EAGLE FINANCIAL SERVICES, INC. ANNOUNCES 2023 FIRST QUARTER FINANCIAL RESULTS AND QUARTERLY DIVIDEND

BERRYVILLE, Va., May 2, 2023 /PRNewswire/ -- Eagle Financial Services, Inc. (OTCQX: EFSI), the holding company for Bank of Clarke, whose divisions include Bank of Clarke Wealth Management, announced its first quarter 2023 results. On April 26, 2023, the Board of Directors announced a quarterly common stock cash dividend of $0.30 per common share, payable on May 19, 2023, to shareholders of record on May 8, 2023. Select highlights for the first quarter include:

• Cash and cash equivalents increased $61.8 million or 92.4% during the quarter growing as a percentage of total assets to 7.3% in the first quarter as compared to 4.1% at December 31, 2022.
• Total deposits increased $125.9 million or 10.0% during the quarter, while the loan to deposit ratio declined to 100.77% as compared to 104.72% as of December 31, 2022.
• Net loans increased $74.2 million or 5.7%.
• On January 1, 2023, the Company implemented the Current Expected Credit Losses ("CECL") standard, which resulted in a $2.1 million increase to the allowance for credit losses and was offset in shareholders' equity and deferred tax assets.

Brandon Lorey, President and CEO, stated, "Despite a tumultuous period in the banking sector, The Bank of Clarke delivered another strong quarter for Eagle Financial Services, Inc. (EFSI). As has been the case for the Bank's 142-year history, balance sheet stability remains a priority and the first quarter reflected that core belief with continued quarter over quarter revenue, loan, and deposit growth. With a significant majority of our deposits fully FDIC insured, we are in a very different position than the banks that ran into issues in the first quarter. Our conservative credit culture has always and continues to serve us well as we remain well positioned to take advantage of market opportunities through a potential economic downturn. The Bank and its employees remain steadfast in our focus and commitment to the communities we serve."

Income Statement Review

Total loan interest income was $18.6 million and $16.2 million for the quarters ended March 31, 2023 and December 31, 2022, respectively.  Total loan interest income was $11.5 million for the quarter ended March 31, 2022. Total loan interest income increased $6.5 million or 61.6% from the quarter ended March 31, 2022 to the quarter ended March 31, 2023. Average loans for the quarter ended March 31, 2023 were $1.37 billion compared to $1.01 billion for the quarter ended March 31, 2022.  The tax equivalent yield on average loans for the quarter ended March 31, 2023 was 5.10%, an increase of 85 basis points from the 4.25% average yield for the same time period in 2022. The majority of this increase in yield can be attributed to the current rising interest rate environment.

Interest and dividend income from the investment portfolio was $891 thousand for the quarter ended March 31, 2023 compared to $879 thousand for the quarter ended December 31, 2022. Interest income and dividend income from the investment portfolio was $872 thousand for the quarter ended March 31, 2022. The slight increase in interest and dividend income between periods resulted mainly from the increase in dividend income. The tax equivalent yield on average investments for the quarter ended March 31, 2023 was 2.29%, up three basis points from 2.26% for the quarter ended December 31, 2022 and up 46 basis points from 1.83% for the quarter ended March 31, 2022.

Total interest expense was $5.9 million for the three months ended March 31, 2023 and $2.9 million and $370 thousand for three months ended December 31, 2022 and March 31, 2022, respectively. The increase in interest expense resulted from increases on rates paid on deposit accounts, the subordinated notes that the Company issued on March 31, 2022, which are currently paying a 4.5% fixed rate, and Federal Home Loan Bank advances of $220 million entered into during the third and fourth quarters of 2022 and the first quarter of 2023. The average cost of interest-bearing liabilities increased 98 and 202 basis points when comparing the quarter ended March 31, 2023 to the quarters ended December 31, 2022 and  March 31, 2022, respectively. The average balance of interest-bearing liabilities increased $156.3 million from the quarter ended December 31, 2022 to the quarter ended March 31, 2023. The average balance of interest-bearing liabilities increased $355.5 million from the quarter ended March 31, 2022 to the same period in 2022. In addition to the growth in interest-bearing liabilities, there has been a shift in the mix of interest-bearing deposits.  Time deposits as a percentage of total interest-bearing deposits have increased from 17.1% and 18.0%  at March 31, 2022 and December 31, 2022, respectively to 23.8% at March 31, 2023.

