EAGLE FINANCIAL SERVICES INC

Previous wording

The purpose of this discussion is to focus on the important factors affecting the Company’s financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Part I, Item 1, Financial Statements, of this Form 10-Q and Part II, Item 8, Financial Statements and Supplementary Data, of the 2023 Form 10-K.

Current wording

The purpose of this discussion is to focus on important factors affecting the Company’s financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Part I, Item 1, Financial Statements, of this Form 10-Q and Part II, Item 8, Financial Statements and Supplementary Data, of the 2023 Form 10-K.

Previous wording

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 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. At March 31, 2024, the Company had total assets of $1.78 billion, net loans of $1.42 billion, total deposits of $1.47 billion, and shareholders’ equity of $107.8 million. The Company’s net income was $2.5 million for the three months ended March 31, 2024.

Current wording

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 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. At June 30, 2024, the Company had total assets of $1.79 billion, net loans of $1.43 billion, total deposits of $1.49 billion, and shareholders’ equity of $111.1 million. The Company’s net income was $5.7 million for the six months ended June 30, 2024.

Previous wording

The Bank is a locally owned and managed financial institution. This allows the Bank to be flexible and responsive in the products and services it offers. The Bank grows primarily by lending funds to local residents and businesses at a competitive price that reflects the inherent risk of lending. The Bank attempts 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.

Current wording

The Company is a locally owned and managed financial institution. This allows the Bank to be flexible and responsive in the products and services it offers. The Bank grows primarily by lending funds to local residents and businesses at a competitive price that reflects the inherent risk of lending. The Bank attempts 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.

Previous wording

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 can co-approve consumer, home equity lines of credit and home equity loan requests up to their stated authorities. Officers in Categories A through F have lesser authorities and with approval of an Executive officer may extend loans to borrowers with exposure of $5.0 million on a secured basis and $3.0 million unsecured. Officers in Categories A through F can also utilize the co-approval of the Regional and Small Business Credit Officers to extend loans with exposures up to $2.5 million and $1.5 million respectively on a secured basis, and up to $1 million and $750 thousand respectively on an unsecured basis. Loans exceeding $15.0 million and up to the Bank’s legal lending limit can be approved by the Risk Committee consisting of four directors (three directors constituting a quorum). The Director’s Loan Committee also reviews and approves changes to the Bank’s Loan Policy as presented by management.

Current wording

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 through F) based upon their level of experience and job function. Consumer Central Lenders can co-approve consumer, home equity lines of credit and home equity loan requests up to their stated authorities. Officers in Categories A through F have lesser authorities and with approval of an Executive officer may extend loans to borrowers with exposure of $5.0 million on a secured basis and $3.0 million unsecured. Officers in Categories A through F can also utilize the co-approval of the Regional and Small Business Credit Officers to extend loans with exposures up to $2.5 million and $1.5 million respectively on a secured basis, and up to $1 million and $750 thousand respectively on an unsecured basis. Loans exceeding $15.0 million and up to the Bank’s legal lending limit can be approved by the Risk Committee consisting of four directors (three directors constituting a quorum). The Director’s Loan Committee also reviews and approves changes to the Bank’s Loan Policy as presented by management.

Previous wording

Return on average assets ("ROA") measures how efficiently the Company uses its assets to produce net income. Some issues reflected within this efficiency include the Company’s asset mix, funding sources, pricing, fee generation, and cost control. The ROA of the Company, on an annualized basis, for the three months ended March 31, 2024 and 2023 was 0.57% and 0.63%, respectively.

Current wording

Return on average assets ("ROA") measures how efficiently the Company uses its assets to produce net income. Some issues reflected within this efficiency include the Company’s asset mix, funding sources, pricing, fee generation, and cost control. The ROA of the Company, on an annualized basis, for the six months ended June 30, 2024 and 2023 was 0.65% and 0.55%, respectively. For the three months ended June 30, 2024 and 2023 the Company's annualized ROA was 0.72% and 0.48%, respectively.

Previous wording

Return on average equity ("ROE") measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by shareholders. The ROE of the Company, on an annualized basis, for the three months ended March 31, 2024 and 2023 was 9.41% and 10.14%, respectively.

Current wording

Return on average equity ("ROE") measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by shareholders. The ROE of the Company, on an annualized basis, for the six months ended June 30, 2024 and 2023 was 10.71% and 9.01%, respectively. For the three months ended June 30, 2024 and 2023 the Company's annualized ROE was 11.89% and 7.93%, respectively.

Previous wording

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. Net interest income was $12.4 million and $12.6 million for the three months ended March 31, 2024 and 2023, respectively, which represents a decrease of $220 thousand, or 1.74%. Net interest income decreased due to the impact of the rising interest rate environment throughout 2023 as the increase in average rates paid outpaced the increase in average rates earned. The Company's net interest spread and net interest margin decreased 53 basis points and 36 basis points, respectively, for the three months ended March 31, 2024 compared to three months ended March 31, 2023.

