Eagle Financial Services Announces 2010 Financial Results and Quarterly Dividend

Eagle Financial Services, Inc, the holding company for Bank of Clarke County, whose divisions include Eagle Investment Group, announces annual and fourth quarter 2010 financial results. The Company’s common stock is listed for trading on the Over-the-Counter (OTC) Bulletin Board under the ticker symbol EFSI.

Fourth Quarter and Annual 2010 Highlights:

Q4 Annual
Net income (000’s) $462 $3,605
Diluted EPS $0.14 $1.11
Net Interest Margin 4.41% 4.38%
Total equity to assets 9.64%
Allowance for loan losses to total loans 1.74%
Total loan growth (ooo’s) $4.40
Retail deposit growth (000’s) $21.00

John R. Milleson, President and CEO, stated “In light of the difficult economic conditions of 2010, we are pleased to report earnings of $3. 6 million, a 4.8% increased from 2009. Our focus over the past two years has been on asset quality and properly reserving against potential losses. Strong core earnings had allowed us to provision $6.3 million in allowance for loan losses and still produce modest profits. For the year, the Company also experienced moderate balance sheet growth with core deposits increasing by $21.0 million and the loan portfolio by $4.4 million. Another favorable item to highlight for 2010 is the increase in the shareholder dividend by $0. 01 to pay $0.69 per common share for the year. We’re proud to note that in 20 J 0, Eagle Financial Services, Inc. was one of the few bank holding companies in Virginia able to increase its dividend.”

Net Interest Income and Net Interest Margin

Net interest income for the quarter ended December 31, 2010 was S5.7 million which represented an increase of 3.7% when compared to $5.5 million for the same period in 2009. Net interest income for the year ended December 31, 2010 was $22.3 million which represented an increase of 7.7% when compared to $20.7 million in 2009. This increase in net interest income resulted mostly from the decline in the Company’s funding costs.

Total loan interest income was $6.0 million for the quarter ended December 31, 2010, reflecting an increase of $40,000 from the quarter ended December 31, 2009. Total loan interest income was $23.5 million for the year ended December 31, 2010, reflecting an increase of $528,000 from the year ended December 31, 2009. Average loans for the quarter ended December 31, 2010 were $411.1 million compared to $400.0 million for the same period in 2009. Average loans for the year ended December 31, 2010 were $407.7 million compared to $391.4 minion for the same period in 2009. The tax equivalent yield on average loans for the quarter ended December 31, 2010 was 5.80%, down 12 basis points from the same time period in 2009. The tax equivalent yield on average loans for the year ended December 31, 2010 was 5.80%, down 11 basis points from the same time period in 2009. Interest income from the investment portfolio was $1.1 million for the quarter ended December 31, 2010 and $1.0 million for the same period in 2009, Interest income from the investment portfolio was S3.9 million for the year ended December 31, 2010 and $4.1 million for the same period in 2009.

Total interest expense for the three months ended December 31, 2010 was $1.3 million and $1.4 million for three months ended December 31, 2009. Total interest expense for the year ended December 31, 2010 was $5.5 million, representing a decrease of $1.3 million or 18.6% from the year ended December 31, 2009. The average cost of interest bearing liabilities decreased 18 basis points when comparing the quarter ended December 31, 2010 to the same time period in 2009. The average cost of interest bearing liabilities decreased 38 basis points when comparing the year ended December 31, 2010 to the same time period in 2009. The average balance of interest bearing liabilities increased $18.8 million from the quarter ended December 31, 2009 to the same period in 2010. The average balance of interest bearing liabilities increased $14.3 million from the year ended December 31, 2009 to the same period in 2010.

The net interest margin was 4.41% for the quarter ended December 31, 2010. When compared to the quarter ended December 31, 2009, the net interest margin decreased 11 basis points. The net interest margin was 4.38% for the year ended December 31, 2010. When compared to the year ended December 31, 2009, the net interest margin increased seven basis points. This increase was attributable to the decreased cost of interest bearing  liabilities.

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 34%.

