EAGLE FINANCIAL SERVICES INC (EFSI)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion is to focus on certain information relevant to the Company’s financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company’s Audited Consolidated Financial Statements and notes thereto included in the 2025 Form 10-K, and in conjunction with the Unaudited Consolidated Financial Statements and notes thereto presented in Part I, Item 1, Financial Statements, of this Form 10-Q. Operating results for the three and six months ended June 30, 2026 are not necessarily indicative of the results for the full-year ending December 31, 2026 or any future period.

GENERAL

Eagle Financial Services, Inc. is a bank holding company which owns 100% of the stock of Bank of Clarke (the “Bank” and, collectively with Eagle Financial Services, Inc., the “Company”, “we”, “us” or “our”). Accordingly, the results of operations for the Company are dependent upon the operations of the Bank.

The Bank conducts a commercial banking business which consists of attracting deposits from the general public and investing those funds in commercial, consumer and real estate loans and mortgage-backed securities, municipal and U.S. government agency securities. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the maximum extent permitted by law.

The Company strives to be an outstanding financial institution in its market by: building solid sustainable relationships with its customers, employees, communities, and shareholders; offering best-in-class products and services; and being the leader in the markets it serves.

At June 30, 2026, the Company had total assets of $1.85 billion, net loans of $1.48 billion, total deposits of $1.60 billion, and shareholders’ equity of $193.9 million.

The Company has continued to build on its strategic actions taken during 2025, which was marked by a successful capital raise and balance sheet repositioning of its investment securities portfolio. These actions strengthened its balance sheet and improved its forward earnings profile. Our vision for 2026 is about disciplined growth with smart investment and continued focus on people and technology, which we believe will lead to stronger core earnings and a balance sheet positioned for more consistent results.

CRITICAL ACCOUNTING ESTIMATES

The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which requires us to make estimates and assumptions. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported.

Our most significant policies are described in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to our audited financial statements for the year ended December 31, 2025, included in the Company's 2025 Annual Report on Form 10-K filed with the SEC. There have been no changes since that time.

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NON-GAAP FINANCIAL MEASURES

This report refers to certain financial measures that are computed under a basis other than GAAP ("non-GAAP"). The Company uses certain non-GAAP financial measures, including non-GAAP net income, non-GAAP noninterest income, non-GAAP earnings per share, non-GAAP return on average equity and average assets, tax-equivalent net interest income and efficiency ratio, to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. Non-GAAP measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.

The Company executed significant non-recurring transactions during the second quarter of 2026 and the first quarter of 2025 that significantly impacted the Company's operating results for the respective periods. In May 2026, the Company sold its membership interest in Bearing Insurance Group, LLC ("Bearing") to an unaffiliated third party and recognized a pre-tax gain of $3.5 million. During the first quarter of 2025, the Company executed balance sheet repositioning transactions and recorded a realized loss on the sale of the available for sale securities totaling $12.4 million. These transactions significantly impacted the Company's operating results and certain performance metrics and ratios for the three months ended June 30, 2026 and the six months ended June 30, 2026 and 2025.

The following table reconciles the GAAP reported measure to the adjusted non-GAAP measure to show the impact of significant non-recurring transactions for the periods presented:

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For additional information and calculations of tax-equivalent net interest income and efficiency ratio, see the sections entitled "Tax-Equivalent Net Interest Income" and "Efficiency Ratio" below.

FORWARD LOOKING STATEMENTS

This report contains statements that are "forward looking statements." The Company may also make forward looking statements in other documents that are filed with the Securities and Exchange Commission, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors, or employees. Forward looking statements include statements regarding our expectations, intentions, and objectives, or other expressions that predict or indicate future events and trends and which do not relate to historical matters. The words “believe,” “expect,” “may,” “will,” “should,” "could," “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. You should not rely on forward looking statements, as they involve known and unknown risks, uncertainties, and other factors, some of which are beyond our control. These risks, uncertainties, and other factors may cause our actual results, performance, or achievements to be materially different than the anticipated future results, performance, or achievements expressed or implied by the forward looking statements.