Current wording

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. Net interest income was $24.6 million and $25.1 million for the six months ended June 30, 2024 and 2023, respectively, which represents a decrease of $496 thousand, or 1.98%. Net interest income was $12.2 million and $12.4 million for the three months ended June 30, 2024 and 2023, respectively, which represents a decrease of $276 thousand, or 2.22%. Net interest income decreased due to the impact of the rising interest rate environment throughout 2023 as the increase in average rates paid outpaced the increase in average rates earned as well as offering promotional rates on time deposits to retain and attract account balances.

Previous wording

Total interest and dividend income was $21.9 million and $18.6 million for the three months ended March 31, 2024 and 2023, respectively, which represents an increase of $3.3 million, or 18.07%. The increase in interest income was driven by an increase in the average balance of the loan portfolio along with the rise in interest rates over the past 15 months. Average interest-earning assets increased $147.3 million, or 9.36%, when comparing the three months ended March 31, 2023 to the three months ended March 31, 2024, while the average yield on earning-assets increased by 34 basis points over the same period.

Current wording

Total interest and dividend income was $43.7 million and $38.9 million for the six months ended June 30, 2024 and 2023, respectively, which represents an increase of $4.7 million, or 12.17%. Total interest and dividend income was $21.7 million and $20.4 million for the three months ended June 30, 2024 and 2023, respectively, which represents an increase of $1.3 million, or 6.80%. The increase in interest income was driven by an increase in the average balance of the loan portfolio along with the rise in interest rates. Average interest-earning assets increased $110.4 million, or 6.80%, when comparing the six months ended June 30, 2023 to the six months ended June 30, 2024, while the average yield on earning-assets increased by 23 basis points over the same period. For the three months ended June 30, 2024, the increase in interest income on loans was primarily due to the higher yields earned as the average balances were level with the prior year period.

Previous wording

Total interest expense was $9.5 million and $5.9 million for the three months ended March 31, 2024 and 2023, respectively, which represents an increase of $3.6 million, or 61.62%. The interest rate environment, coupled with the growth of higher-paying deposit accounts, have been the main drivers for the increase in interest expense. Interest expense on deposit accounts increased $4.0 million, or 114.63%, during the three months ended March 31, 2024, of which $3.0 million was attributable to time deposits. During the three months ended March 31, 2024 and 2023 the average balance of interest-bearing deposits was $1.05 billion and $867.0 million, respectively. The $4.0 million increase in deposit interest expense was slightly offset by a decrease in interest expense on Federal Home Loan Bank advances. The average balance of Federal Home Loan Bank advances was $145.9 million and $169.7 million with an average rate of 4.72% and 4.85% during the three months ended March 31, 2024 and 2023, respectively.

Current wording

Total interest expense was $19.1 million and $13.8 million for the six months ended June 30, 2024 and 2023, respectively, which represents an increase of $5.3 million, or 37.83%. Total interest expense was $9.6 million and $7.9 million for the three months ended June 30, 2024 and 2023, respectively, which represents an increase of $1.7 million, or 20.95%. The interest rate environment, coupled with the growth of higher-paying deposit accounts, have been the main drivers for the increase in interest expense during both the three and six months ended June 30, 2024 and 2023. Interest expense on deposit accounts increased $5.9 million, or 66.10%, during the six months ended June 30, 2024, of which $4.3 million was attributable to time deposits. During the six months ended June 30, 2024 and 2023 the average balance of interest-bearing deposits was $1.05 billion and $919.9 million, respectively. The $5.9 million increase in deposit interest expense was slightly offset by a decrease in interest expense on FHLB advances. The average balance of FHLB advances was $145.5 million and $170.9 million with an average rate of 4.73% and 4.79% during the six months ended June 30, 2024 and 2023, respectively. The increase in interest expense during the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was primarily due to time deposits, while FHLB borrowings experienced a decrease in expense reflecting a lower level of utilization during the three month period ending June 30, 2024.

Previous wording

The net interest margin was 2.91% and 3.27% for the three months ended March 31, 2024 and 2023, respectively. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The tax rate used to calculate the tax benefit was 21% for 2024 and 2023.

Current wording

The net interest margin was 2.86% and 3.12% for the six months ended June 30, 2024 and 2023, respectively, and 2.81% and 2.99% for the three months ended June 30, 2024 and 2023, respectively. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The tax rate used to calculate the tax benefit was 21% for 2024 and 2023.

Previous wording

Net interest margin has primarily declined due to deposit pricing pressure as interest rates increased throughout 2023 and competition for new deposits was experienced. If these factors persist, net interest margin may experience further downward pressure and may also result in the Company having to borrow additional wholesale funding to fund asset growth, which is more expensive than deposits.

