	%
Total earning assets	$	1,909,551		$	25,958		5.39	%	$	1,732,323		$	23,714		5.45	%
Allowance for credit losses on loans		(15,699	)							(14,729	)
Total non-earning assets		118,550								105,884
Total assets	$	2,012,402							$	1,823,478

Liabilities and Shareholders' Equity:
Interest-bearing deposits:
NOW accounts	$	314,742		$	1,863		2.35	%	$	254,996		$	1,535		2.39	%
Money market accounts		267,787			1,478		2.19	%		261,653			1,555		2.36	%
Savings accounts		125,512			35		0.11	%		132,983			38		0.11	%
Time deposits:
$250,000 and more		170,124			1,761		4.11	%		159,761			1,932		4.81	%
Less than $250,000		281,617			2,749		3.87	%		294,579			3,359		4.54	%
Total interest-bearing deposits	$	1,159,782		$	7,886		2.70	%	$	1,103,972		$	8,419		3.03	%
Federal funds purchased		7			-	NM				12			-	NM
Federal Home Loan Bank advances		40,000			494		4.90	%		148,804			1,756		4.69	%
Subordinated debt, net		29,552			354		4.75	%		29,484			354		4.78	%
Total interest-bearing liabilities	$	1,229,341		$	8,734		2.82	%	$	1,282,272		$	10,529		3.27	%
Noninterest-bearing liabilities:
Demand deposits		579,568								409,753
Other Liabilities		21,863								17,838
Total liabilities	$	1,830,772							$	1,709,863
Shareholders' equity		181,630								113,615
Total liabilities and shareholders' equity	$	2,012,402							$	1,823,478
Net interest income				$	17,224							$	13,185

Net interest spread							2.57	%							2.18	%
Interest expense as a percent of average earning assets							1.81	%							2.42	%
Net interest margin (non-GAAP) (3)							3.58	%							3.03	%

(1)

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

(2)

Annualized.

(3)

Refer to section entitled "Tax-Equivalent Net Interest Income" for the reconciliation of tax-equivalent net interest income.

NM - Not Meaningful

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The following table shows average balance, interest, and yield/rate information, as well as net interest margin on a tax- equivalent basis for the nine months ended September 30, 2025 and 2024 (dollars in thousands):


	September 30, 2025								September 30, 2024
				Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/
Assets:	Balance			Expense		Rate (2)			Balance			Expense		Rate (2)
Securities:
Taxable	$	119,351		$	3,457		3.87	%	$	139,150		$	2,677		2.57	%
Tax-Exempt (1)		116			4		4.61	%		495			15		4.10	%
Total Securities	$	119,467		$	3,461		3.87	%	$	139,645		$	2,692		2.58	%
Loans:
Taxable		1,428,186			60,806		5.69	%		1,440,024			60,320		5.60	%
Non-accrual		11,825			-		-	%		4,251			-		-	%
Tax-Exempt (1)		9,859			374		5.07	%		10,489			394		5.02	%
Total Loans	$	1,449,870		$	61,180		5.64	%	$	1,454,764		$	60,714		5.57	%
Federal funds sold and interest-bearing deposits in other banks		288,033			9,688		4.50	%		98,872			4,007		5.41	%
Total earning assets	$	1,857,370		$	74,329		5.35	%	$	1,693,281		$	67,413		5.32	%
Allowance for credit losses on loans		(15,457	)							(14,623	)
Total non-earning assets		109,072								104,748
Total assets	$	1,950,985							$	1,783,406

Liabilities and Shareholders' Equity:
Interest-bearing deposits:
NOW accounts	$	298,045		$	4,958		2.22	%	$	256,741		$	4,570		2.38	%
Money market accounts		271,758			4,511		2.22	%		262,319			4,431		2.26	%
Savings accounts		129,500			108		0.11	%		136,019			118		0.12	%
Time deposits:
$250,000 and more		176,676			5,788		4.38	%		147,241			5,284		4.79	%
Less than $250,000		300,965			9,288		4.13	%		267,502			8,955		4.77	%
Total interest-bearing deposits	$	1,176,944		$	24,653		2.80	%	$	1,069,822		$	23,358		2.92	%
Federal funds purchased		5			-	NM				13			-	NM
Federal Home Loan Bank advances		63,535			2,301		4.84	%		146,606			5,178		4.72	%
Subordinated debt, net		29,535			1,063		4.81	%		29,467			1,063		4.82	%
Total interest-bearing liabilities	$	1,270,019		$	28,017		2.95	%	$	1,245,908		$	29,599		3.17	%
Noninterest-bearing liabilities:
Demand deposits		494,034								410,679
Other Liabilities		21,736								17,201
Total liabilities	$	1,785,789							$	1,673,788
Shareholders' equity		165,196								109,618
Total liabilities and shareholders' equity	$	1,950,985							$	1,783,406
Net interest income				$	46,312							$	37,814

Net interest spread							2.40	%							2.15	%
Interest expense as a percent of average earning assets							2.02	%							2.33	%
Net interest margin (non-GAAP) (3)							3.33	%							2.98	%

(1)

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

(2)

Annualized.

(3)

Refer to section entitled "Tax-Equivalent Net Interest Income" for the reconciliation of tax-equivalent net interest income.

