EAGLE FINANCIAL SERVICES INC

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 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.

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 September 30, 2024, the Company had total assets of $1.88 billion, net loans of $1.47 billion, total deposits of $1.55 billion, and shareholders’ equity of $117.8 million. The Company’s net income was $9.2 million for the nine months ended September 30, 2024.

Previous wording

As interest rates change, the Bank attempts to maintain its net interest margin by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through its trust department, sales of investments, secondary market mortgage activities, and deposit operations. The Bank also incurs noninterest expenses such as compensating employees, maintaining and acquiring fixed assets, and purchasing goods and services necessary to support its daily operations.

Current wording

As interest rates change, the Bank attempts to maintain its net interest margin by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through its trust department, secondary market mortgage activities, BOLI, and deposit operations. The Bank also incurs noninterest expenses such as compensating employees, maintaining and acquiring fixed assets, and purchasing goods and services necessary to support its daily operations.

Previous wording

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 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.

Current wording

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 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.

Previous wording

Net income for the six months ended June 30, 2024 was $5.7 million, an increase of 23.48%, or $1.1, when compared to the same period in 2023. For the three months ended June 30, 2024, net income was $3.2 million, an increase of $1.1 million, or 54.76% compared to the three months ended June 30, 2023. Earnings per share, basic and diluted, were $1.61 and $1.32 for the six months ended June 30, 2024 and 2023, respectively. Earnings per share, basic and diluted, were $0.89 and $0.58 for the three months ended June 30, 2024 and 2023, respectively.

Current wording

Net income for the nine months ended September 30, 2024 was $9.2 million, an increase of 31.53%, or $2.2 million, when compared to the same period in 2023. For the three months ended September 30, 2024, net income was $3.4 million, an increase of $1.1 million, or 47.65%, compared to the three months ended September 30, 2023. Earnings per share, basic and diluted, were $2.58 and $1.98 for the nine months ended September 30, 2024 and 2023, respectively. Earnings per share, basic and diluted, were $0.97 and $0.66 for the three months ended September 30, 2024 and 2023, respectively.

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 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.

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 nine months ended September 30, 2024 and 2023 was 0.69% and 0.54%, respectively. For the three months ended September 30, 2024 and 2023 the Company's annualized ROA was 0.75% and 0.51%, 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 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.

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 nine months ended September 30, 2024 and 2023 was 11.16% and 8.96%, respectively. For the three months ended September 30, 2024 and 2023 the Company's annualized ROE was 11.99% and 8.87%, 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 $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.

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 $37.7 million and $38.0 million for the nine months ended September 30, 2024 and 2023, respectively, which represents a decrease of $249 thousand, or 0.66%. Net interest income was $13.2 million and $12.9 million for the three months ended September 30, 2024 and 2023, respectively, which represents an increase of $250 thousand, or 1.94%. The increase in the average rate paid on interest-bearing liabilities has continued to outpace the increase in the average rate earned on interest-earning assets during the three and nine months ended September 30, 2024, compared to the same periods in 2023. For the nine months ended September 30, 2024, net interest income decreased from the 2023 period primarily due to a 70 basis point increase in the average rate paid on interest-bearing deposits reflecting efforts to retain and attract account balances by offering promotional rates. For the three months ended September 30, 2024, the average rate paid on interest-bearing deposits increased 37 basis points compared to the average rate paid for the three months ended September 30, 2023, and the average balance of interest-bearing deposits grew by $61.8 million.

Previous wording

The Company's net interest spread and net interest margin decreased 42 basis points and 26 basis points, respectively, for the six months ended June 30, 2024 compared to six months ended June 30, 2023. For the three months ended June 30, 2024, the Company's net interest spread and net interest margin decreased 30 basis points and 18 basis points, respectively, compared to the same period in 2023.

Current wording

The Company's net interest spread and net interest margin decreased 31 basis points and 19 basis points, respectively, for the nine months ended September 30, 2024 compared to nine months ended September 30, 2023. For the three months ended September 30, 2024, the Company's net interest spread and net interest margin decreased 13 basis points and 5 basis points, respectively, compared to the same period in 2023.

Previous 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.

Current wording

Total interest and dividend income was $67.3 million and $61.1 million for the nine months ended September 30, 2024 and 2023, respectively, which represents an increase of $6.2 million, or 10.21%. Total interest and dividend income was $23.7 million and $22.2 million for the three months ended September 30, 2024 and 2023, respectively, which represents an increase of $1.5 million, or 6.78%. 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 $96.7 million, or 5.80%, when comparing the nine months ended September 30, 2023 to the nine months ended September 30, 2024, while the average yield on earning-assets increased by 20 basis points over the same period. For the three months ended September 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 $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.