Current wording

Net interest margin has primarily declined due to deposit pricing pressure as interest rates increased throughout 2023 and and as competition for new deposits continues to be experienced. If these factors persist, net interest margin may experience further downward pressure and may also result in the Company having to borrow additional wholesale funding to fund asset growth, which is more expensive than deposits.

Previous wording

The tax-equivalent yield on earning assets increased from 4.79% to 5.13% for the three months ended March 31, 2024 compared to the same three month period in 2023 . For those same time periods, the tax-equivalent yield on securities increased 29 basis points. The tax equivalent yield on loans increased 44 basis points from 5.10% for the three months ended March 31, 2023 to 5.54% for the same time period in 2024. The increase in the tax-equivalent yield on earning assets for the three months ended March 31, 2024 resulted mostly from the increase in the tax-equivalent yield on loans. The increase in the yield on loans as compared to the corresponding period in 2023 was primarily due to the rising interest rate environment over the past 15 months.

Current wording

The tax-equivalent yield on earning assets was 5.07% for the six months ended June 30, 2024 compared to 4.84% for the six months ended June 30, 2023, an increase of 23 basis points during the current year period. The tax-equivalent yield on securities increased 26 basis points for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The tax equivalent yield on loans increased 33 basis points from 5.17% for the six months ended June 30, 2023 to 5.50% for the same time period in 2024. For the three months ended June 30, 2024 and 2023, the tax-equivalent yield on earning assets was 5.01% and 4.88%, respectively, an increase of 13 basis points in the current year period. The tax-equivalent yields on securities and loans also increased during the three month period in 2024 compared to 2023 by 23 basis points and 21 basis points, respectively.

Previous wording

The average rate on interest-bearing liabilities increased from 2.23% to 3.10% for the three months ended March 31, 2024 compared to the same three month period in 2023. The average rate on interest-bearing deposits increased 121 basis points during the period, driven by the increase in time deposits. The interest rate environment, along with the growth of higher-cost deposit accounts, have been the main drivers for the increased in the average rate on interest bearing deposits.

Current wording

The average rate on interest-bearing liabilities increased 64 basis points to 3.12% from 2.48% for the six months ended June 30, 2024 compared to the 2023 period, and increased 43 basis points for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The average rate on interest-bearing deposits increased 60 basis points and 88 basis points during the three and six months ended June 30, 2024, respectively, compared to the same 2023 periods, driven by increases in time deposits. The interest rate environment, marketplace competition and growth of higher-cost deposit accounts have been the main drivers for the increases in the average rate and total expense paid on interest-bearing deposits.

Previous wording

The provision for credit losses is based upon management’s estimate of the amount required to maintain an adequate allowance for credit losses as discussed within the Critical Accounting Policies section above and in Note 1 of our interim financial information. The Company's calculation of the provision for credit losses consists of changes in the allowance for credit losses on loans and the reserve for unfunded loan commitments. The allowance for credit losses on loans represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. The amount of provision for credit losses on loans is affected by several factors including the growth rate of loans, net charge-offs (recoveries), and the estimated amount of expected losses within the loan portfolio. The provision for credit losses for the three months ended March 31, 2024 and 2023 was $475 thousand and $664 thousand, respectively. The provision for credit losses for the three months ended March 31, 2024 resulted mostly from net credit losses charged to the allowance as the composition of the portfolio was substantially the same as the prior measurement period.

Current wording

The provision for credit losses is based upon management’s estimate of the amount required to maintain an adequate allowance for credit losses. The Company's calculation of the provision for credit losses consists of changes in the allowance for credit losses on loans and the reserve for unfunded loan commitments. The allowance for credit losses on loans represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. The amount of provision for credit losses on loans is affected by several factors including the growth rate of loans, net charge-offs (recoveries), and the estimated amount of expected losses within the loan portfolio.

Previous wording

Total noninterest income was $3.5 million for each of the three months ended March 31, 2024 and 2023. Management reviews the activities which generate noninterest income on an ongoing basis. The following table provides the components of noninterest income for the three months ended March 31, 2024 and 2023, which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

Current wording

Total noninterest income was $4.3 million and $3.4 million for the three months ended June 30, 2024 and 2023, respectively and for the six months ended June 30, 2024 and 2023 was $7.8 million and $6.9 million, respectively. Management reviews the activities which generate noninterest income on an ongoing basis. The following table provides the components of noninterest income for the three and six months ended June 30, 2024 and 2023, which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

Previous wording

Wealth management fee income increased from 2023 to 2024. Wealth management fee income is comprised of income from fiduciary activities as well as commissions from the sale of non-deposit investment products. The amount of income from fiduciary activities is determined by the number of active accounts and total assets under management. Total assets under management have seen an increase during the three months ended March 31, 2024 when compared to the three months ended March 31, 2023 as a result of new business efforts. Fee increases and one-time fees for estates and other services have also contributed to the year over year increases in revenue.