NM - Not Meaningful

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Tax-Equivalent Net Interest Income

The following table reconciles tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income. Tax-equivalent net interest income (Non-GAAP) 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 2025 and 2024.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2025		2024		2025		2024
	(in thousands)				(in thousands)
GAAP Financial Measurements:
Interest Income - Loans	$	20,722	$	21,143	$	61,102	$	60,631
Interest Income - Securities and Other Interest-Earnings Assets		5,211		2,543		13,148		6,696
Interest Expense - Deposits		7,886		8,419		24,653		23,358
Interest Expense - Borrowings		848		2,110		3,364		6,241
Total Net Interest Income	$	17,199	$	13,157	$	46,233	$	37,728
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans (1)	$	25	$	27	$	78	$	83
Add: Tax Benefit on Tax-Exempt Interest Income - Securities (1)		-		1		1		3
Total Tax Benefit on Tax-Exempt Interest Income	$	25	$	28	$	79	$	86
Tax-Equivalent Net Interest Income	$	17,224	$	13,185	$	46,312	$	37,814

(1)

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

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.

The year-over-year improvements in net interest income, tax-equivalent net interest income, net interest spread, and net interest margin primarily reflect the impact of the balance sheet repositioning strategy, pursuant to which the Company raised capital, increased cash on hand and replaced lower-yielding investment securities with higher yielding securities. Declining average rates paid on interest-bearing deposits and maturities of FHLB advances also contributed to the increase in net interest income, which was partially offset by higher average balances of time deposits during the 2025 periods.

Net interest income, on a tax-equivalent basis, was $17.2 million and $13.2 million for the three months ended September 30, 2025 and 2024, respectively, an increase of $4.0 million, or 30.6%. For the nine months ended September 30, 2025 and 2024, net interest income, on a tax-equivalent basis, was $46.3 million and $37.8 million, respectively, which represents an increase of $8.5 million, or 22.5%.

The Company's net interest spread and net interest margin increased 25 basis points and 35 basis points, respectively, for the nine months ended September 30, 2025 compared to nine months ended September 30, 2024. For the three months ended September 30, 2025, the Company's net interest spread and net interest margin increased 39 basis points and 55 basis points, respectively, compared to the three months ended September 30, 2024. Ongoing margin pressures include deposit pricing, the Bank's continued strategy of originating mortgage loans for sale, and an increase in nonaccrual loans during the nine months ended September 30, 2025.

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Total average balance of securities decreased by $12.8 million and $20.2 million for the three and nine months ended September 30, 2025, respectively, from the average balances in the prior year periods primarily due to routine paydowns and maturities in the portfolio. The average yield on securities increased 177 basis points and 129 basis points during the three and nine months ended September 30, 2025, respectively, compared to the three and nine months ended September 30, 2024 reflecting the sale of lower-yielding securities and reinvestment into higher-yielding securities in the first quarter of 2025.

The total average loan balances for the three and nine months ended September 30, 2025 decreased $26.3 million and $4.9 million, respectively, from the same periods in 2024 largely reflecting the sale of a pool of mortgage loans totaling $18.8 million early in the first quarter of 2025 ahead of the Company's public offering and continuing paydowns and payoffs in the marine loan portfolio as the Company is no longer accepting new marine business. These decreases were partially offset by new loan growth in the commercial real estate loan portfolios.

Total average balance of federal funds sold and interest-bearing deposits in other banks have increased $216.3 million and $189.2 million during the three and nine months ended September 30, 2025, respectively, compared to the three and nine months ended September 30, 2024, which were bolstered by the impact of the proceeds received from the public offering and increased deposit balances.

Total average interest-bearing deposit balances for three and nine months ended September 30, 2025 increased $55.8 million $107.1 million, respectively, from the same periods in 2024. These increases were primarily in NOW accounts and time deposits. The average rate paid on interest-bearing deposits has decreased 33 basis points and 12 basis points during the three and nine months ended September 30, 2025, respectively, compared to the three and nine months ended September 30, 2024 reflecting lower short-term market interest rates.

The average balance of FHLB advances decreased $108.8 million and $83.1 million during the three and nine months ended September 30, 2025, respectively, compared to the three and nine months ended September 30, 2024 due to maturing advances that were not replaced with new borrowings.

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Volume and Rate Analysis (Tax-Equivalent Basis)

Interest income and expense are affected by fluctuation in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each. The following table provides information about changes in rate and volume (dollars in thousands):


	Three Months Ended September 30, 2025 from 2024									Nine Months Ended September 30, 2025 from 2024
	Increase (Decrease) Due to:									Increase (Decrease) Due to:
	Volume			Rate			Total			Volume			Rate			Total
Earning Assets:
Securities:
Taxable	$	(70	)	$	554		$	484		$	(305	)	$	1,085		$	780
Tax-exempt		(3	)		(2	)		(5	)		(13	)		2			(11	)
Loans:
Taxable		(479	)		64			(415	)		(509	)		995			486
Tax-exempt		(9	)		1			(8	)		(24	)		4			(20	)
Federal funds sold and interest-bearing deposits in other banks		2,425			(237	)		2,188			6,229			(548	)		5,681
Total earning assets	$	1,864		$	380		$	2,244		$	5,378		$	1,538		$	6,916

Interest-Bearing Liabilities:
NOW accounts	$	353		$	(25	)	$	328		$	667		$	(279	)	$	388
Money market accounts		37			(114	)		(77	)		157			(77	)		80
Savings accounts		(3	)		-			(3	)		(4	)		(6	)		(10	)
Time deposits:
$250,000 and more		138			(309	)		(171	)		881			(377	)		504
Less than $250,000		(140	)		(470	)		(610	)		850			(517	)		333
Total interest-bearing deposits	$	385		$	(918	)	$	(533	)	$	2,551		$	(1,256	)	$	1,295
Federal funds purchased	$	-		$	-		$	-		$	-		$	-		$	-
Federal Home Loan Bank advances		(1,344	)		82			(1,262	)		(3,012	)		135			(2,877	)
Subordinated debt		-			-			-			-			-			-
Total interest-bearing liabilities	$	(959	)	$	(836	)	$	(1,795	)	$	(461	)	$	(1,121	)	$	(1,582	)
Change in net interest income	$	2,823		$	1,216		$	4,039		$	5,839		$	2,659		$	8,498

Provision for Credit Losses

The provision for credit losses results from management's review of the adequacy of the allowance for credit losses. The allowance for credit losses is management's estimate, at the reporting date, of expected lifetime credit losses and includes consideration of current forecasted economic conditions. Estimating the amount required to maintain an adequate allowance for credit losses involves a high degree of judgment.

