Eagle Financial Services, Inc. Announces 2020 Third Quarter Financial Results And Quarterly Dividend

BERRYVILLE, Va., Oct. 22, 2020 /PRNewswire/ -- Eagle Financial Services, Inc. (OTCQX: EFSI), the holding company for Bank of Clarke County, whose divisions include Eagle Investment Group, reported continued strong performance for the third quarter of 2020. On October 21, 2020, the Board of Directors announced a quarterly common stock cash dividend of $0.26 per common share, payable on November 16, 2020, to shareholders of record on November 2, 2020. Select highlights for the third quarter include:

• Net income of $3.4 million
• Loan growth of $16.8 million
• Deposit growth of $47.3 million
• Basic and diluted earnings per share of $0.99

Brandon Lorey, President and CEO, stated, "I am thrilled to announce that Eagle Financial Services, Inc. delivered another quarter of record income, earnings, and deposit growth despite the continued downward pressure on margins and increasing competition throughout our markets. Net income was just above $3.4 million for the quarter with earnings per share of $0.99 and an ROA of 1.3%. Year to date loan growth, net of PPP, was $72 million (14% Annualized CAGR) with deposit growth, again net of PPP, of $95 million or 16% CAGR. With our branches fully reopened, our call center staff ready to answer questions through the phone or through our new video chat technology, and our digital channel available 24/7, we continue to provide our customers with the ability to bank on their terms, through the channels they prefer."

Income Statement Review

Net income for the quarter ended September 30, 2020 was $3.4 million reflecting an increase of 20.8% from the quarter ended June 30, 2020 and an increase of 52.7% from the quarter ended September 30, 2019. The increase from both periods was mainly driven by net interest income increases related to net loan growth and reduced interest expense on deposit accounts.  Net income was $2.8 million for the three-month period ended June 30, 2020 and $2.2 million for the quarter ended September 30, 2019.

Net interest income for the quarter ended September 30, 2020 and June 30, 2020 was $9.5 million and $8.8 million, respectively. Net interest income was $8.0 million for the quarter ended September 30, 2019.  The increase in net interest income from the quarters ended June 30, 2020 and September 30, 2019 resulted primarily from growth in the Company's loan portfolio.

Total loan interest income was $9.3 million and $8.8 million for the quarters ended September 30, 2020 and June 30, 2020, respectively.  Total loan interest income was $8.0 million for the quarter ended September 30, 2019. Total loan interest income increased $1.3 million or 16.1% from the quarter ended September 30, 2019 to the quarter ended September 30, 2020. Average loans for the quarter ended September 30, 2020 were $798.4 million compared to $750.0 million for the quarter ended June 30, 2020.  For the quarter ended September 30, 2019, total average loans were $637.3 million. The tax equivalent yield on average loans for the quarter ended September 30, 2020 was 4.65%, a decrease of seven basis points from 4.72% for the quarter ended June 30, 2020 and down 36 basis points from the 5.01% average yield for the same time period in 2019. The majority of this decrease in yield can be attributed to the SBA Paycheck Protection Program ("PPP") loans.  During the nine months ended September 30, 2020, the Company originated $88.2 million in PPP loans which have a 1.00% interest rate, much lower than the existing portfolio's yield. Interest and dividend income from the investment portfolio was $830 thousand for the quarter ended September 30, 2020 compared to $882 thousand for the quarter ended June 30, 2020. Interest income and dividend income from the investment portfolio was $971 thousand for the quarter ended September 30, 2019. Average investments for the quarter ended September 30, 2020 were $144.1 million compared to $154.4 million for the quarter ended June 30, 2020. Average investments were $141.9 million for the quarter ended September 30, 2019. The tax equivalent yield on average investments for the quarter ended September 30, 2020 was 2.40%, the same as the quarter ended June 30, 2020 and down 47 basis points from 2.87% for the same time period in 2019.

Total interest expense was $683 thousand for the three months ended September 30, 2020 and $904 thousand and $1.1 million for three months ended June 30, 2020 and September 30, 2019, respectively. The decrease in interest expense resulted from the reduction in interest rates paid on deposit accounts. The average cost of interest-bearing liabilities decreased 16 and 46 basis points when comparing the quarter ended September 30, 2020 to the quarters ended June 30, 2020 and September 30, 2019, respectively. The average balance of interest-bearing liabilities decreased $2.0 million from the quarter ended June 30, 2020 to the quarter ended September 30, 2020. The average balance of interest-bearing liabilities increased $88.6 million from the quarter ended September 30, 2019 to the same period in 2020.

The net interest margin was 3.86% for the quarter ended September 30, 2020. For the quarters ended June 30, 2020 and September 30, 2019, the net interest margin was 3.70% and 4.01%, 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 $2.2 million for the quarter ended September 30, 2020, which represented a decrease of $206 thousand or 8.5% from the $2.4 million for the three months ended June 30, 2020. The decrease was driven mostly by the $529 thousand gain on sale of AFS securities recognized during the quarter ended June 30, 2020.  Noninterest income for the quarter ended September 30, 2019 was $2.2 million.

Noninterest expense increased $451 thousand, or 6.4%, to $7.5 million for the quarter ended September 30, 2020 from $7.0 million for the quarter ended June 30, 2020.  Much of this increase resulted from the increase in salaries and benefits expenses. Annual pay increases, newly hired employees and additional bonus/COVID pay for employees that have been unable to work remotely during the pandemic have attributed to these increases. Noninterest expense was $7.4 million for the quarter ended September 30, 2019, representing an increase of $54 thousand or 0.7% when comparing to the quarter ended September 30, 2020 to the quarter ended September 30, 2019.