Net interest income for the quarter ended March 31, 2023 was $12.6 million reflecting a decrease of 4.6% from the quarter ended December 31, 2022 and an increase of 13.5% from the quarter ended March 31, 2022. Net interest income was $13.3 million and $11.1 million for the quarters ended December 31, 2022 and March 31, 2022, respectively.  The decrease in net interest income from the quarter ended December 31, 2022 was caused by the increase in funding costs for deposits and borrowings. The increase in net interest income from the quarter March 31, 2022 resulted primarily from growth in the Company's loan portfolio along with the rising interest rate environment.

Net income for the quarter ended March 31, 2023 was $2.6 million reflecting a decrease of 19.1% from the quarter ended December 31, 2022 and a decrease of 20.5% from the quarter ended March 31, 2022. The decrease from the quarter ended December 31, 2022 was due to several factors including the increased funding costs for deposits and borrowings and increased salaries and employee benefits expenses to hire and retain employees. The number of full-time equivalent employees (FTEs) has increased from 224 at March 31, 2022, to 253 at March 31, 2023. The decrease in net income from the quarter ended March 31, 2022 was mainly driven by these same factors.  Net income was $3.2 million for the three-month period ended December 31, 2022 and $3.3 million for the quarter ended March 31, 2022.

The net interest margin was 3.27% for the quarter ended March 31, 2023. For the quarters ended December 31, 2022 and March 31, 2022, the net interest margin was 3.68% and 3.61%, respectively. The Company's net interest margin is not a measurement under accounting principles generally accepted in the United States, but it is a common measure used by the financial services industry to determine how profitably earning assets are funded. The Company's net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets. Tax equivalent net interest income is calculated by grossing up interest income for the amounts that are non-taxable (i.e., municipal income) then subtracting interest expense. The tax rate utilized is 21%.

Noninterest income was $3.5 million for the quarter ended March 31, 2023, which represented an increase of $437 thousand or 14.1% from the $3.1 million for the three months ended December 31, 2022. Noninterest income for the quarter ended March 31, 2022 was $3.2 million. The increase between the quarters ended December 31, 2022 and March 31, 2023 was mainly driven by the gains on the sale of loans held for sale, which are driven by activity levels based on buyer interest. The $283 thousand or 8.7% increase from March 31, 2022 and March 31, 2023 was driven mainly by increased wealth management fees. The Bank of Clarke Wealth Management Division continues to grow the number of active accounts as well as assets under management, which is the main driver for wealth management fees.

Noninterest expense increased $793 thousand, or 6.9%, to $12.3 million for the quarter ended March 31, 2023 from $11.5 million for the quarter ended December 31, 2022. Noninterest expense was $9.9 million for the quarter ended March 31, 2022, representing an increase of $2.4 million or 24.4% when comparing the quarter ended March 31, 2023 to the quarter ended March 31, 2022. An increase in salaries and benefits expenses was noted between both periods. Annual pay increases, newly hired employees, incentive plan accruals and increased insurance costs have attributed to these increases. The number of full-time equivalent employees (FTEs) has increased from 224 at March 31, 2022, to 253 at March 31, 2023. An increase in professional fees was also noted between both periods.  This increase is mainly due to increased audit expenses related to new FDICIA requirements after reaching $1 billion in asset size as well as fees associated with SEC filings during the first quarter of 2023.