Current wording

Wealth management fee income increased from 2023 to 2024. Wealth management fee income is comprised of income from fiduciary activities as well as commissions from the sale of non-deposit investment products. The amount of income from fiduciary activities is determined by the number of active accounts and total assets under management. Total assets under management have increased as a result of new business efforts. Fee increases and one-time fees for estates and other services have also contributed to the year over year increase in revenue.

Previous wording

Gain on sale of loans decreased during the three months ended March 31, 2024 when compared to the same period in 2023. During the first quarter of 2024, the Company sold $10.9 million in mortgage loans on the secondary market. There were no sales of SBA commercial loans or marine loans during the first quarter of 2024. During the first quarter of 202,3 the Company sold $2.1 million in mortgage loans on the secondary market, $2.1 million in SBA commercial loans and $23.6 million of marine loans. These loan sales resulted in gains of $161 thousand and $456 thousand during the three months ended March 31, 2024 and 2023, respectively.

Current wording

Gain on sale of loans increased during the three and six months ended June 30, 2024 when compared to the same period in 2023. During the first half of 2024, the Company sold $25.5 million in mortgage loans on the secondary market and $2.6 million SBA commercial loans. During the first half of 2023, the Company sold $5.2 million in mortgage loans on the secondary market, $2.9 million in SBA commercial loans and $38.6 million of marine loans. These loan sales resulted in gains of $653 thousand and $648 thousand during the six months ended June 30, 2024 and 2023, respectively. Gain on loan sales during the three months ended June 30, 2024 and 2023 was $492 thousand and $192 thousand, respectively, and resulted from mortgage loan sales of $14.6 million and $2.6 million in SBA commercial loans during the second quarter of 2024 compared to mortgage loan sales of $3.0 million, marine loan sales of $15.0 million, and SBA commercial loans sales of $797 thousand during the second quarter of 2023.

Previous wording

Bank owned life insurance ("BOLI") fee income increased during the three months ended March 31, 2024 when compared to the same period in 2023 as a result of an investment of $5 million into BOLI by the Company during the fourth quarter of 2023.

Current wording

Bank owned life insurance ("BOLI") fee income increased during the three and six months ended June 30, 2024 when compared to the same periods in 2023 as a result of an investment of $5 million into BOLI by the Company during the fourth quarter of 2023.

Previous wording

Other operating income decreased for the three months ended March 31, 2024 when compared to the same periods in 2023. This decrease can be mainly attributed to cash distributions received during the three months of 2023 from our investment in Bankers Insurance, that were not received during the three months of 2024.

Current wording

Other operating income increased for the three and six months ended June 30, 2024 when compared to the same periods in 2023. The increases during the current year periods can be mainly attributed to higher cash distributions received from investments in Small Business Investment Companies as well as the receipt of a BOLI settlement, which resulted in a gain of $254 thousand.

Previous wording

Total noninterest expenses decreased $9 thousand, or 0.1% for the three months ended March 31, 2024 compared to the same period in 2023. The following table presents the components of noninterest expense for the three months ended March 31, 2024 and 2023, which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

Current wording

Total noninterest expenses decreased $445 thousand, or 3.43% for the three months ended June 30, 2024 and $454 thousand, or 1.79%, for the six months ended June 30, 2024 compared to the same periods in 2023. The following table presents the components of noninterest expense for the three and six months ended June 30, 2024 and 2023, which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

Previous wording

On August 23, 2023, the Company completed a sale of specific assets from its marine lending segment. As part of the sale, the Company sold its interest in marine vessel floor plan loans totaling $52.8 million, its rights to service loans that had been sold to secondary market investors prior to the date of sale (valued at $595 thousand on balance sheet prior to sale), and other assets that were not individually significant. The Company received total consideration, net of selling expenses, of $53.5 million and recognized a gain of $435 thousand. The assets sold as well as their related revenues and contribution to earnings did not constitute a significant portion of the Company's assets or operating results for the year ended December 31, 2023. As part of the sale, the Company reduced its workforce associated with the marine lending division, as it expects to cease accepting new marine lending business. Subsequent to the sale of these assets, the Company retained ownership of approximately $260.5 million of marine vessel retail loans which continue to constitute a significant portion of the Company's assets, revenues, and earnings. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid. Subsequent to the sale, non-interest expenses related to marine lending have been significantly reduced or eliminated as discussed in variance explanation paragraphs below.