Current wording

Total interest expense was $29.6 million and $23.1 million for the nine months ended September 30, 2024 and 2023, respectively, which represents an increase of $6.5 million, or 28.07%. Total interest expense was $10.5 million and $9.3 million for the three months ended September 30, 2024 and 2023, respectively, which represents an increase of $1.2 million, or 13.52%. 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 nine months ended September 30, 2024. Interest expense on deposit accounts increased $7.4 million, or 46.24%, during the nine months ended September 30, 2024, of which $5.3 million was attributable to time deposits. During the nine months ended September 30, 2024 and 2023 the average balance of interest-bearing deposits was $1.07 billion and $961.1 million, respectively. The $7.4 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 $146.6 million and $168.2 million with an average rate of 4.72% and 4.77% during the nine months ended September 30, 2024 and 2023, respectively. The increase in interest expense during the three months ended September 30, 2024 compared to the three months ended September 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 September 30, 2024.

Previous 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.

Current wording

The net interest margin was 2.86% and 3.05% for the nine months ended September 30, 2024 and 2023, respectively, and 2.88% and 2.93% for the three months ended September 30, 2024 and 2023, respectively. The net interest margin is calculated on a tax-equivalent basis. 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 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.

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. 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 following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the six months ended June 30, 2024 and 2023 (dollars in thousands):

Current wording

The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the nine months ended September 30, 2024 and 2023 (dollars in thousands):

Previous 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.

Current wording

The tax-equivalent yield on earning assets was 5.10% for the nine months ended September 30, 2024 compared to 4.90% for the nine months ended September 30, 2023, an increase of 20 basis points during the current year period. The tax-equivalent yield on securities increased 19 basis points for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The tax equivalent yield on loans increased 30 basis points from 5.27% for the nine months ended September 30, 2023 to 5.57% for the same time period in 2024. For the three months ended September 30, 2024 and 2023, the tax-equivalent yield on earning assets was 5.17% and 5.02%, respectively, an increase of 15 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 5 basis points and 27 basis points, respectively.

Previous wording

The increase in the tax-equivalent yield on earning assets for the three and six months ended June 30, 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 periods in 2023 was primarily due to the sustained elevated interest rate environment,

Current wording

The increase in the tax-equivalent yield on earning assets for the three and nine months ended September 30, 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 periods in 2023 was primarily due to the sustained elevated interest rate environment,

Previous 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.

Current wording

The average rate on interest-bearing liabilities increased 51 basis points to 3.17% from 2.66% for the nine months ended September 30, 2024 compared to the 2023 period, and increased 29 basis points for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The average rate on interest-bearing deposits increased 37 basis points and 70 basis points during the three and nine months ended September 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 for the six months ended June 30, 2024 and 2023 was $656 thousand and $1.1 million, respectively. The provision for credit losses for the three months ended June 30, 2024 and 2023 was $181 thousand and $403 thousand, respectively. The provision for credit losses for the six months ended June 30, 2024 resulted largely from a specific reserve on an individually evaluated relationship, net credit losses, and a reduction in the reserve for unfunded commitments. The composition and balance of the portfolio was substantially the same as the prior measurement period.

Current wording

The provision for credit losses for the nine months ended September 30, 2024 and 2023 was $2.2 million and $1.3 million, respectively. The provision for credit losses for the three months ended September 30, 2024 and 2023 was $1.5 million and $216 thousand, respectively. The provision for credit losses for the nine months ended September 30, 2024 resulted largely from a $2.0 million provision against the marine portfolio due to charge-offs of $1.5 million, a specific reserve on an individually evaluated relationship of $268 thousand, and growth in the portfolio balance as compared to the prior measurement period. Marine loan charge-offs during the nine months ended September 30, 2024 reflect a clean-up within the portfolio and not a systemic performance issue.

Previous 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.

Current wording

Total noninterest income was $5.3 million and $4.2 million for the three months ended September 30, 2024 and 2023, respectively and for the nine months ended September 30, 2024 and 2023 was $13.0 million and $11.1 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 nine months ended September 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 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.

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. Higher interest rates and more favorable conditions in the stock market have resulted in an expansion of total assets under management. One-time fees for estates and other services have also contributed to the year over year increase in revenue. Investment sales have also increased as favorable market activity has made the use of brokerage and advisory investments more attractive.

Previous 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.

Current wording

Gain on sale of loans increased during the three and nine months ended September 30, 2024 when compared to the same period in 2023. The Company sold $40.4 million in mortgage loans on the secondary market and $6.9 million SBA commercial loans during the nine months ended September 30, 2024. This compares to loan sales consisting of $21.1 million in mortgage loans, $3.1 million in SBA commercial loans, and $49.1 million of marine loans during the nine months ended September 30, 2023. Loan sales resulted in gains of $1.3 million and $913 thousand during the nine months ended September 30, 2024 and 2023, respectively. Gain on loan sales recorded during the three months ended September 30, 2024 and 2023 was $627 thousand and $265 thousand, respectively, and resulted from mortgage loan sales of $14.9 million and $4.2 million in SBA commercial loans during the third quarter of 2024 compared to mortgage loan sales of $15.9 million, marine loan sales of $10.5 million, and SBA commercial loans sales of $275 thousand during the third quarter of 2023.