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The following table presents the provision for credit losses:


	Three Months Ended											Nine Months Ended
	September 30,											September 30,
(dollars in thousands)	2025			2024		$ Change			% Change			2025			2024			$ Change			% Change
Provision for credit losses on loans	$	1,131		$	1,526	$	(395	)		(26	)%	$	3,133		$	2,315		$	818			35	%
Provison for credit losses on unfunded commitments		(19	)		18		(37	)		(206	)%		(120	)		(115	)		(5	)		4	%
Provison for credit losses	$	1,112		$	1,544	$	(432	)		(28	)%	$	3,013		$	2,200		$	813			37	%

The provision for credit losses for the three and nine months ended September 30, 2025 and 2024 included the impact of net losses and specific reserve allocations on individually evaluated nonaccrual loans and reflected management's estimate of forecasted economic conditions and changes in loan balances.

During the three months ended September 30, 2025 and 2024, net charge-offs totaled $2.3 million and $1.2 million, respectively, and $3.4 million and $1.5 million during the nine months ended September 30, 2025 and 2024.

Specific reserve allocations totaled $333 thousand at September 30, 2025 reflecting three commercial loan relationships and totaled $268 thousand at September 30, 2024, allocated to one commercial loan relationship.

Noninterest Income

Total noninterest income was $5.2 million and $5.3 million for the three months ended September 30, 2025 and 2024, respectively, and $1.5 million and $13.0 million, respectively for the nine months ended September 30, 2025 and 2024. 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, 2025 and 2024, which are included within the respective Consolidated Statements of Income headings.


	Three Months Ended											Nine Months Ended
	September 30,											September 30,
(dollars in thousands)	2025			2024		$ Change			% Change			2025			2024			$ Change			% Change
Wealth management fees	$	1,827		$	1,515	$	312			21	%	$	5,158		$	4,244		$	914			22	%
Service charges on deposit accounts		558			518		40			8	%		1,567			1,428			139			10	%
Other service charges and fees		1,151			1,117		34			3	%		3,183			3,250			(67	)		(2	)%
(Loss) on sale of securities		-			-		-		NM				(12,425	)		-			(12,425	)	NM
(Loss) on disposal of bank premises and equipment		(2	)		-		(2	)	NM				(18	)		(11	)		(7	)		64	%
Gain on sale of loans		1,012			627		385			61	%		2,545			1,280			1,265			99	%
Small business investment company income		58			496		(438	)		(88	)%		211			882			(671	)		(76	)%
Bank owned life insurance income		268			930		(662	)		(71	)%		819			1,721			(902	)		(52	)%
Other operating income		293			48		245			510	%		488			242			246			102	%
Total noninterest income (loss)	$	5,165		$	5,251	$	(86	)		(2	)%	$	1,528		$	13,036		$	(11,508	)		(88	)%

NM - Not Meaningful

Wealth management fee income increased from 2024 to 2025. 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 which has increased over

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the 2024 year period. Additionally, per transaction fees for estates and other services have also contributed to the year over year increase in revenue.

The increase in service charges on deposit accounts during 2025 reflects growth in the number of accounts as well as higher levels of overdraft charges.

The Company executed balance sheet repositioning transactions within its investment securities portfolio during March 2025. The sale of $99.2 million of available for sale debt securities, with a fair value of $86.8 million, resulted in a net pre-tax loss of $12.4 million during the nine months ended September 30, 2025. Management utilized the proceeds from the public offering capital raise completed in February 2025 to enable the balance sheet repositioning.

Gain on sale of loans increased during the three and nine months ended September 30, 2025 when compared to the same periods in 2024. The Company sold $72.3 million in mortgage loans on the secondary market, consisting of $53.5 million of loans originated for sale and a $18.8 million pool of residential mortgage loans held for investment, and $16.3 million of SBA commercial loans during the nine months ended September 30, 2025. This compares to loan sales consisting of $40.4 million in mortgage loans and $6.9 million SBA commercial loans during the nine months ended September 30, 2024. The Company intends to continue originating mortgage loans for sale, whereas the mortgage portfolio sale was completed in the first quarter of 2025, at par, and ahead of the Company's public offering in order to bolster on-balance sheet liquidity.

Gain on loan sales during the three months ended September 30, 2025 and 2024 reflected sales of $21.6 million and $14.9 million of mortgage loans, respectively, and $6.4 million and $4.2 million of SBA commercial loans, respectively.

Income from holdings in small business investment companies decreased during three and nine months ended September 30, 2025, respectively, compared to the same period in 2024. The decreases during the current year period are mainly attributed to lower cash distributions received, based on the results of their performance and timing of distributions.

Bank owned life insurance income ("BOLI") decreased during three and nine months ended September 30, 2025 due to BOLI settlements received during the prior year periods.

Other operating income increased for the three and nine months ended September 30, 2025 due to loan swap fee income recognized on agreements with initial notional balances totaling $15.7 million, which resulted in a gain of $179 thousand. There was no loan swap fee income generated during the three and nine months ended September 30, 2024.