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 $5.3 million or 0.52% of total assets at June 30, 2020 to $4.7 million or 0.44% of total assets at September 30, 2020. This decrease resulted from one loan 90 days or more past due and still accruing interest that has been brought to a current status at September 30, 2020.  Nonperforming assets were $2.6 million at September 30, 2019.  Total nonaccrual loans were $4.3 million at September 30, 2020 and $4.2 million at June 30, 2020. Nonaccrual loans were $2.1 million at September 30, 2019. Several larger dollar loans were placed in nonaccrual status during the second quarter of 2020.  The majority of these loans are in the commercial real estate portfolio and have had cash flows negatively impacted by the COVID-19 pandemic. 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 remained at $442 thousand at June 30, 2020 and September 30, 2020.

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 September 30, 2020, the Company had 16 troubled debt restructurings totalling $2.8 million. Approximately $2.7 million or 14 loans are performing loans, while the remaining loans are on non-accrual status. At June 30, 2020, the Company had 14 troubled debt restructurings totalling $2.7 million. Approximately $2.5 million or 12 loans were performing loans, while the remaining loans were on non-accrual status.

The Company realized $196 thousand in net recoveries for the quarter ended September 30, 2020 versus net recoveries of $226 thousand for the three months ended June 30, 2020 while $261 thousand in net charge-offs were recognized for the three months ended September 30, 2019. The amount of provision for loan losses reflects the results of the Bank's analysis used to determine the adequacy of the allowance for loan losses. The Company recorded a provision for loan losses of $100 thousand for the quarter ended September 30, 2020. The Company recognized provision for loan losses of $752 thousand and $117 thousand for the quarters ended June 30, 2020 and September 30, 2019, respectively. The provision for the quarter ended September 30, 2020 resulted mostly from loan growth during the quarter while the provision for the quarter ended June 30, 2020 resulted mostly from the decline in the current state of the economy. The ratio of allowance for loan losses to total loans was 0.83% at September 30, 2020 and 0.81% at June 30, 2020, respectively.  The ratio of allowance for loan losses to total loans was 0.77% at September 30, 2019. Excluding outstanding PPP loans of $88.2 million as of September 30, 2020, the allowance for loan losses as a percentage of total loans was 0.93%. The ratio of allowance for loan losses to total nonaccrual loans was 155.10% at September 30, 2020.  The ratio of allowance for loan losses to total nonaccrual loans was 158.08% and 237.66% at June 30, 2020 and September 30, 2019, 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.

Total Consolidated Assets

Total consolidated assets of the Company at September 30, 2020 were $1.07 billion, which represented an increase of $50.4 million or 4.9% from total assets of $1.02 billion at June 30, 2020. At September 30, 2019 total consolidated assets were $851.4 million. Total loans increased $16.8 million from $788.9 million at June 30, 2020 to $805.7 million at September 30, 2020. Total securities increased $6.8 million from $146.9 million at June 30, 2020, to $153.7 million at September 30, 2020. At September 30, 2019 total investment securities were $139.4 million and total loans were $638.2 million. The growth in total loans and total assets during the quarters ended September 30, 2019 and September 30, 2020 was largely due to regular loan portfolio growth as the Company expands lending types and areas.

Deposits and Other Borrowings

Total deposits increased $47.3 million to $955.2 million at September 30, 2020 from $907.9 million at June 30, 2020. At September 30, 2019 total deposits were $735.4 million.  The growth in deposits mainly reflected PPP loan proceeds being deposited into customers' accounts at the time the loans were originated and remaining on deposit as of September 30, 2020.

The Company had no outstanding borrowings from the Federal Home Loan Bank of Atlanta at September 30, 2020 or June 30, 2020. The Company had $10.0 million in borrowings outstanding from the Federal Home Loan Bank of Atlanta as of September 30, 2019. This borrowing was paid off during the fourth quarter of 2019.

Equity

Shareholders' equity was $103.9 million at September 30, 2020 and $101.6 million at June 30, 2020. Shareholders' equity was $94.6 million at September 30, 2019. The book value of the Company at September 30, 2020 was $30.65 per common share. Total common shares outstanding were 3,416,013 at September 30, 2020. On October 22, 2020, the board of directors declared a $0.26 per common share cash dividend for shareholders of record as of November 2, 2020 and payable on November 16, 2020.

COVID-19 Impacts

The COVID-19 crisis has changed our communities, both in the way we live and the way we do business. While circumstances continue to change, the Company is continuing to steadfastly work to meet and exceed the needs of its customers, employees, and the communities in which it does business. Customers' banking needs have continued to be fulfilled through multiple banking channels including mobile, digital, and adjusted-schedule physical.  In efforts to assist local businesses during this pandemic, the Company has originated 901 PPP loans, totalling $88.2 million, into the hands of our community's small businesses. In addition to local small businesses, the Company is also working with its consumer and commercial customers through its loan deferral program whereby customers experiencing hardships due to COVID-19 may be granted a deferral in loan payments for up to 90 days. As of September 30, 2020, the Company had approved 251 deferrals with loan balances totalling approximately $134.0 million for its customers experiencing hardships related to COVID-19. As of September 30, 2020, 231 loans with loan balances totalling approximately $97.9 million had begun making payments on their loans after the deferral date had passed.

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 effects of the COVID-19 pandemic, including on the Company's credit quality and business operations, as well as its impact on general economic and financial market 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; 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 requirements; 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, 2019 and other filings with the Securities and Exchange Commission.