Asset Quality and Provision for Loan Losses

Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due and still accruing, other real estate owned (foreclosed properties), and repossessed assets. Nonperforming assets decreased from $2.6 million or 0.13% of total assets at December 31, 2022 to $2.0 million or 0.10% of total assets at March 31, 2023. Nonperforming assets were $2.6 million at March 31, 2022.  Total nonaccrual loans were $1.8 million at March 31, 2023 and $2.2 million at December 31, 2022. Nonaccrual loans were $2.6 million at March 31, 2022. The majority of all nonaccrual loans are secured by real estate and management evaluates the financial condition of these borrowers and the value of any collateral on these 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.  Other real estate owned was zero and $108 thousand at March 31, 2023 and December 31, 2022, respectively.

The Company may, under certain circumstances, restructure loans in troubled debt restructurings as a concession to a borrower when the borrower is experiencing financial distress. Formal, standardized loan restructuring programs are not utilized by the Company. Each loan considered for restructuring is evaluated based on customer circumstances and may include modifications to one or more loan provision. Such restructured loans are included in impaired loans but may not necessarily be nonperforming loans. At March 31, 2023, the Company had 30 troubled debt restructurings totaling $4.9 million. Approximately $4.7 million or 28 loans are performing loans, while the remaining loans are on non-accrual status. At December 31, 2022, the Company had 28 troubled debt restructurings totaling $4.6 million. Approximately $4.4 million or 26 loans were performing loans, while the remaining loans were on non-accrual status.

The Company realized $54 thousand in net charge-offs for the quarter ended March 31, 2023 versus $454 thousand in net charge-offs for the three months ended December 31, 2022. During the three months ended March 31, 2022, $12 thousand in net charge-offs were recognized.

Beginning January 1, 2023, the Company adopted Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which replaced the former "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the CECL model. The adoption of the CECL model resulted in a $2.1 million increase in the allowance for loan losses and a $406 thousand increase in other liabilities due to the allowance for credit losses on unfunded commitments. At adoption, we also recorded a corresponding $2.0 million after-tax decrease in retained earnings. Utilizing CECL may have an impact on our allowance for credit losses going forward and may result in a lack of comparability between 2023 and 2022 quarterly periods. The amount of provision for credit losses reflects the results of the Bank's analysis used to determine the adequacy of the allowance for credit losses. The Company recorded $709 thousand in provision for credit loss for the quarter ended March 31, 2023 due mainly to the growth of the loan portfolio during the quarter. The Company recognized provision for loan losses of $930 thousand and $540 thousand for the quarters ended December 31, 2022 and March 31, 2022, respectively. The provisions for the quarters ended December 31, 2022 and  March 31, 2022 resulted mostly from loan growth during the quarter.

The ratio of allowance for credit losses to total loans was 1.00% at March 31, 2023. The ratio of allowance for loan losses to total loans was 0.85% and 0.91% at December 31, 2022 and March 31, 2022, respectively. The increase in the ratio is mainly attributable to the adoption of CECL. The ratio of allowance for credit losses to total nonaccrual loans was 758.56% at March 31, 2023.  The ratio of allowance for loan losses to total nonaccrual loans was 518.86% and 357.47% at December 31, 2022 and March 31, 2022, respectively. Management's judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower's ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. The Company is committed to maintaining an allowance at a level that adequately reflects the risk inherent in the loan portfolio.

Balance Sheet

Total consolidated assets of the Company at March 31, 2023 were $1.76 billion, which represented an increase of $140.0 million or 8.66% from total assets of $1.62 billion at December 31, 2022. At March 31, 2022, total consolidated assets were $1.37 billion. The majority of the growth in consolidated assets was due to growth in cash and cash equivalents and net loans, which are discussed in further detail below.

Total cash and cash equivalents (including cash and due from banks and federal funds sold) increased $61.8 million or 92.4% as of March 31, 2023, compared to December 31, 2022. Cash and cash equivalents grew as a percentage of total assets to 7.3% in the first quarter as compared to 4.1% at December 31, 2022.

At March 31, 2023, total securities available for sale were $160.2 million, an increase of $1.8 million from December 31, 2022, and a decrease of $34.4 million from March 31, 2022. At  March 31, 2023, total net unrealized losses on the AFS securities portfolio were $22.1 million, an improvement of $3.8 million million from total net unrealized losses on AFS securities of $25.9 million at December 31, 2022.