Current wording

On August 23, 2023, the Company completed a sale of specific assets from its marine lending segment. As part of the sale, the Company sold its interest in marine vessel floor plan loans totaling $52.8 million, its rights to service loans that had been sold to secondary market investors prior to the date of sale (valued at $595 thousand on balance sheet prior to sale), and other assets that were not individually significant. The Company received total consideration, net of selling expenses, of $53.5 million and recognized a gain of $435 thousand. The assets sold as well as their related revenues and contribution to earnings did not constitute a significant portion of the Company's assets or operating results for the year ended December 31, 2023. As part of the sale, the Company reduced its workforce associated with the marine lending division, and ceased accepting new marine lending business. Subsequent to the sale of these assets, the Company retained ownership of approximately $260.5 million of marine vessel retail loans which continue to constitute a significant portion of the Company's assets, revenues, and earnings. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid. Subsequent to the sale, non-interest expenses related to marine lending have been significantly reduced or eliminated as discussed in variance explanation paragraphs below.

Previous wording

Salaries and employee benefits decreased during the three months ended March 31, 2024 over 2023, largely reflecting decreases in salaries and incentive expenses while experiencing increases in employee benefits and commission expenses. The Company's number of full-time equivalent employees ("FTE's") has decreased from 253 at March 31, 2023 to 238 at March 31, 2024. In addition to normal staffing fluctuation, the decrease in the number of FTE's was due to the sale of the marine finance assets during the third quarter of 2023. The Company reduced its workforce associated with the marine lending division as it expects to cease accepting new marine lending business. Partially offsetting the expense decreases due to the lower number of FTE's, were annual pay increases, commissions paid on new business efforts, increasing insurance costs and enhanced employee benefit plans.

Current wording

Salaries and employee benefits decreased during the three and six months ended June 30, 2024 over 2023, largely reflecting decreases in salaries while experiencing increases in employee benefits and annual incentive plan expenses. The Company's number of full-time equivalent employees ("FTE's") has decreased from 275 at June 30, 2023 to 244 at June 30, 2024. In addition to normal staffing fluctuation, the decrease in the number of FTE's was due to the sale of the marine finance assets during the third quarter of 2023. The Company reduced its workforce associated with the marine lending division and ceased accepting new marine lending business. Partially offsetting the expense decreases due to the lower number of FTE's, were annual pay increases, commissions paid on new business efforts, increasing insurance costs and enhanced employee benefit plans.

Previous wording

Advertising and marketing expenses and computer software expenses decreased during the three months ended March 31, 2024 compared to the same period in 2023. This was primarily due to the discontinuation of new marine lending business, including the cost of business development and computer systems, as well as corporate rebranding expenses incurred during the 2023 period.

Current wording

Advertising and marketing expenses and computer software expenses decreased during the three and six months ended June 30, 2024 compared to the same periods in 2023. This was primarily due to the discontinuation of new marine lending business, including the cost of business development and computer systems, as well as corporate rebranding expenses incurred during the 2023 periods.

Previous wording

FDIC assessment and bank franchise tax expenses, which are based in part on asset size and capital levels, have increased during the three months ended March 31, 2024 over 2023. The increase in FDIC assessment was also due to a two basis point increase in the assessment rate charged by the FDIC, which was applied to all financial institutions.

Current wording

FDIC assessment and bank franchise tax expenses, which are based in part on asset size and capital levels, have increased during the three and six months ended June 30, 2024 over 2023. The increase in FDIC assessment for the six months ended June 30, 2024 was also due to a two basis point increase in the assessment rate charged by the FDIC, which was applied to all financial institutions beginning in June 2023.

Previous wording

Professional fees decreased between the three months ended March 31, 2024 and the same period in 2023. During the 2023 period there were legal expenses for the marine lending business, legal costs related to the ESOP termination, and strategic planning expenses that were not incurred during the 2024 period.

Current wording

Professional fees decreased between the three and six months ended June 30, 2024 and the same periods in 2023. During the 2023 period there were legal expenses for the marine lending business, legal costs related to the ESOP termination, and strategic planning expenses that were not incurred during the 2024 periods. These decreases were partially offset by a slight increase in external audit expenses.

Previous wording

Data processing fee expenses increased during three months ended March 31, 2024 over the same period in 2023, reflecting increased costs for core systems, including fees that are volume based,

Current wording

Data processing fee expenses increased during three and six months ended June 30, 2024 over the same period in 2023, reflecting increased costs for core systems, including fees that are volume based.

Previous wording

The efficiency ratio of the Company was 77.73% and 76.52% for the three months ended March 31, 2024 and 2023, respectively. The efficiency ratio is not a measurement under accounting principles generally accepted in the United States. It is calculated by dividing noninterest expense by the sum of tax equivalent net interest income and noninterest income excluding gains and losses on the investment portfolio and other gains/losses from OREO, repossessed vehicles, disposals of bank premises and equipment, etc. The tax rate utilized is 21%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency.