Asset Quality and Provision for Loan Losses

Provisions for loan losses were $2.2 million for the three months ended December 31, 2010, compared to $1.5 million for the quarter ended December 31,2009. Provisions for loan losses were $6.3 million for the year ended December 31, 2010, compared to $4.4 million for the year ended December 31, 2009. The ratio of allowance for loan losses to total loans was 1.74% at December 31, 2010 and 1.48% at December 31, 2009. The ratio of  allowance for loan losses to total non-accrual loans was 84.89% at December 31, 20 I 0 and 117 .08% at December 31, 2009. 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 increased provision for the quarter and the year resulted from both the increase in specific allocations related to additional non-accrual loans and also to an adjustment to the Bank’s method of analysis of the allowance for loan losses with respect to the Bank’s loss history. The period of loss history consider for the analysis was shortened in order to better reflect the level of losses that the Bank is currently realizing.

Non-performing assets increased from $7.9 million or 1.48% of total assets at December 31, 2009 to $10.2 million or 1.83% of total assets at December 31, 2010. This increase mostly resulted from additions to non-accrual loans. During the fourth quarter of 2010, the Bank placed six loans totaling $2.2 million on non-accrual status. 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. The majority of the loans placed on nonaccrual status during the fourth quarter is secured by real estate and have allocated specific allowances totaling $675,000.

One real estate asset valued at $70,000 was foreclosed upon during the fourth quarter of 2010 while three sales of foreclosed property valued at $403,000 were realized during the same period. Loans greater than 90 days past due decreased from $13,000 at December 31, 2009 to $10,000 at December 31, 2010.

The Company realized $2.9 million in net charge-offs for the quarter ended December 31, 2010 versus $376,000 for the same period in 2009. The Company realized $5.2 million in net charge-offs for the year ended December 31, 2010 versus $2.9 for the same period in 2009. The majority of the net charge offs related to several partial charge offs, together totaling $3.2 million, on loans collateralized by residential development property and  commercial real estate. Early in 2009, the Company developed a troubled credit group to monitor past due loans, identify potential problem credits, and develop action plans to work through its troubled loans as promptly as possible. Asset quality remains a primary concern of the Company. Necessary resources continue to be devoted to the ongoing review of the loan portfolio and the workouts of problem assets to minimize any losses to the Company. Management will continue to monitor delinquencies, risk rating changes, charge-offs, market trends and other indicators of risk in the Company’s portfolio, particularly those tied to residential and commercial real estate, and adjust the allowance for loan losses accordingly.

Non-Interest Income and Non-Interest Expense

Noninterest income was $1.3 million for the quarters ended December 31, 2010 and 2009. Noninterest income was $5.5 million for the year ended December 31, 2010 and $4.6 million for the same period in 2009. Non-interest expense was $4.4 million for the quarters ended December 31, 2010 and 2009. Non-interest expense was $16.8 million and $16.5 million for the years ended December 31, 2010 and 2009, respectively. The Company has continued to diligently manage and monitored its other operating expenses.

Total Consolidated Assets

Total consolidated assets of the Company at December 31, 2010 were $558.3 million, which represented an increase of $23.0 million or 4.3% from total assets of $535.4 million at December 31, 2009. Total loans increased $4.4 million from $409.9 million at December 31, 2009 to $408.4 million at December 31, 2010. Considering the current interest rate and competitive market environment, the Company has been conscientious about maintaining both its underwriting standards and its net interest margin and thereby cautious about the  growth it has accepted in the loan portfolio.

Deposits and Other Borrowings

Total deposits, which include brokered deposits, increased $30.7 million to $428.8 million at December 31, 2010 from $398.1 million at December 31,2009. The Company held $19.9 million in brokered deposits at December 31, 2010.  At December 31, 2009 brokered deposits were $9.9 million. Securities sold under agreement to repurchase were $14.4 million at December 31, 2010 and $14.0 million at December 31, 2009. Borrowings with the Federal Home Loan Bank of Atlanta were $52.3 million at December 31, 2010 and $62.3 million at December 31, 2009.

Equity

Shareholders’ equity at December 31, 2010 was $53.8 million and $51.6 million at December 31, 2009. The book value of the Company at December 31, 2010 was $16.50 per common share. Total common shares outstanding were 3,262,249 at December 31, 2010. On January 19, 2011, the board of directors declared a $0.18 per common share cash dividend for shareholders of record as of January 31, 2011 and  payable on February 15, 2011.