Total net loans increased $74.2 million from $1.31 billion at December 31, 2022 to $1.39 billion at March 31, 2023. During the quarter ended March 31, 2023, $27.8 million in loans were sold. The Company sold $2.1 million in mortgage loans on the secondary market and $25.7 million of loans from the commercial and consumer loan portfolios. These loan sales resulted in net gains of $372 thousand. The growth in loans was largely due to organic loan portfolio growth as the Company expands lending types and markets.

Total deposits increased to $1.39 billion as of March 31, 2023 when compared to December 31, 2022 deposits of $1.26 billion. At March 31, 2022 total deposits were $1.23 billion.  Growth in deposits has been dividend between core and non-core accounts.  During the first quarter of 2023, approximately $52.5 million or 41.7% of total deposit growth was organic growth as the Company continued to expand and grow into newer market areas. The remaining growth was attributable to brokered deposits. As interest rates have risen, the Company has noticed a shift in the mix of deposits away from non-interest bearing deposits and towards time deposits.  Time deposits increased by $115.1 million or 72.9% between December 31, 2022 and March 31, 2023, while non-interest bearing deposits have decreased $14.6 million or 3.1% and savings and interest bearing demand deposits have increased by $25.4 million or 4.0% for the same time period. Time deposits as a percentage of total deposits have increased from 10.0% and 12.5% at March 31, 2022 and December 31, 2022, respectively, to 19.6% at March 31, 2023.  The increase in time deposits is partially due to $30.0 million in brokered accounts that the Company entered into during the first quarter of 2023. At March 31, 2023, over 73% of deposits were fully FDIC insured.

The Company had $220.0 million and $175.0 million, respectively, in outstanding borrowings from the Federal Home Loan Bank of Atlanta at March 31, 2023 and December 31, 2022.  There were no outstanding borrowings from the Federal Home Loan Bank as of  March 31, 2022.  The weighted average rate paid on Federal Home Loan Bank advances as of March 31, 2023 and December 31, 2022 was 4.83% and 4.17%, respectively. At  December 31, 2022, the Company had $33.0 million in fed funds purchased. There were no outstanding fed funds purchased as of March 31, 2023 or March 31, 2022.  These borrowings were used mainly to fund the strong loan growth that occurred during the quarter ended March 31, 2023.

On March 31, 2022, the Company entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited institutional investors, pursuant to which the Company issued 4.50% Fixed-to-Floating Rate Subordinated Notes due 2032, in the aggregate principal amount of $30.0 million.

Shareholders' equity was $104.5 million and $101.7 million at March 31, 2023 and December 31, 2022, respectively. Shareholders' equity was $102.1 million at March 31, 2022. Shareholders' equity has been impacted by an accumulated other comprehensive loss related to securities available-for-sale. These unrealized losses are primarily a result of rapid increases in interest rates during 2022. The book value of the Company at March 31, 2023 was $29.65 per common share. Total common shares outstanding were 3,522,874 at March 31, 2023. On April 26, 2023, the board of directors declared a $0.30 per common share cash dividend for shareholders of record as of May 8, 2023 and payable on May 19, 2023.

Cautionary Note Regarding Forward-Looking Statements

Certain information contained in this discussion may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to the Company's future operations and are generally identified by phrases such as "the Company expects," "the Company believes" or words of similar import. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to: changes in interest rates and general economic conditions; the legislative and regulatory climate; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve; changes in interest rates; the quality or composition of the Company's loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company's market area; acquisitions and dispositions; the Company's ability to keep pace with new technologies; a failure in or breach of the Company's operational or security systems or infrastructure, or those of third-party vendors or other service providers, including as a result of cyberattacks; the Company's capital and liquidity; changes in tax and accounting rules, principles, policies and guidelines; and other factors included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and other filings with the Securities and Exchange Commission.