Current wording

The efficiency ratio of the Company was 77.00% and 81.91% for the three months ended June 30, 2024 and 2023, respectively. The efficiency ratio of the Company was 77.36% and 79.18% for the six months ended June 30, 2024 and 2023. The improvement in the efficiency ratio during 2024 primarily reflects an increase in noninterest income. The efficiency ratio is not a measurement under accounting principles generally accepted in the United States. It is calculated by dividing noninterest expense by the sum of tax equivalent net interest income and noninterest income excluding gains and losses on the investment portfolio and other gains/losses from OREO, repossessed vehicles, disposals of bank premises and equipment, etc. The tax rate utilized is 21%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency.

Previous wording

The calculation of the efficiency ratio for the three months ended March 31, 2024 and 2023 was as follows:

Current wording

The calculation of the efficiency ratio for the three and six months ended June 30, 2024 and 2023 was as follows:

Previous wording

Income tax expense was $495 thousand and $535 thousand during the three months ended March 31, 2024 and 2023, respectively. The effective tax rate was 16.27% and 17.15% for the three months ended March 31, 2024 and 2023, respectively. The effective tax rate is below the statutory rate of 21% due to tax-exempt income on investment securities and loans. The effective tax rate is also impacted by BOLI as well as income tax credits on qualified affordable housing project investments as discussed in Note 12 to the Consolidated Financial Statements as well as qualified rehabilitation credits.

Current wording

Income tax expense was $585 thousand and $383 thousand during the three months ended June 30, 2024 and 2023, respectively and $1.1 million and $918 thousand during the six months ended June 30, 2024 and 2023, respectively. The effective tax rate was 15.52% and 15.69% for the three months ended June 30, 2024 and 2023, respectively. The effective tax rate was 15.85% and 16.51% for the six months ended June 30, 2024 and 2023, respectively. The effective tax rate is below the statutory rate of 21% due to tax-exempt income on investment securities and loans, BOLI, income tax credits on qualified affordable housing project investments, and qualified rehabilitation credits. Qualified affordable housing project investments are discussed in Note 12 to the Consolidated Financial Statements.

Previous wording

Total securities available for sale were $131.9 million at March 31, 2024, compared to $137.4 million at December 31, 2023. This represents a decrease of $5.5 million, or 4.06%. The Company purchased no securities during the three months ended March 31, 2024. The Company had total maturities, calls, and principal repayments of $3.2 million during the three months ended March 31, 2024. Note 4 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio at March 31, 2024 and December 31, 2023. The Company had a net unrealized loss on available for sale securities of $25.1 million at March 31, 2024 as compared to a net unrealized loss of $22.8 million at December 31, 2023. Unrealized gains or losses on available for sale securities are reported within shareholders’ equity, net of the related deferred tax effect, as accumulated other comprehensive income (loss). The primary cause of the unrealized losses at March 31, 2024 and December 31, 2023 was changes in market interest rates and other market conditions and not credit concerns of the issuers. Since the losses can be primarily attributed to changes in market interest rates and conditions and not expected cash flows or an issuer’s financial condition and management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, the Company concluded a credit loss did not exist.

Current wording

Total securities available for sale were $129.5 million at June 30, 2024, compared to $137.4 million at December 31, 2023. This represents a decrease of $7.9 million, or 5.79%. The Company purchased no securities during the six months ended June 30, 2024. The Company had total maturities, calls, and principal repayments of $6.9 million during the six months ended June 30, 2024. Note 4 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio at June 30, 2024 and December 31, 2023. The Company had a net unrealized loss on available for sale securities of $23.8 million at June 30, 2024 as compared to a net unrealized loss of $22.8 million at December 31, 2023. Unrealized gains or losses on available for sale securities are reported within shareholders’ equity, net of the related deferred tax effect, as accumulated other comprehensive income (loss). The primary cause of the unrealized losses at June 30, 2024 and December 31, 2023 was changes in market interest rates and other market conditions and not credit concerns of the issuers. Since the losses can be primarily attributed to changes in market interest rates and conditions and not expected cash flows or an issuer’s financial condition and management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, the Company concluded a credit loss did not exist.

Previous wording

The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Gross loans were $1.44 billion and $1.46 billion at March 31, 2024 and December 31, 2023, respectively. This represents a decrease of $23.6 million, or 1.62%, during the three months ended March 31, 2024. The ratio of gross loans to deposits increased during the three months ended March 31, 2024 from 97.10% at December 31, 2023 to 97.63% at March 31, 2024.

Current wording

The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Gross loans were $1.45 billion and $1.46 billion at June 30, 2024 and December 31, 2023, respectively. This represents a decrease of $13.7 million, or 0.94%, during the six months ended June 30, 2024. The ratio of gross loans to deposits increased during the six months ended June 30, 2024 from 97.10% at December 31, 2023 to 97.34% at June 30, 2024.

