EAGLE FINANCIAL SERVICES, INC. ANNOUNCES 2022 THIRD QUARTER RECORD EARNINGS AND INCREASED SHAREHOLDER DIVIDEND

BERRYVILLE, Va., Oct. 27, 2022 /PRNewswire/ -- Eagle Financial Services, Inc. (OTCQX: EFSI), the holding company for Bank of Clarke County, whose divisions include Eagle Investment Group, announced its third quarter 2022 results and quarterly dividend.  On October 26, 2022, the Board of Directors announced a quarterly common stock cash dividend of $0.30 per common share, payable on November 21, 2022, to shareholders on record on November 7, 2022. Select highlights for the third quarter include:

Brandon Lorey, President and CEO, stated, "Despite the headwinds of increasing costs of funds, I am thrilled to announce a record earnings quarter for Eagle Financial Services, Inc. at $4.08 million and continued growth in both loans and deposits. Net loan growth was $80.1 million driven largely by our commercial lending in our eastern markets coupled with continued deposit growth across our entire footprint. Earnings per share topped $1.17, the Bank's highest EPS figure in its long history. We remain laser focused on our cost of funds and maintaining adequate growth rates for both loans and deposits. I am also very happy to announce another increase of $.01 in the EFSI dividend as we continue our long-standing tradition of sharing the organization's success with its shareholders. As always, I would like to thank our staff for their continued and tireless work in putting our customers in the center of everything we do, as we work to earn the moniker of being the trusted financial partners for all we serve in the Valley and Northern Virginia."

Net income for the quarter ended September 30, 2022, was $4.1 million reflecting an increase of 2.3% from the quarter ended June 30, 2022, and an increase of 42.1% from the quarter ended September 30, 2021. The increase from the quarters ended June 30, 2022, and September 30, 2021 was mainly driven by increased net interest income led by strong loan growth.  Net income was $4.0 million for the three-month period ended June 30, 2022, and $2.9 million for the quarter ended September 30, 2021.

Net interest income for the quarters ended September 30, 2022, was $12.9 million reflecting an increase of 11.6% from the quarter ended June 30, 2022, and an increase of 24.0% from the quarter ended September 30, 2021. Net interest income was $11.9 million and $10.4 million for the quarters ended June 30, 2022, and September 30, 2021, respectively.  The increase in net interest income from the quarters ended June 30, 2022, and September 30, 2021, resulted primarily from growth in the Company's loan portfolio along with the rising interest rate environment.

Total loan interest income was $13.3 million and $11.7 million for the quarters ended September 30, 2022, and June 30, 2022, respectively.  Total loan interest income was $10.0 million for the quarter ended September 30, 2021. Total loan interest income increased $3.2 million or 32.2% from the quarter ended September 30, 2021, to the quarter ended September 30, 2022. Average loans for the quarter ended September 30, 2022, were $1.17 billion compared to $902.8 million for the quarter ended September 30, 2021.  The tax equivalent yield on average loans for the quarter ended September 30, 2022, was 4.51%, an increase of nine basis points from the 4.42% average yield for the same time period in 2021. 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 $932 thousand for the quarter ended September 30, 2022, compared to $939 thousand for the quarter ended June 30, 2022. Interest income and dividend income from the investment portfolio was $707 thousand for the quarter ended September 30, 2021. The slight decrease in interest and dividend income between the second and third quarters of 2022 resulted from the sale of securities during the third quarter of 2022. The increase in interest and dividend income between the quarters ended September 30, 2022, and September 30, 2021, resulted from the increase in yields on securities purchased during 2022 as well as the increase in the balance of the investment portfolio. Average investments for the quarter ended September 30, 2022, were $181.6 million compared to $179.5 million for the quarter ended September 30, 2021. The tax equivalent yield on average investments for the quarter ended September 30, 2022, was 2.07%, up three basis points from 2.04% for the quarter ended June 30, 2022, and up 45 basis points from 1.62% for the quarter ended September 30, 2021.

Total interest expense was $1.5 million for the three months ended September 30, 2022, and $728 thousand and $383 thousand for three months ended June 30, 2022, and September 30, 2021, 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 a Federal Home Loan Bank advance of $75 million entered into in July 2022 at a fixed rate of 2.18%. The average cost of interest-bearing liabilities increased 30 and 45 basis points when comparing the quarter ended September 30, 2022, to the quarters ended June 30, 2022, and September 30, 2021, respectively. The average balance of interest-bearing liabilities increased $77.4 million from the quarter ended June 30, 2022, to the quarter ended September 30, 2022. The average balance of interest-bearing liabilities increased $187.1 million from the quarter ended September 30, 2021, to the same period in 2022.

The net interest margin was 3.72% for the quarter ended September 30, 2022. For the quarters ended June 30, 2022, and September 30, 2021, the net interest margin was 3.70% and 3.56%, 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 $3.2 million for the quarter ended September 30, 2022, which represented a decrease of $685 thousand or 17.8% from the $3.8 million for the three months ended June 30, 2022. The majority of this decrease was due to the $737 thousand loss on the sale of available for sale securities during the third quarter of 2022.  Noninterest income for the quarter ended September 30, 2021, was $2.9 million. Despite the loss on the sale of available for sale securities, the $283 thousand increase between the quarters ended September 30, 2021, and September 30, 2022 was driven by an increase in income from fiduciary activities which increased $218 thousand or 24.9% due to an increase in assets under management.

