Eagle Financial Services - Earnings Call - Q2 2025

Executive Summary

• EFSI delivered record Q2 net income of $5.27M and $0.98 EPS, driven by a 44 bps NIM expansion to 3.42% and 17.7% sequential growth in net interest income (NII) to $15.7M.
• Results modestly beat Wall Street: EPS $0.98 vs $0.815 consensus and revenue $19.95M vs $19.39M consensus; beats were supported by higher securities yields post-portfolio repositioning, lower FHLB interest expense, and stronger gain-on-sale income. Estimates marked with asterisk are from S&P Global.*
• Funding mix improved: deposits rose $152.7M in Q2 (majority from two customers’ business-sale proceeds), enabling $25M FHLB paydown; borrowings fell to $69.7M.
• Asset quality remains the key watch item: NPAs stayed elevated at 0.86% of assets, driven by two Q1 nonaccrual relationships (~$13.7M exposure); management added specific reserves and expects no further significant write-downs on three DC multifamily properties.

What Went Well and What Went Wrong

• What Went Well

  • Margin and NII: NIM expanded 44 bps q/q to 3.42% on higher securities and loan yields and lower borrowing costs; NII rose 17.7% q/q to $15.7M.
  • Efficiency: Efficiency ratio improved to 64.91% from 72.20% in Q1, reflecting stronger core revenue and cost discipline.
  • Management execution: CEO highlighted “record net income of $5.3 million and EPS of $0.98” and credited “post-capital raise execution” and “strategic repositioning of the securities portfolio” for NIM expansion and 1.09% ROA.

• What Went Wrong

  • Asset quality: NPAs increased to $17.5M (0.86% of assets) vs $3.3M a year ago, driven by two large credits moved to nonaccrual in Q1; specific reserves on nonaccruals rose to $1.5M.
  • Expense pressure: Noninterest expense rose 6.4% q/q to $13.4M, mainly salaries/benefits as FTEs increased to 245 from 233.
  • Deposit durability uncertainty: $151.7M of the $152.7M Q2 deposit increase came from two customers’ business sales; management is unsure how much will remain, which could affect liquidity/mix and NIM if they exit.

Transcript

Operator (participant)

Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Eagle Financial Services, Inc. Q2 earnings call. All lines have been placed on a listen-only mode. Thank you. I would now like to turn the conference over to Nick Smith, Executive Vice President, Investor Relations. Please go ahead.

Nick Smith (EVP of Investor Relations)

Thank you. Good morning. Thank you for joining us for our second quarter earnings conference call. Before we begin, please note that the information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those expressed by those statements. I'd like to direct all listeners to read the cautionary note regarding forward-looking statements contained in our most recent annual report on Form 10-K filed with the SEC and in our earnings release, as well as the risk factors identified in the annual report and in our more recent periodic reports filed with the SEC. The company does not undertake to update any of the forward-looking statements made today. A copy of our earnings release, which contains non-GAAP financial measures, is available on our website at investors.bankofclarke.bank.

The information regarding our use of non-GAAP financial measures may be found in the body of the earnings release, and a reconciliation to the most directly comparable GAAP financial measures is included at the end of the earnings release for your reference. This quarter, along with our earnings release, we published an updated investor presentation that has additional disclosures that we believe will be helpful. The presentation can be accessed on our investor relations website. Please also note that as we discuss our financials today, unless otherwise noted, all of the prior period comparisons will be made with the first quarter of 2025. Joining us from management this morning is Brandon Lorey, our Chief Executive Officer, Kate Chappell, our Chief Financial Officer, and Joe Zmitrovich, our Chief Banking Officer. At this time, I'll turn the call over to Brandon Lorey. Brandon?

Brandon C. Lorey (CEO)

Thank you, Nick, and thank you all for listening to the call today. Last night, we reported net income for the second quarter of $5.3 million. The second quarter of 2025 was our first full operating quarter post-capital raise and subsequent uplist to Nasdaq that was completed in February. And I could not be prouder of the team at Bank of Clarke and Eagle Financial Services. Our results speak to the continued execution on our strategic plan focused on improving our earning asset and funding composition, reducing non-interest expense to total assets, and continued growth of our fee income areas. I'd like to take a moment to speak about credit quality. Non-performing assets were $17.5 million, or 0.86% of total assets, at June 30, 2025.

13.7 million of the reported non-performing assets were comprised of two relationships, the first of which, with an outstanding balance of $2.2 million, was an owner-occupied property whose owner passed away unexpectedly, and business operations halted. The courts have since assigned an executor of the estate, and the bank is now filing a summary judgment, which will permit us to move forward with the foreclosure process in the third quarter. The second relationship was comprised of four residential multifamily income-producing properties in Washington, D.C., with a combined exposure of approximately $11.5 million. The largest of the four properties, with a loan balance of $5.9 million, was sold on July 8th for $5.7 million, with the bank agreeing to a short sale of $4.8 million, creating a deficiency balance of $1.1 million after consideration of past due taxes and other costs.