Previous wording

The loan portfolio consists primarily of loans for owner-occupied single-family dwellings and loans secured by commercial real estate. Note 5 to the Consolidated Financial Statements provides the composition of the loan portfolio at March 31, 2024 and December 31, 2023. During the three months ended March 31, 2024, through the normal course of business, $10.8 million in loans were sold, consisting of mortgage loans. These loan sales resulted in net gains of $161 thousand. The decline in loans was largely due to paydowns and a large consumer loan payoff, while experiencing modest growth in other areas during the quarter.

Current wording

The loan portfolio consists primarily of loans for owner-occupied single-family dwellings and loans secured by commercial real estate. Note 5 to the Consolidated Financial Statements provides the composition of the loan portfolio at June 30, 2024 and December 31, 2023. During the six months ended June 30, 2024, through the normal course of business, $28.1 million in loans were sold, consisting primarily of mortgage loans. These loan sales resulted in net gains of $653 thousand. The balance of gross loans remained essentially level from year-end 2023, reflecting paydowns and a large consumer loan payoff, offset by modest growth during 2024.

Previous wording

Residential real estate loans, consisting of first liens, junior liens and home equity loans, were $354.2 million, or 24.61%, and $356.1 million, or 24.35%, of total loans at March 31, 2024 and December 31, 2023, respectively. The decline of $2.0 million, or 0.55%, reflects the Company's efforts to originate more salable loans than portfolio loans.

Current wording

Residential real estate loans, consisting of first liens, junior liens and home equity loans, were $359.7 million, or 24.82%, and $356.1 million, or 24.35%, of total loans at June 30, 2024 and December 31, 2023, respectively. The modest increase of $3.6 million, or 1.00%, largely reflects the Company's efforts to originate more salable loans than portfolio loans.

Previous wording

Commercial real estate loans (including multifamily loans) were $598.9 million, or 41.62%, and $600.3 million, or 41.04%, of total loans at March 31, 2024 and December 31, 2023, respectively, representing a decrease of $1.4 million, or 0.23%, during the three months ended March 31, 2024. Owner occupied commercial real estate loans experienced a slight increase during the three months ended March 31, 2024, while non-owner occupied and multifamily commercial real estate loans declined during the same period.

Current wording

Commercial real estate loans (including multifamily loans) were $610.6 million, or 42.14%, and $600.3 million, or 41.04%, of total loans at June 30, 2024 and December 31, 2023, respectively, representing an increase of $10.2 million, or 1.70%, during the six months ended June 30, 2024. Owner occupied commercial real estate loans experienced a $6.2 million increase during the six months ended June 30, 2024, and non-owner occupied and multifamily commercial real estate loans increased $4.0 million during the same period.

Previous wording

Marine loans were $247.0 million, or 17.17%, and $251.2 million, or 17.17%, of total loans at March 31, 2024 and December 31, 2023, respectively, representing a decrease of $4.1 million or 1.64%. The decline in marine loans reflects paydowns only and no new originations. On August 23, 2023, the Company completed a sale of specific assets from its marine lending segment. As part of the sale, the Company sold its interest in marine vessel floor plan loans totaling $52.8 million and reduced its workforce associated with the marine lending division as it expects to cease accepting new marine lending business. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid.

Current wording

Marine loans were $236.9 million, or 16.35%, and $251.2 million, or 17.17%, of total loans at June 30, 2024 and December 31, 2023, respectively, representing a decrease of $14.3 million, or 5.68%. The decline in marine loans reflects paydowns and payoffs only and no new originations. On August 23, 2023, the Company completed a sale of specific assets from its marine lending segment. As part of the sale, the Company sold its interest in marine vessel floor plan loans totaling $52.8 million and reduced its workforce associated with the marine lending division as it expects to cease accepting new marine lending business. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid.

Previous wording

The purpose of, and the methods for, measuring the allowance for credit losses on loans are discussed in the Critical Accounting Policies section above. Note 5 to the Consolidated Financial Statements shows the activity within the allowance for credit losses on loans during the three months ended March 31, 2024 and 2023 and the year ended December 31, 2023. Charged-off loans were $705 thousand and $75 thousand for the three months ended March 31, 2024 and 2023, respectively. Recoveries were $185 thousand and $21 thousand for the three months ended March 31, 2024 and 2023, respectively. This resulted in net charge-offs of $520 thousand and $54 for the three months ended March 31, 2024 and 2023, respectively. The annualized ratio of net charge-offs to average loans was 0.04% and 0.00% for the three months ended March 31, 2024 and 2023, respectively. The allowance for credit losses on loans as a percentage of loans was 1.00% at March 31, 2024 and 0.99% at December 31, 2023. The increase as compared to December 31, 2023 was mainly attributable to net loan charge-offs coupled with a slight decline in gross loan balances.