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Noninterest Expenses

Total noninterest expenses increased $1.5 million, or 11.28%, for the three months ended September 30, 2025 and $2.6 million, or 6.76%, for the nine months ended September 30, 2025 compared to the same periods in 2024. The following table presents the components of noninterest expense for the three and nine months ended September 30, 2025 and 2024, which are included within the respective Consolidated Statements of Income headings.


	Three Months Ended										Nine Months Ended
	September 30,										September 30,
(dollars in thousands)	2025		2024		$ Change			% Change			2025		2024		$ Change			% Change
Salaries and employee benefits	$	8,717	$	7,548	$	1,169			15	%	$	23,741	$	22,086	$	1,655			7	%
Occupancy expenses		691		530		161			30	%		1,951		1,569		382			24	%
Equipment expenses		437		427		10			2	%		1,261		1,201		60			5	%
Advertising and marketing expenses		317		247		70			28	%		652		729		(77	)		(11	)%
Stationary and supplies		37		35		2			6	%		114		91		23			25	%
ATM network fees		327		406		(79	)		(19	)%		1,021		1,159		(138	)		(12	)%
Loss on sale of repossessed assets		-		204		(204	)		(100	)%		133		204		(71	)		(35	)%
FDIC assessment		172		343		(171	)		(50	)%		748		1,103		(355	)		(32	)%
Computer software expense		389		226		163			72	%		996		680		316			46	%
Bank franchise tax		388		342		46			13	%		1,136		1,011		125			12	%
Professional fees		493		408		85			21	%		1,697		1,425		272			19	%
Data processing fees		469		679		(210	)		(31	)%		1,652		1,802		(150	)		(8	)%
Other operating expenses		1,907		1,495		412			28	%		5,230		4,717		513			11	%
Total noninterest expenses	$	14,344	$	12,890	$	1,454			11	%	$	40,332	$	37,777	$	2,555			7	%

NM - Not Meaningful

Salaries and employee benefits increased during the three and nine months ended September 30, 2025 over 2024, reflecting increases in salaries, commission and employee insurance expense, and annual incentive plan expense. The Company's number of full-time equivalent employees ("FTE's") has increased from 233 at September 30, 2024 to 249 at September 30, 2025.

Occupancy expenses increased during the three and nine months ended September 30, 2025 largely due to the impact of the sales-leaseback transaction of the Company's operating center and branch building in December 2024. Rental expense, net of building depreciation increased $133 thousand and $382 thousand, during the three and nine months ended September 30, 2025, respectively, compared to the 2024 periods. The increase in rental expense also reflects a new long-term lease executed during the first quarter of 2025 as the Company has moved its standalone loan production office and established a full-service branch in McLean, Viriginia.

Three repossessed marine vessels were sold during the first quarter of 2025, resulting in the recognition of a $133 thousand loss during the nine months ended September 30, 2025. There were no sales of repossessed assets during the three months ended September 30, 2025 compared to the sale of one repossessed marine vessel during the three and nine months ended September 30, 2024, which resulted in a loss of $204 thousand.

FDIC assessment expense, which is based in part on asset size and capital levels, decreased during the three and nine months ended September 30, 2025 compared to the same periods in 2024. The decrease in FDIC assessment reflects an improvement in the capital and financial ratio portion of the assessment rate, largely due to the capital raise completed in early 2025.

Computer software expenses increased during the three and nine months ended September 30, 2025 as the Company continues to invest in technology to enhance systems security and drive operational efficiencies.

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Professional fees increased during the three and nine months ended September 30, 2025 compared to the same periods in 2024 primarily due to legal fees related to loan matters, outside recruitment services, and internal audit services.

Data processing fees decreased reflecting core provider pricing discounts recognized during 2025.

Other operating expenses increased by $412 thousand, or 27.56%, and $513 thousand, or 10.88%, during the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024, largely reflecting a higher level of fraudulent activity related to customer accounts, higher expenses related to volume based costs and loan collection costs, an increase in director expenses, and greater travel costs related to investor relations activities.

Efficiency Ratio

The efficiency ratio of the Company was 64.06% and 71.34% for the three months ended September 30, 2025 and 2024, respectively, and 66.68% and 75.22% for the nine months ended September 30, 2025 and 2024, respectively. The improvement in the efficiency ratio during 2025 reflects an increase in net interest and noninterest income. The efficiency ratio is not a measurement under GAAP. It is calculated by dividing noninterest expense by the sum of tax equivalent net interest income and noninterest income. The Company adjusts for non-recurring items such as gains and losses on the investment portfolio and other gains/losses from OREO, repossessed assets, 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.

The calculation of the efficiency ratio for the three and nine months ended September 30, 2025 and 2024 was as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2025			2024			2025			2024
	(in thousands)						(in thousands)
Summary of Operating Results:
Noninterest expenses (GAAP)	$	14,344		$	12,890		$	40,332		$	37,777
Less: Loss on sale of repossessed assets		-			204			133			204
Adjusted noninterest expenses (Non-GAAP)	$	14,344		$	12,686		$	40,199		$	37,573

Net interest income		17,199			13,157			46,233			37,728

Noninterest income (GAAP)		5,165			5,251			1,528			13,036
Less: (Loss) on the sale and disposal of premises and equipment		(2	)		-			(18	)		(11	)
Less: (Loss) on the sale of securities		-			-			(12,425	)		-
Less: Income from life insurance proceeds		-			653			-			907
Adjusted noninterest income (Non-GAAP)	$	5,167		$	4,598		$	13,971		$	12,140
Tax equivalent adjustment (1)		25			28			79			86
Total net interest income and noninterest income, adjusted (Non-GAAP)	$	22,391		$	17,783		$	60,283		$	49,954