Previous 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.

Current wording

Bank owned life insurance ("BOLI") fee income increased during the three and nine months ended September 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. Additionally, during the three and nine months ended September 30, 2024, the Company received BOLI settlements resulting in gains of $653 thousand and $907 thousand, respectively.

Previous 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.

Current wording

Income from holdings in small business investment companies increased $345 thousand and $532 thousand for the three and nine months ended September 30, 2024, respectively when compared to the same periods in 2023. The increases during the current year periods can be mainly attributed to higher cash distributions received, based on the results of their performance.

Previous 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.

Current wording

Total noninterest expenses decreased $1.2 million, or 8.80% for the three months ended September 30, 2024 and $1.7 million, or 4.30%, for the nine months ended September 30, 2024 compared to the same periods in 2023. The following table presents the components of noninterest expense for the three and nine months ended September 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

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.

Current wording

Salaries and employee benefits decreased during the three and nine months ended September 30, 2024 over 2023, largely reflecting decreases in salaries and stock based compensation expenses 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 245 at September 30, 2023 to 233 at September 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. Stock based compensation expense decreased due to a higher level of share forfeitures recognized during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. Mostly offsetting these decreases were annual pay increases, an increase in the annual incentive accrual, increasing insurance costs and enhanced employee benefit plans.

Previous wording

Equipment expenses have increased during the three and six months ended June 30, 2024 compared to the same periods in 2023. A new loan origination system implemented during the fourth quarter of 2023 was a significant driver of the year-over-year increase.

Current wording

Equipment expenses have increased during the three and nine months ended September 30, 2024 compared to the same periods in 2023. A new loan origination system implemented during the fourth quarter of 2023 was a significant driver of the year-over-year increase.

Previous 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.

Current wording

Advertising and marketing expenses and computer software expenses decreased during the nine months ended September 30, 2024 compared to the same period in 2023. This decrease during nine months ended September 30, 2024 was primarily due to the discontinuation of new marine lending business subsequent to August 2023, including costs for business development, 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 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.

Current wording

FDIC assessment expense, which is based in part on asset size and capital levels, decreased during the three and nine months ended September 30, 2024 over 2023. The decrease in FDIC assessment for the three months ended September 30, 2024 reflects an improvement in the financial ratios portion of the assessment rate, largely due to the decline in the one-year asset growth factor. The assessment rate also includes a two basis point charge by the FDIC, which was applied to all financial institutions beginning in June 2023.

Previous 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.

Current wording

Professional fees decreased between the three and nine months ended September 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.

Previous 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.

Current wording

Data processing fee expenses increased during three and nine months ended September 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 77.00% 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.

Current wording

The efficiency ratio of the Company was 71.34% and 84.71% for the three months ended September 30, 2024 and 2023, respectively. The efficiency ratio of the Company was 75.22% and 81.08% for the nine months ended September 30, 2024 and 2023. The improvement in the efficiency ratio during 2024 reflects an increase in noninterest income, coupled with lower noninterest expenses. Noninterest expenses during the three and nine months ended September 30, 2023 included one-time expenses of $1.0 million related to the sale of the marine finance assets during the third quarter of 2023. Excluding these expenses, the efficiency ratio for three and nine months ended September 30, 2023 would have been 78.71% and 79.02%, respectively. The efficiency ratio is not a measurement under GAAP. It is calculated by dividing noninterest expense by the sum of tax equivalent net interest income and noninterest income. The Company adjusts for non-recurring items such as gains and losses on the investment portfolio and other gains/losses from OREO, repossessed assets, 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 and six months ended June 30, 2024 and 2023 was as follows:

Current wording

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

Previous 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.

Current wording

Income tax expense was $550 thousand and $457 thousand during the three months ended September 30, 2024 and 2023, respectively and $1.6 million and $1.4 million during the nine months ended September 30, 2024 and 2023, respectively. The effective tax rate was 13.84% and 16.46% for the three months ended September 30, 2024 and 2023, respectively. The effective tax rate was 15.11% and 16.49% for the nine months ended September 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. During the three and nine months ended September 30, 2024, BOLI included income from life insurance proceeds of $653 thousand and $907 thousand, respectively. There was no income from life insurance proceeds in the comparative three and nine month periods. Qualified affordable housing project investments are discussed in Note 12 to the Consolidated Financial Statements.