Current wording

The purpose of, and the methods for, measuring the allowance for credit losses on loans are discussed in the Critical Accounting Policies section in the 2023 Form 10-K. Note 5 to the Consolidated Financial Statements shows the activity within the allowance for credit losses on loans during the three and six months ended June 30, 2024 and 2023 and the year ended December 31, 2023. Charged-off loans were $877 thousand and $127 thousand for the six months ended June 30, 2024 and 2023, respectively. Recoveries were $609 thousand and $224 thousand for the six months ended June 30, 2024 and 2023, respectively. This resulted in net charge-offs (recoveries) of $268 thousand and $(97) thousand for the six months ended June 30, 2024 and 2023, respectively. The annualized ratio of net charge-offs (recoveries) to average loans was 0.07% and (0.03)% for the six months ended June 30, 2024 and 2023, respectively. The allowance for credit losses on loans as a percentage of loans was 1.04% at June 30, 2024 and 0.99% at December 31, 2023. The increase as compared to December 31, 2023 was mainly attributable to net loan charge-offs and a specific reserve on a collateral-dependent commercial business loan relationship.

Previous wording

Nonperforming Assets and Other Assets

Current wording

Credit Risk, Nonperforming Assets and Other Assets

Previous wording

Nonperforming assets decreased by $1.1 million during the three months ended March 31, 2024. Nonaccrual loans were $4.2 million and $5.6 million at March 31, 2024 and December 31, 2023. There was $415 thousand in OREO and repossessed at March 31, 2024 and $304 thousand at December 31, 2023. There were $411 thousand in loans past due 90 days or more and still accruing at March 31, 2024 and $181 thousand in loans past due 90 days or more and still accruing at December 31, 2023. The percentage of nonperforming assets to loans, OREO and repossessed assets was 0.35% at March 31, 2024 and 0.42% at December 31, 2023, respectively.

Current wording

Nonperforming assets decreased by $2.8 million during the six months ended June 30, 2024. Nonaccrual loans were $2.7 million and $5.6 million at June 30, 2024 and December 31, 2023, respectively. There was $403 thousand in OREO and repossessed at June 30, 2024 and $304 thousand at December 31, 2023. There were $167 thousand in loans past due 90 days or more and still accruing at June 30, 2024 and $181 thousand in loans past due 90 days or more and still accruing at December 31, 2023. The percentage of nonperforming assets to loans, OREO and repossessed assets was 0.23% at June 30, 2024 and 0.42% at December 31, 2023, respectively.

Previous wording

Total past due loans, as disclosed in Note 5 to the Consolidated Financial Statements, increased to $3.3 million at March 31, 2024 compared to $2.3 at December 31, 2023. The increase in past due loans was primarily due to three loans totaling $1.0 million, consisting of $605 thousand for a marine vessel, $295 thousand non-owner occupied commercial real estate property, and $185 thousand commercial business loan.

Current wording

Total past due loans, as disclosed in Note 5 to the Consolidated Financial Statements, increased to $3.5 million at June 30, 2024 compared to $2.3 million at December 31, 2023. The $1.2 million increase in past due loans was primarily due to changes in the marine and consumer loan portfolios. Total past due loans consist of $1.5 million in marine loans, loans secured by real estate totaling $1.4 million, and consumer and commercial business loans totaling $671 thousand.

Previous wording

During the three months ended March 31, 2024, nonaccrual loans decreased by $1.5 million and totaled $4.2 million at March 31, 2024 compared to $5.6 million at December 31, 2023. The decrease reflects a $1.3 million payoff of a commercial real estate loan and loan charge-offs totaling $118 thousand. There were no new nonaccrual loans during the three months ended March 31, 2024. Management evaluates the financial condition of borrowers and the value of any collateral on nonaccrual 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 and are reflected in the allowance for credit losses on loans. At March 31, 2024 and December 31, 2023, there was no allowance for credit losses required on nonaccrual loans due to sufficient collateral values.

Current wording

During the six months ended June 30, 2024, nonaccrual loans decreased by $2.9 million and totaled $2.7 million at June 30, 2024 compared to $5.6 million at December 31, 2023. The decrease reflects $3.7 million in payoffs of two commercial real estate loans and loan charge-offs totaling $133 thousand, partially offset by a commercial business loan relationship totaling $969 thousand added to nonaccrual loans during the six months ended June 30, 2024. Management evaluates the financial condition of borrowers and the value of any collateral on nonaccrual 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 and are reflected in the allowance for credit losses on loans. At June 30, 2024 there was a $346 thousand allowance for credit losses required on the commercial business loan relationship due to a potential deficiency in collateral value. There was no allowance for credit losses required on nonaccrual loans at December 31, 2023.