Efficiency ratio		64.06	%		71.34	%		66.68	%		75.22	%

(1)

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

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Income Taxes

The following table presents the Company's income tax provision and applicable tax rates for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2025			2024			2025			2024
Income tax expense	$	1,324		$	550		$	536		$	1,630
Adjusted income tax expense (non-GAAP)		1,324			550			3,145			1,630
Effective income tax rate		19.17	%		13.84	%		12.14	%		15.11	%
Adjusted effective income tax rate (non-GAAP)		19.17	%		13.84	%		18.68	%		15.11	%

The year over year comparisons include tax-exempt income on investment securities and loans, BOLI income, income tax credits on qualified affordable housing project investments, and qualified rehabilitation credits. Additionally, during the nine months ended September 30, 2025, the effective tax rate was impacted by the balance sheet repositioning transactions, which resulted in a pre-tax loss of $12.4 million with an associated tax benefit of $2.6 million, calculated by using the federal statutory tax rate of 21%. Qualified affordable housing project investments are discussed in Note 11 to the Consolidated Financial Statements.

Business Segments

The Company has three reportable operating segments: community banking, marine lending and wealth management. See Note 16 to the Consolidated Financial Statements.

The following table presents a summarized statement of income for the community banking business segment for the three and nine months ended September 30, 2025 and 2024:


	For the Three Months Ended September 30,										For the Nine Months Ended September 30,
(dollars in thousands)	2025		2024		$ Change			% Change			2025			2024		$ Change			% Change
Net interest income	$	15,963	$	11,896	$	4,067			34	%	$	42,577		$	33,386	$	9,191			28	%
Gain on sales of loans		1,012		627		385			61	%		2,545			1,280		1,265			99	%
(Loss) on the sale of securities		-		-		-		NM				(12,425	)		-		(12,425	)	NM
Other noninterest income		2,284		3,109		(825	)		(27	)%		6,122			7,512		(1,390	)		(19	)%
Net Revenue		19,259		15,632		3,627			23	%		38,819			42,178		(3,359	)		(8	)%
Provision for credit losses		551		1,609		(1,058	)		(66	)%		2,722			1,902		820			43	%
Noninterest expense		13,283		11,957		1,326			11	%		37,334			34,936		2,398			7	%
Income (Loss) before taxes		5,425		2,066		3,359			163	%		(1,237	)		5,340		(6,577	)		(123	)%
Income tax expense (benefit)		1,011		145		866			597	%		(640	)		466		(1,106	)		(237	)%
Net Income (Loss)	$	4,414	$	1,921	$	2,493			130	%	$	(597	)	$	4,874	$	(5,471	)		(112	)%

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Net interest income increased during the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024 primarily due to income earned on: i) non-marine loans; ii) the investment securities portfolio, which was restructured in the first quarter of 2025 to sell and replace lower yielding investments with higher yielding securities; iii) higher levels of earning deposit balances in other other banks; and iv) reduction in borrowings expense as FHLB advances have matured. These increases were partially offset by an increase in interest-bearing deposit expense due to growth in average balances. Higher levels of interest-earning deposits balances in other banks reflects proceeds received from the capital raise and sales of available for sale securities completed during the first quarter of 2025, as well as increases in customer deposit balances.

Provision for credit losses reflects charge-offs totaling $2.0 million and $3.2 million for the three and nine months ended September 30, 2025, specific reserves of $333 thousand related to three commercial loans totaling $2.3 million, partially offset by recoveries and decreases in loan balances.

Loss on the sale of securities resulted from the Company's execution of balance sheet repositioning transactions within its investment securities portfolio in March 2025. Available for sale debt securities totaling $99.2 million, with a fair value of $86.8 million, were sold resulting in a net pre-tax loss of $12.4 million.

The decrease in income tax expense during the nine months ended September 30, 2025 was directly related to the recognized loss on the sale of securities.

The following table presents a summarized statement of income for the marine lending segment for the three and nine months ended September 30, 2025 and 2024:


	For the Three Months Ended September 30,											For the Nine Months Ended September 30,
(dollars in thousands)	2025		2024			$ Change			% Change			2025		2024		$ Change			% Change
Net interest income	$	1,590	$	1,615		$	(25	)		(2	)%	$	4,719	$	5,405	$	(686	)		(13	)%
Net Revenue		1,590		1,615			(25	)		(2	)%		4,719		5,405		(686	)		(13	)%
Provision for (recovery of) credit losses		561		(65	)		626			(963	)%		291		298		(7	)		(2	)%
Noninterest expense		96		114			(18	)		(16	)%		326		467		(141	)		(30	)%
Income before taxes		933		1,566			(633	)		(40	)%		4,102		4,640		(538	)		(12	)%
Income tax expense		198		328			(130	)		(40	)%		863		974		(111	)		(11	)%
Net Income	$	735	$	1,238		$	(503	)		(41	)%	$	3,239	$	3,666	$	(427	)		(12	)%

Net revenues declined due to pay downs in the portfolio, which are not being replaced with new loan originations. The marine loan portfolio totaled $185.9 million and $225.9 million at September 30, 2025 and September 30, 2024, respectively.

Provision for credit losses increased reflecting charge-off activity partially offset by declining loan balances during the three months ended September 30, 2025 compared to the three months ended September 30, 2024.