Previous 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.

Current wording

Total securities available for sale were $130.1 million at September 30, 2024, compared to $137.4 million at December 31, 2023. This represents a decrease of $7.3 million, or 5.38%. The Company purchased no securities during the nine months ended September 30, 2024. The Company had total maturities, calls, and principal repayments of $11.7 million during the nine months ended September 30, 2024. Note 4 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio at September 30, 2024 and December 31, 2023. The Company had a net unrealized loss on available for sale securities of $18.3 million at September 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 September 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 $1.45 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.

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 $1.48 billion and $1.46 billion at September 30, 2024 and December 31, 2023, respectively. This represents an increase of $20.6 million, or 1.41%, during the nine months ended September 30, 2024. The ratio of gross loans to deposits decreased during the nine months ended September 30, 2024 from 97.10% at December 31, 2023 to 95.95% at September 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 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.

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 September 30, 2024 and December 31, 2023. During the nine months ended September 30, 2024, through the normal course of business, $47.3 million in loans were sold, consisting primarily of mortgage loans. These loan sales resulted in net gains of $1.3 million. The balance of gross loans experienced solid growth, primarily in loans secured by real estate, which more than offset decreases in the marine and consumer loan portfolios due to paydowns and a large consumer loan payoff during 2024.

Previous 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.

Current wording

Residential real estate loans, consisting of first liens, junior liens and home equity loans, were $367.3 million, or 24.76%, and $356.1 million, or 24.35%, of total loans at September 30, 2024 and December 31, 2023, respectively. The increase of $11.2 million, or 3.14%, is primarily due to originations of residential adjustable-rate jumbo loans held in portfolio.

Previous 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.

Current wording

Commercial real estate loans (including multifamily loans) were $630.6 million, or 42.51%, and $600.3 million, or 41.04%, of total loans at September 30, 2024 and December 31, 2023, respectively, representing an increase of $30.3 million, or 5.04%, during the nine months ended September 30, 2024. Owner occupied commercial real estate loans experienced a $21.8 million increase during the nine months ended September 30, 2024, and non-owner occupied and multifamily commercial real estate loans increased $8.5 million during the same period.

Previous 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.

Current wording

Marine loans were $225.9 million, or 15.23%, and $251.2 million, or 17.17%, of total loans at September 30, 2024 and December 31, 2023, respectively, representing a decrease of $25.3 million, or 10.06%. The decline in marine loans reflects paydowns, payoffs and charge-offs 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

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 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.

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 nine months ended September 30, 2024 and 2023 and the year ended December 31, 2023. Charged-off loans were $2.3 million and $314 thousand for the nine months ended September 30, 2024 and 2023, respectively. Of the total charge-offs during the nine months ended September 30, 2024, $1.5 million, or 64.50%, were marine loans reflecting clean-up within the portfolio and not a systemic performance issue. Recoveries were $754 thousand and $255 thousand for the nine months ended September 30, 2024 and 2023, respectively. This resulted in net charge-offs (recoveries) of $1.5 million and $59 thousand for the nine months ended September 30, 2024 and 2023, respectively. The annualized ratio of net charge-offs (recoveries) to average loans was 0.42% and 0.02% for the nine months ended September 30, 2024 and 2023, respectively. The allowance for credit losses on loans as a percentage of loans was 1.03% at September 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

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk on a quarterly basis. Loans risk rated as special mention, which exhibit negative trends and potential weaknesses, totaled $76.6 million at June 30, 2024 compared to $33.5 million at December 31, 2023. Loans risk rated as classified, include substandard, doubtful, and loss loans, totaled $5.0 million and $8.0 million at June 30, 2024 and December 31, 2023, respectively. All other loans were classified as pass, exhibiting acceptable history of profits, cash flow ability and liquidity. The increase in special mention loans of $43.1 million was primarily in the owner-occupied commercial real estate portfolio as loans were downgraded from pass as the result of not having current financial statement information available at their annual review. Upon receipt of current financial information, the loans will be evaluated and returned to a pass classification if appropriate.

Current wording

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk on a quarterly basis. Loans risk rated as special mention, which exhibit negative trends and potential weaknesses, totaled $73.4 million at September 30, 2024 compared to $33.5 million at December 31, 2023. Loans risk rated as classified, include substandard, doubtful, and loss loans, totaled $3.0 million and $8.0 million at September 30, 2024 and December 31, 2023, respectively. All other loans were classified as pass, exhibiting acceptable history of profits, cash flow ability and liquidity. The increase in special mention loans of $39.9 million was primarily in the owner-occupied commercial real estate portfolio as loans were downgraded from pass as the result of not having current financial statement information available at their annual review. Upon receipt of current financial information, the loans will be evaluated and returned to a pass classification if appropriate.