Noninterest expense increased $530 thousand, or 5.0%, to $11.1 million for the quarter ended September 30, 2022, from $10.4 million for the quarter ended June 30, 2022. Salaries and employee benefits expenses were higher in the third quarter of 2022 due to an increased employee incentive accrual.  This increase was due to additional goals being met in the third quarter that had not been met in previous quarters. Noninterest expense was $9.5 million for the quarter ended September 30, 2021, representing an increase of $1.5 million or 16.1% when comparing to the quarter ended September 30, 2022, to the quarter ended September 30, 2021. An increase in salaries and benefits expenses was noted between the third quarter of 2022 when compared to the same period in 2021. 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 215 at September 30, 2021, to 235 at September 30, 2022.

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 increased from $2.1 million or 0.15% of total assets at June 30, 2022, to $2.4 million or 0.16% of total assets at September 30, 2022. Nonperforming assets were $3.7 million at September 30, 2021.  Total nonaccrual loans were $2.4 million at September 30, 2022, and $2.0 million at June 30, 2022. Nonaccrual loans were $3.5 million at September 30, 2021. 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 at zero at September 30, 2022, and June 30, 2022.

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, 2022, the Company had 26 troubled debt restructurings totaling $4.4 million. Approximately $4.2 million or 24 loans are performing loans, while the remaining loans are on non-accrual status. At June 30, 2022, the Company had 21 troubled debt restructurings totaling $3.4 million. Approximately $3.2 million or 19 loans were performing loans, while the remaining loans were on non-accrual status.

The Company realized $895 thousand in net recoveries for the quarter ended September 30, 2022, versus $172 thousand in net recoveries for the three months ended June 30, 2022. During the three months ended September 30, 2021, $58 thousand in net recoveries were recognized. 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 no provision for loan loss for the quarter ended September 30, 2022, due to the large net recovery that was recognized during the quarter. The Company recognized provision for loan losses of $360 thousand and $300 thousand for the quarters ended June 30, 2022, and September 30, 2021, respectively. The provision for the quarters ended June 30, 2022, and September 30, 2021, resulted mostly from loan growth during the quarters. The ratio of allowance for loan losses to total loans was 0.89% at September 30, 2022, and 0.88% at June 30, 2022.  The ratio of allowance for loan losses to total loans was 0.91% at September 30, 2021. Excluding outstanding PPP loans, the allowance for loan losses as a percentage of total loans was 0.89% at September 30, 2022, 0.88% at June 30, 2022, and 0.94% at September 30, 2021. The ratio of allowance for loan losses to total nonaccrual loans was 442.59% at September 30, 2022.  The ratio of allowance for loan losses to total nonaccrual loans was 488.85% and 239.18% at June 30, 2022, and September 30, 2021, 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 of the Company at September 30, 2022, were $1.47 billion, which represented an increase of $70.1 million or 5.03% from total assets of $1.40 billion at June 30, 2022. At September 30, 2021, total consolidated assets were $1.25 billion. Total net loans increased $80.1 million from $1.11 billion at June 30, 2022, to $1.19 billion at September 30, 2022. During the quarter, $2.2 million in SBA PPP loans were forgiven or paid down and $31.3 million in loans were sold. The Company sold $2.1 million in mortgage loans on the secondary market and $29.2 million of loans from the commercial and consumer loan portfolios. These loan sales resulted in gains of $254 thousand. Total securities decreased $24.9 million from $181.2 million at June 30, 2022, to $156.3 million at September 30, 2022.  At September 30, 2021, total investment securities were $202.5 million and net loans were $914.6 million. The growth in total loans and total assets was largely due to organic loan portfolio growth as the Company expands lending types and markets.

Total deposits increased to $1.54 billion as of September 30, 2022, when compared to June 30, 2022. At September 30, 2021, total deposits were $1.13 billion.  The growth in deposits was mainly organic growth as the Company continues to expand and grow into newer market areas.

The Company had $75.0 million in outstanding borrowings from the Federal Home Loan Bank of Atlanta at September 30, 2022.  There were no outstanding borrowings from the Federal Home Loan Bank as of June 30, 2022, or September 30, 2021. At June 30, 2022, the Company had $28.6 million outstanding in fed funds purchased. There were no outstanding fed funds purchased as of September 30, 2022, or September 30, 2021.

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 $98.5 million and $99.5 million at September 30, 2022, and June 30, 2022, respectively. Shareholders' equity was $109.8 million at September 30, 2021. The decrease in shareholder's equity at September 30, 2022, was driven by the other comprehensive loss from the unrealized loss on available for sale securities. The book value of the Company at September 30, 2022, was $28.58 per common share. Total common shares outstanding were 3,481,188 at September 30, 2022. On October 26, 2022, the board of directors declared a $0.30 per common share cash dividend for shareholders of record as of November 7, 2022, and payable on November 21, 2022.

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, 2021 and other filings with the Securities and Exchange Commission.