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The following table presents a summarized statement of income for the wealth management segment for the three and nine months ended September 30, 2025 and 2024:


	For the Three Months Ended September 30,									For the Nine Months Ended September 30,
(dollars in thousands)	2025		2024		$ Change		% Change			2025		2024		$ Change		% Change
Other noninterest income	$	1,869	$	1,515	$	354		23.37	%	$	5,286	$	4,244	$	1,042		24.55	%
Net Revenue		1,869		1,515		354		23	%		5,286		4,244		1,042		25	%
Noninterest expense		839		727		112		15	%		2,298		2,074		224		11	%
Income before taxes		1,030		788		242		31	%		2,988		2,170		818		38	%
Income tax expense		216		166		50		30	%		627		456		171		38	%
Net Income	$	814	$	622	$	192		31	%	$	2,361	$	1,714	$	647		38	%

Net revenue increased during the three and nine months ended September 30, 2025 over the 2024 periods due to increases in trust services income reflecting fees earned on a higher level of assets under management and estate settlements and increases in investment sales revenue. The increase in noninterest expense reflects increases in salaries and employee benefits expenses.

FINANCIAL CONDITION

Two significant events impacting the Company's financial condition occurred during the first quarter of 2025. On February 13, 2025, the Company completed an underwritten public offering of 1,796,875 shares of its common stock at a public offering price of $32.00 per share. The net proceeds from the offering were $53.5 million. During March 2025, the Company executed balance sheet repositioning transactions within its investment securities portfolio. The execution of these events was to support continued organic growth and capital generation. These are further described in their corresponding paragraphs below.

Securities

The carrying amounts of the Company's available for sale securities are as follows:


	September 30, 2025					December 31, 2024
(dollars in thousands)	Amount		Percent			Amount		Percent
Obligations of U.S. government corporations and agencies	$	7,574		6	%	$	7,668		6	%
U.S. Treasury securities		10,008		8	%		-		0	%
Mortgage-backed securities		77,163		64	%		104,967		87	%
Collateralized mortgage obligations		22,789		19	%		-		0	%
Obligations of states and political subdivisions		-		0	%		4,645		4	%
Subordinated debt		3,845		3	%		4,050		3	%
Total securities available for sale at fair value	$	121,379		100	%	$	121,330		100	%

Total securities available for sale increased $49 thousand, or 0.04% during 2025. The Company purchased $102.2 million of securities during the nine months ended September 30, 2025, which includes $66.0 million as part of the balance sheet repositioning transactions in the first quarter of 2025. The Company had total maturities, calls, and principal repayments of $19.8 million and sales of $99.2 million during the nine months ended September 30, 2025.

Net unrealized loss on available for sale securities was $7.1 million at September 30, 2025 as compared to a net unrealized loss of $23.6 million at December 31, 2024. 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).

During March 2025, balance sheet repositioning transactions were comprised of sales of available for sale debt securities with an amortized cost balance of $99.2 million (fair value of $86.8 million) and a weighted average yield of 1.72%, with proceeds

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reinvested into purchases of $66.0 million of available for sale debt securities with a weighted average yield of 4.72%. The total sales of $99.2 million represented 68.48% of December 31, 2024 securities balance. The majority of these repositioning sales and purchases consisted of mortgage-backed securities. The sale of debt securities resulted in a net pre-tax realized loss of $12.4 million (after-tax of $9.8 million) that was recognized in the first quarter of 2025. In addition to the repositioning transactions, the Company purchased U.S. Treasury notes totaling $9.9 million prior to the repositioning to maintain pledging levels throughout the repositioning period and has also made subsequent purchases.

The primary cause of the unrealized losses at September 30, 2025 and December 31, 2024 was changes in market interest rates, rather than other market conditions or credit concerns of the issuers over the time between purchase and measurement periods. 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. Details of the Company's loan portfolio are presented below:


	September 30, 2025					December 31, 2024
(dollars in thousands)	Amount		Percent to Total Loans			Amount		Percent to Total Loans
Mortgage real estate loans:
HELOCs	$	54,549		4	%	$	50,646		3	%
Residential First Lien - Investor		103,942		7	%		105,910		7	%
Residential First Lien - Owner Occupied		178,725		12	%		194,065		13	%
Residential Junior Liens		10,497		1	%		11,184		1	%
Total residential real estate loans		347,713		24	%		361,805		25	%
Commercial - Owner Occupied		290,931		20	%		272,236		19	%
Commercial - Non-Owner Occupied & Multifamily		398,076		27	%		367,680		25	%
Total commercial real estate loans		689,007		47	%		639,916		44	%
Construction & Secured by Farmland		84,467		6	%		95,200		6	%
Total mortgage real estate loans		1,121,187		77	%		1,096,921		75	%
Commercial and industrial loans		103,424		7	%		110,343		8	%
Marine loans		185,938		13	%		210,095		14	%
Consumer loans		29,422		2	%		31,017		2	%
Other loans		14,192		1	%		12,220		1	%
Total loans		1,454,163		100	%		1,460,596		100	%
Net deferred loans costs and premiums		5,765					6,453
Gross loans	$	1,459,928				$	1,467,049

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Gross loans were $1.46 billion and $1.47 billion at September 30, 2025 and December 31, 2024, respectively. This represents a decrease of $7.1 million, or 0.49%, during the nine months ended September 30, 2025. The ratio of gross loans to deposits decreased during the nine months ended September 30, 2025 from 93.14% at December 31, 2024 to 88.21% at September 30, 2025 reflecting the decrease in gross loans, compounded by a 5.07% increase in deposits during the same time period.

The loan portfolio consists primarily of loans for owner-occupied single-family dwellings and loans secured by commercial real estate. Loan sales, paydowns within the marine portfolio, and significant payoffs of commercial and industrial loans related to the sales of two customers' businesses caused the balance of gross loans to experience a net decline, while being partially offset by growth in the commercial real estate loans portfolios.