Some of the factors that might cause these differences include the following:

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difficult market conditions in our industry;

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the ability to successfully manage growth or implement growth strategies if the Bank is unable to identify attractive markets, locations or opportunities to expand in the future or if the Bank is unable to successfully integrate new branches, business lines or other growth opportunities into its existing operations;

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competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

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the successful management of interest rate risk;

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risks inherent in making loans such as repayment risks and fluctuating collateral values;

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the Company's ability to successfully resolve non-performing assets;

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changes in general economic and business conditions in the Bank’s market area;

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reliance on the Bank’s management team, including the ability to attract and retain key personnel;

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changes in interest rates and interest rate policies;

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maintaining capital levels adequate to support growth;

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maintaining cost controls and asset qualities as new branches are opened or acquired;

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demand, development and acceptance of new products and services;

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deposit flows;

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the Bank's ability to manage liquidity;

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the cost and availability of secondary funding sources;

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effects of soundness of other financial institutions;

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problems with technology utilized by the Bank;

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changing trends in customer profiles and behavior;

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geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;

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the economic impact of duties, tariffs or other barriers or restrictions on trade, any retaliatory counter measures, or the volatility and uncertainty arising there from;

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political developments, including government shutdowns, and other significant disruptions and changes in the funding, size, scope, and efficiencies of the federal government, its agencies and services;

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the Company's potential exposure to fraud, negligence, computer theft, and cyber-crime;

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potential impact on us of existing and future legislation and regulations;

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changes in accounting policies and banking and other law and regulations; and

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other factors described in Item 1A., "Risk Factors," in the Company's 2025 Form 10-K.

You should carefully review all of these factors and you should be aware that there may be other factors that cause these differences. These forward looking statements were based on information, plans, and estimates

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The purpose of this discussion is to focus on certain information relevant to the Company’s financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company’s Audited Consolidated Financial Statements and notes thereto presented in Item 8, Financial Statements and Supplementary Data, of this Form 10-K. Operating results for the year ended December 31, 2025 are not necessarily indicative of the results for any future period.

GENERAL

Eagle Financial Services, Inc. is a bank holding company which owns 100% of the stock of Bank of Clarke (the “Bank” and, collectively with Eagle Financial Services, Inc., the “Company”, “we”, “us” or “our”). Accordingly, the results of operations for the Company are dependent upon the operations of the Bank.

The Bank conducts a commercial banking business which consists of attracting deposits from the general public and investing those funds in commercial, consumer and real estate loans and mortgage-backed securities, municipal and U.S. government agency securities. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the maximum extent permitted by law.

The Company strives to be an outstanding financial institution in its market by building solid sustainable relationships with its customers, employees, communities, and shareholders.

At December 31, 2025, the Company had total assets of $1.89 billion, net loans of $1.46 billion, total deposits of $1.61 billion, and shareholders’ equity of $188.8 million.

During 2025, the Company strengthened its balance sheet and improved its forward earnings profile, as marked by a successful capital raise, a strategic balance sheet repositioning of its investment securities portfolio, and subsequent uplist of its stock to NASDAQ. The Company sold available for sale securities with an amortized cost balance of $99.2 million, resulting in a net realized pre-tax loss of $12.4 million, and reinvested $66.0 million into purchases of available for sale securities. Additionally, the Company completed an underwritten public offering of 1,796,875 shares of its common stock at a public offering price of $32.00 per share. Net proceeds from the offering were $53.5 million. Also during 2025, the Company opened a full-service branch in McLean, VA offering a full suite of retail and business banking, lending, and wealth management solutions offered at the Bank's other locations.

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The following table presents selected financial data, which was derived from the Company’s audited financial statements for the periods indicated.

