Eagle Financial Services Inc Q1 FY2026 Earnings Call

Thank you for standing by. At this time, I would like to welcome everyone to the Eagle Financial Services First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. I would now like to turn the call over to Nicholas Smith, Deputy CFO. You may begin.

Good morning, and thank you for joining us for our First Quarter Earnings Conference Call. Before we begin, please note that the information provided during this call contains forward-looking statements. Actual results may differ materially from those statements. Please refer to our most recent Form 10 , our Q1 earnings release, and other filings with the SEC for a detailed discussion of risk factors. We do not assume any obligation to update any forward-looking statements as a result of new information except as required by law. Also during the call, we will discuss certain non-GAAP financial measures in reference to the company's performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation, which can be found on our Investor Relations website. With us today are our CEO, Brandon Morey, our CFO, Kate Chappell, and our Chief Banking Officer, Joseph Trubish. I will now turn the call over to Brandon.

Thank you, Nick, and good morning, everyone. Our first quarter results reflect continued progress executing against our long-term strategy, even as we navigate a more normalized growth environment following the liquidity events that we discussed throughout 2025. For the quarter, we reported net income of $3.7 million, or $0.69 per polluted share. While earnings declined modestly from the fourth quarter, the underlying performance of the franchise remained solid. Margin expanded, the efficiency ratio improved meaningfully, and the credit quality remained well-controlled. Net interest margin increased to 3.63%, driven primarily by continued improvement in funding costs and the benefits of last year's balance sheet repositioning. Deposit pricing discipline and the runoff of our higher-cost funding continue to positively impact our spread. We also made good progress on the expense side. Non-interest expense declined sequentially, largely reflecting lower incentive compensation of rules compared to the fourth quarter. As a result, our efficiency ratio improved to 68 percent, down from 70 percent last quarter. Credit quality remained stable. Non-performing assets increased slightly to 0.80 percent of total assets, given by the addition of two smaller relationships to non-acrual status. these are well secured and based on updated valuations we believe the collateral is sufficient we also recorded net recoveries in the quarter which is a positive signal as we continue to actively manage criticized assets overall our balance sheet remains strong and conservative liquidity is ample capital levels exceed well-capitalized regulatory thresholds and we reduce wholesale borrowings meaningfully during a quarter these actions position us well as we continue to support our clients and communities Kate will now walk through the financial results in some greater detail.

Thanks, Brandon. For the first quarter, we reported net income of $3.7 million compared to $4.3 million in the fourth quarter. Return on average assets was 0.81% and return on average equity was 7.98%. Net interest income totaled $15.9 million, down modestly from last quarter, primarily due to lower average earning assets. Despite this, net interest margin expanded to 3.63%. up two basis points from the fourth quarter. The improvement was driven largely by lower interest expense, particularly on deposits, as pricing moderated and the funding mix continued to improve. On the fee side, non-interest income totaled $4.9 million. Wealth management fees declined sequentially following several elevated estate-related transactions in the fourth quarter, which we had previously highlighted as non-recurring. This decline was partially offset by higher gain on sales of loans driven by increased SBA production and solid mortgage activity. Non-interest expense declined to $14.2 million, down $1.3 million from the fourth quarter. The decrease was driven primarily by lower salaries and benefit expenses, reflecting higher incentive accruals in the fourth quarter, tied to plan metrics achieved at year end. Other operating expenses were generally well-controlled. As Brandon mentioned, the efficiency ratio improved to 68% for the quarter, reflecting both lower expenses and margin expansions. Turning to credit, we recorded $2 million in provision for credit losses during the This increase relative to the fourth quarter was driven primarily by higher-specific reserves related to two commercial and industrial relationships, as well as changes in certain historic loss factors. Importantly, net charge-offs were negative for the quarter due to net recovery. We are actively managing one large problem relationship that is well-identified and closely monitored. As we move into the second quarter, we expect to receive additional information that could result in either a resolution of exposure or an incremental reserve bill. Outside of this specific relationship, we are not seeing broader underlying credit issues within the portfolio. up. Delinquencies, non-performing assets, and criticized loan trends remain well controlled and continue to reflect the strength of our underwriting and portfolio dispersification. The elevator provision recorded this quarter meaningfully strengthens our reserve position, bringing our coverage more in line with regional peers, and provides a strong safety net as we work through this particular credit. We believe this conservative approach is appropriate and and decisions the balance sheet well moving forward. On the balance sheet, total assets declined to $1.84 billion, primarily due to lower cash balances and the continued runoff of higher cost borrowing. Loans declined modestly, reflecting marine portfolio and reservation and SBA loan sales, partially offset by the growth in an owner-occupied commercial real estate. Total deposits declined slightly to $1.6 billion. The core deposits increased during the quarter, driven by growth and non-interest-bearing demand deposits. During the quarter, we fully paid down our remaining FHLB borrowing. This action materially reduced our reliance on wholesale funding and improved overall balance sheet flexibility. I'll now turn the call over to Joe to discuss the loan portfolio.

Thank you, Kate. Loan balances declined modestly during the quarter, driven primarily by the continued amortization of the marine portfolio and the sale of approximately $7.5 million of SBA loans. We also had three commercial loan payoffs totaling $17.9 million, which included a maturing commercial bridge note and a municipal loan taken out by pre-planned bond financing. That said, we continue to see steady activity across our commercial lending business lines, with $81 million in loan closings in the first quarter. Settlements included a strong increase in owner-occupied commercial real estate balances, reflecting our ongoing focus on relationship-based lending in our poor markets. Looking ahead, the pipeline remains solid at $275 million, which is over $100 million more year over year. In addition, our credit discipline remains unchanged and we continue to emphasize strong collateral conservative structures and proactive borrower engagement brandon back to you thank you joe we're very pleased with our first quarter

results margin expansion improved efficiency stable credit and a strong capital liquidity position reflect the progress we've made over the past year while the operating environment remains competitive our relationship-based model discipline balance sheet management investment, and strong teams position us well as we move through 2026. We continue to engage in conversations with potential bank partners that align with our community-focused model and long-term strategic objectives. Our approach to mergers and acquisitions remains disciplined, and we will only pursue opportunities that clearly enhance the strength and value of our franchise. We appreciate the continued support of our shareholders and look forward to updating you on our progress next quarter. Thank you so much for joining us today.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.