During the nine months ended September 30, 2025, through the normal course of business, $88.6 million in loans were sold, consisting primarily of mortgage loans. Included in total loans sold was a pool of residential mortgage loans totaling $18.8 million, which was sold at par. This pool was sold in January 2025, ahead of the Company's public offering, to bolster on-balance sheet liquidity.

Residential real estate loans decreased primarily due to the portfolio loan sale in early 2025.

Commercial real estate loans increased during the nine months ended September 30, 2025 with growth in both owner occupied and non-owner occupied portfolios. The increase was due to strong originations, including a large construction loan that converted to permanent financing.

The majority of the decrease in construction and secured by farmland loans was due to a large construction loan which converted to permanent financing in the owner-occupied commercial real estate portfolio.

Marine loans are declining due to normal paydowns and payoffs only as the Company is no longer accepting new marine business. 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 Note 1 to the Consolidated Financial Statements in the 2024 Form 10-K.

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The following table presents the activity in the allowance for credit losses on loans and related ratios for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2025			2024			2025			2024
Balance at beginning of period	$	15,979		$	15,014		$	15,027		$	14,493
Charge-Offs
Construction & secured by farmland		-			-			-			(94	)
Residential real estate		-			(65	)		(30	)		(127	)
Commercial real estate		(1,660	)		-			(2,631	)		(7	)
Commercial		(219	)		(8	)		(353	)		(83	)
Marine		(467	)		(1,004	)		(581	)		(1,457	)
Consumer		(37	)		(259	)		(127	)		(376	)
Other		(34	)		(46	)		(106	)		(115	)
Total charge-off's		(2,417	)		(1,382	)		(3,828	)		(2,259	)
Recoveries
Construction & secured by farmland		1			94			4			100
Residential real estate		44			4			296			304
Commercial real estate		-			-			-			162
Commercial		32			14			110			44
Marine		-			-			-			-
Consumer		21			28			34			132
Other		19			5			34			12
Total recoveries		117			145			478			754
Net charge-off's		(2,300	)		(1,237	)		(3,350	)		(1,505	)
Provision for credit losses on loans		1,131			1,526			3,133			2,315
Balance at end of period	$	14,810		$	15,303		$	14,810		$	15,303
Net charge-off's to average loans (annualized)		0.63	%		0.33	%		0.31	%		0.14	%
Allowance for credit losses on loans as a percentage of gross loans		1.01	%		1.03	%		1.01	%		1.03	%

Charge-offs during the three months ended September 30, 2025 primarily consisted of losses on three marine vessels that were repossessed, a nonaccrual owner-occupied commercial real estate loan, and a $1.2 million deficiency balance related to non-owner occupied commercial loan relationship consisting of four residential multifamily income producing properties. Total charge-offs for this relationship during the nine months ended September 30, 2025 were $2.2 million, representing over 50% of the total year-to-date charge-offs. The Company does not anticipate having to make any further significant write-downs on the three remaining properties after the sale of the fourth and largest property during the third quarter of 2025.

Recoveries were $478 thousand and $754 thousand for the nine months ended September 30, 2025 and 2024, respectively, resulting in net charge-offs of $3.4 million and $1.5 million for the nine months ended September 30, 2025 and 2024, respectively.

The reduction of two basis points in the allowance for credit losses on loans to gross loans ratio largely reflects the combined impact of the change in mix of loan pool balances and associated reserve factors applied. Declining loan balances and a net decrease in the total loss factor for the construction and secured by farmland, residential first lien, and marine portfolios more than offset the balance growth and loss factor increase in the commercial real estate portfolio during the nine months ended September 30, 2025 compared to the prior year.

Management believes that the allowance for credit losses on loans is currently adequate to absorb the current expected losses in the loan portfolio.

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Credit Risk, Nonperforming Assets and Other Assets

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 on a quarterly basis. The following table presents credit risk ratings as of September 30, 2025 and December 31, 2024:


	September 30, 2025					December 31, 2024
(dollars in thousands)	Amount		Percent to Total Loans			Amount		Percent to Total Loans
Risk categories
Pass	$	1,390,875		96	%	$	1,405,997		96	%
Special Mention		48,523		3	%		50,081		3	%
Classified		14,765		1	%		4,518		1	%
Total loans	$	1,454,163		100	%	$	1,460,596		100	%

Loans risk rated as special mention, which exhibit negative trends and potential weaknesses include loans with stale financial information. Of the total special mention loans, $32.6 million had stale financial information at September 30, 2025 compared to $45.0 million at December 31, 2024.

Loans risk rated as classified, include substandard, doubtful, and loss loans increased primarily due to two large commercial real estate relationships being placed on nonaccrual status during the first quarter of 2025, including a $2.2 million owner-occupied relationship and an $5.5 million non-owner occupied relationship. Two additional commercial real estate relationships, each totaling $1.8 million, were added to nonaccrual loans during the third quarter of 2025.

All other loans were classified as pass, exhibiting acceptable history of profits, cash flow ability and liquidity.