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MANAGEMENT’S STRATEGY

The Company strives to be an outstanding financial institution in its market by building solid sustainable relationships with: (1) its customers, by providing highly personalized customer service, a network of conveniently placed branches and ATMs, a competitive variety of products/services and courteous, professional employees, (2) its employees, by providing generous benefits, a positive work environment, advancement opportunities and incentives to exceed expectations, (3) its communities, by participating in local concerns, providing monetary support, supporting employee volunteerism and providing employment opportunities, and (4) its shareholders, by providing sound profits and returns, sustainable growth, regular dividends and committing to our local, independent status.

OPERATING STRATEGY

The Bank is a locally managed, commercial focused banking institution operating in several of the country's most attractive markets. The Company expanded its ownership to institutional investors through a public offering of its common stock in February 2025, increasing the number of shares outstanding by 50% and added approximately $53.5 million in capital. This operating strategy allows the Bank to be flexible and responsive in the products and services it offers and to further grow by lending funds to local residents and businesses at a competitive price that reflects the inherent risk of lending. The Bank strives to fund these loans through deposits gathered from local residents and businesses. The Bank prices its deposits by comparing alternative sources of funds and selecting the lowest cost available. When deposits are not adequate to fund asset growth, the Bank relies on borrowings, both short and long term. The Bank’s primary source of borrowed funds is the Federal Home Loan Bank of Atlanta which offers numerous terms and rate structures to the Bank.

As interest rates change, the Bank attempts to maintain its net interest margin. This is accomplished by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through the Bank of Clarke Wealth Management Division, which is the Bank’s investment management division that offers both trust services and investment sales, mortgage originations, loan sales to the secondary market, and deposit operations. The Bank also incurs noninterest expenses associated with compensating employees, maintaining and acquiring fixed assets, and purchasing goods and services necessary to support its daily operations.

The Bank maintains a full-service marketing department dedicated to driving new business and increasing awareness of the Bank's banking, lending, and wealth management offerings across its footprint. Marketing employs an integrated, multi-channel strategy that includes television and radio advertising, digital media (such as display ads, SEO/SEM, podcasts, and streaming platforms), print and electronic publications, billboards, email campaigns, branch signage, and social media. The Marketing department is responsible for all content creation, campaign strategy and execution, marketing-related internal and external communications, marketing vendor management, and brand stewardship.

LENDING POLICIES

Administration and supervision over the lending process is provided by the Bank’s Credit Administration Department. The principal risk associated with the Bank’s loan portfolio is the creditworthiness of its borrowers. In an effort to manage this risk, the Bank’s policy gives loan amount approval limits to individual loan officers based on their position and level of experience. Credit risk is increased or decreased, depending on the type of loan and prevailing economic conditions. In consideration of the different types of loans in the portfolio, the risk associated with real estate mortgage loans, commercial loans and consumer loans varies based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay debt.

The Company has written policies and procedures to help manage credit risk. The Company utilizes a loan review process that includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and regular portfolio reviews to establish loss exposure and to ascertain compliance with the Company’s policies.

The Bank uses a tiered approach to approve credit requests consisting of individual lending authorities, joint approval of Co-Approval officers (Executive, Regional Credit Officer, Small Business Credit Officer), and a director loan committee. Lending limits for individuals are set by the Board of Directors and are determined by loan purpose, collateral type, and internal risk rating of the borrower. The highest individual authority (Executive) is assigned to the Bank’s President/ Chief Executive Officer, Chief Banking Officer and Chief Credit Officer (approval authority only). Two Executive officers may combine their authority to approve loan requests to borrowers with credit exposure up to $10.0 million on a secured basis and $6.0 million unsecured. Three Executive officers may combine to approve loan requests to borrowers with credit exposure up to $15.0 million on a secured basis and $9.0 million unsecured. Consumer Central Lenders are individual lenders who have been assigned to an Approval Category (A th

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