The owner has entered into an agreement with the bank to pay back the deficiency balance, and the bank has cross-collateralized that note with the existing three properties, as well as two additional properties as a condition of the short sale. The bank has allocated a specific reserve for the full amount of the deficiency balance included in the ACL at 6/30 of 2025. Concurrently, the owner agreed to pass along receivership of the three remaining properties to the bank, which we anticipate will alleviate prolonged court proceedings. These properties were written down to their liquidation value, assuming no repairs in the first quarter. The bank continues to demonstrate strong credit fundamentals with no underlying negative trends and minimal exposure to the Washington, D.C. market.

Looking ahead, we maintain a positive outlook on the credit environment and remain confident in the performance trajectory of Eagle Financial Services and the Bank of Clarke for the remainder of 2025. I will let Kate walk through the financial results with greater detail. Kate?

Kathleen J. Chappell (CFO)

Thanks, Brandon. Last evening, we reported net income of $5.3 million or $0.98 per diluted share. Net interest income for the period was $24.8 million, up $1.3 million linked quarter. Net interest margin for the quarter was 3.42%, an improvement of 44 basis points when compared to net interest margin of 2.98% linked quarter. In the second quarter, two customers of the bank sold their businesses, resulting in a $151.7 million increase in demand deposits at the quarter end. While we are working to retain these deposits long-term, we are unsure what portion of the deposits will remain with the bank. The sales proceeds resulted in an increase in average demand deposits and average interest-earning cash for the second quarter of $48.4 million, and an increase in interest income and net interest income of approximately $500,000.

We estimate that net interest margin for the quarter, adjusted for excess interest earned on cash related to the proceeds from the sales, was 3.4%. Securities interest income was $4.9 million, up $1 million linked quarter. Excluding the first quarter impact of securities portfolio restructuring, growth in non-interest income was led primarily by gain on sales of loans and continued performance in wealth management. We anticipate that the gain on sales of loans will be flat for the second half of the year when compared to the first six months. Non-interest expenses increased $810,000 to $13.4 million for the quarter ended June 30, 2025, led primarily by an increase in salaries and benefits spend. The increase was led by the increase in FTEs as we continue to execute on our strategic plan. I will now let Joe speak about our loan portfolio.

Nick Smith (EVP of Investor Relations)

Thank you, Kate. In the second quarter, the bank's loan portfolio decreased by $13 million, primarily driven by $7 million of runoff in the marine portfolio and $6 million in payoffs directly related to the sales of customers' businesses. Additionally, the construction category declined by approximately $22 million, including $15 million from a completed project converting to an owner-occupied CRA loan, with the remainder attributed to several completed projects that were sold. Despite these challenges, the commercial loan portfolio has remained flat year to date, reflecting disciplined credit management and stable demand. Total originations during the quarter were approximately $70 million, and the commercial pipeline expanded by $75 million since the first quarter. Despite increased deal flow, elevated competition and sector-specific headwinds continue to impact borrower demand, competitive positioning, and the bank's credit scrutiny.

Pricing pressure remains significant across most products, driven by aggressive terms from both traditional and non-bank lenders. In response, the bank has adopted a balanced approach, remaining responsive to evolving customer needs while maintaining disciplined risk management and profitability targets. Looking ahead, we anticipate modest commercial loan growth over the remainder of the year. While macroeconomic uncertainty and monetary policy developments may influence borrower behavior, we remain well-positioned to capitalize on targeted opportunities. Focused origination efforts, coupled with vigilant portfolio management, support our outlook for stable to moderate expansion in the commercial loan book. Brandon?

Brandon C. Lorey (CEO)

Thanks, Joe. I'd like to begin by first congratulating Bank of Clarke's Chief Credit Officer, James George, on his planned retirement after 11 years of distinguished service. We have proactively identified an internal candidate for succession who transitioned into a senior credit role earlier this year, and James will continue to serve on the executive team through mid-November to ensure a smooth and thoughtful transition. Our strategic focus remains on driving strong, profitable organic growth, with particular emphasis on expanding our commercial loan portfolio across our core markets. To support this momentum and better serve our growing customer base, we anticipate opening a full-service branch in Tysons Corner during the fourth quarter, positioning us in one of the region's most dynamic commercial corridors. At the same time, we continue to monitor the disruption across the Northern Virginia, Maryland, and D.C. markets, where bank consolidation activity remains elevated.

We are actively engaging in conversations with potential bank partners and acquisition targets that align with our community-focused model and long-term growth objectives. As we look ahead, we remain confident in our strategic direction and the strength of our team to execute with both discipline and purpose. On behalf of the leadership team, I want to extend my sincere thanks to our customers for their continued trust, to our employees for their unwavering dedication, and to our shareholders for their ongoing support. We appreciate your partnership and look forward to building on our momentum in the quarters ahead. Thank you all for joining the call today.

Operator (participant)

This concludes today's conference. You may now disconnect.