Nonperforming assets increased by $11.7 million during the nine months ended September 30, 2025, primarily reflecting an increase in nonaccrual loans and repossessed assets. Nonperforming assets and related ratios are detailed in the table below:


(dollars in thousands)	September 30, 2025			December 31, 2024
Nonaccrual loans	$	13,167		$	2,072
Loans past due 90 days or more and accruing interest		91			-
Other real estate owned and repossessed assets		1,009			514
Total nonperforming assets	$	14,267		$	2,586

Allowance for credit losses on loans	$	14,810		$	15,027

Gross loans	$	1,459,928		$	1,467,049

Allowance for credit losses on loans to nonperforming assets		104	%		581	%

Allowance for credit losses on loans to total gross loans		1.01	%		1.02	%

Allowance for credit losses on loans to nonaccrual loans		112	%		725	%

Nonaccrual loans to total gross loans		0.90	%		0.14	%

Non-performing assets to period end gross loans, other real estate owned and repossessed assets		0.98	%		0.18	%

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Total past due loans, as disclosed in Note 5 to the Consolidated Financial Statements, increased to $16.1 million at September 30, 2025 compared to $4.5 million at December 31, 2024. The $11.6 million increase in past due loans primarily reflects loans secured by real estate. One non-owner occupied commercial real estate relationship accounts for $5.5 million of the total increase, comprised of three residential multifamily income producing properties as of September 30, 2025 after the sale of a fourth property, which was the largest loan in the relationship at $5.9 million, during the third quarter of 2025. The Company has been granted receivership on the remaining three properties and is actively with the receiver to update the properties and ready them for sale while continuing to collect the housing payments.

Nonaccrual loans are risk rated as classified and comprised the majority of the classified loan balance as previously described. 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. At September 30, 2025 total specific reserves of $333 thousand were required on one owner occupied commercial real estate relationship and two commercial business loan relationships due to a potential deficiency in collateral value, compared to specific reserves of $248 thousand at December 31, 2024.

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 $1.66 billion and $1.58 billion at September 30, 2025 and December 31, 2024, respectively. This represents an increase of $79.9 million or 5.07% during the nine months ended September 30, 2025. The majority of this increase was due to large deposits in non-interest bearing accounts received during the second quarter 2025 primarily related to sales proceeds of two customers' businesses with a remaining balance of $79.4 million at September 30, 2025.

The following table provides the composition of total deposits at September 30, 2025 and December 31, 2024.


(dollars in thousands)	September 30, 2025			December 31, 2024			$ Change			% Change
Noninterest bearing demand deposits	$	521,149		$	406,180		$	114,969			28	%
NOW accounts		293,739			278,835			14,904			5	%
Money market accounts		269,401			269,115			286			0	%
Regular savings accounts		124,390			131,380			(6,990	)		(5	)%
Time deposits less than $250,000		262,174			293,864			(31,690	)		(11	)%
Time deposits $250,000 and more		184,195			195,782			(11,587	)		(6	)%
Total deposits	$	1,655,048		$	1,575,156		$	79,892			5	%
Core deposits	$	1,314,271		$	1,299,323			14,948			1	%
Core deposits as a percent of total deposits		79	%		82	%
Non-core deposits	$	340,777		$	275,833			64,944			24	%
Non-core deposits as a percent of total deposits		21	%		18	%

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The total increase in deposits was primarily in non-core accounts, which increased $64.9 million while core accounts increased $14.9 million. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts and time deposits less than $250,000, excluding wholesale or brokered deposits. The aforementioned deposit inflow related to sales proceeds from two customers' businesses was considered to be non-core as the Company is currently unsure of what portion of the funds will remain at the Bank and for how long.

In general, deposit pricing is done in response to monetary policy actions and yield curve changes. Local competition for funds also affects the cost of time deposits. Marketing efforts, including rate specials, are utilized to maintain maturing accounts and to acquire new time deposit accounts. At September 30, 2025, over 88% of deposits were fully FDIC insured.

CAPITAL RESOURCES

The Bank continues to be a well capitalized financial institution. Total shareholders' equity at September 30, 2025 was $185.6 million, reflecting a percentage of total assets of 9.60%, as compared to $119.0 million and 6.38% at December 31, 2024. The $66.6 million increase in shareholders' equity was primarily due to net proceeds of $53.5 million received from the completion of an underwritten public offering of 1,796,875 shares of its common stock at a public offering price of $32.00 per share. An additional increase of $13.1 million is due to a decrease in unrealized losses on the securities available for sale portfolio largely reflecting the impact of the balance sheet repositioning. This increase in shareholders' equity was further enhanced by a net operating income of $3.9 million and partially offset by $4.4 million in dividends declared for the nine months ended September 30, 2025. During the nine months ended September 30, 2025 and 2024, the Company declared dividends of $0.93 and $0.90 per share, respectively. The Company has a Dividend Investment Plan that allows shareholders to reinvest dividends in Company stock.

At September 30, 2025, 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. The Bank's capital amounts and ratios are presented using the Federal Reserve's risk-based capital framework.

Effective January 1, 2015, the Federal Reserve issued final risk-based capital rules to align with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. In addition, a capital conservation buffer requirement of 2.5% was effective January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with any ratio (excluding the leverage ratio) above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The capital conservation buffer rule requires the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

At September 30, 2025 and December 31, 2024, the Bank's capital ratios were as follows: Common equity Tier 1 capital was 14.29% and 11.04%, respectively, Tier 1 risk-based capital was 14.29% and 11.04%, respectively, Total risk-based capital was 15.25% and 12.00%, respectively, and Tier 1 leverage was 10.78% and 8.79%, respectively. The increase in the Bank's capital ratios was due to the completion of the Company's public offering in February 2025.

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Pursuant to the Federal Reserve's Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the Company, are not subject to consolidated regulatory capital requirements.

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.

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, unpledged securities classified as available for sale and loans maturing within one year. At September 30, 2025, liquid assets totaled $467.7 million as compared to $335.9 million at December 31, 2024. These amounts represented 26.78% and 19.22% of total liabilities at September 30, 2025 and December 31, 2024, respectively. The increase during the first nine months of 2025 reflects the increased cash on hand from the net proceeds of the capital raise and higher levels of deposits, as well as an increase in the balance of loans maturing within one year. 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 2024 Form 10-K.

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Eagle Financial Services Inc. published this content on November 13, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on November 13, 2025 at 20:21 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]

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