# EAGLE FINANCIAL SERVICES INC (EFSI) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from EAGLE FINANCIAL SERVICES INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/880641/000095017024038718/efsi-20231231.htm
Accession: 0000950170-24-038718
Filing date: 2024-03-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/EFSI/
All MD&A years: /company/EFSI/mda/
Previous year: /company/EFSI/mda/fy2022/ (FY 2022)
Next year: /company/EFSI/mda/fy2024/ (FY 2024)

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

The purpose of this discussion is to focus on the important factors affecting the financial condition, results of operations, liquidity and capital resources of Eagle Financial Services, Inc. (the “Company”). This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

GENERAL

The Company is a bank holding company which owns 100% of the stock of Bank of Clarke (the “Bank”). 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 corporate, municipal and U.S. government agency securities. The Bank also operates a wealth management division, which provides both a full-service trust department and a separate brokerage area. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the extent permitted by law. At December 31, 2023, the Company had total assets of $1.83 billion, net loans of $1.45 billion, total deposits of $1.51 billion and shareholders’ equity of $108.4 million. The Company’s net income was $9.4 million for the year ended December 31, 2023.

22

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

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[[/GREPCENT_TABLE]]

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MANAGEMENT’S STRATEGY

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

OPERATING STRATEGY

The Bank is a locally 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.

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

The Bank has a marketing department which seeks to develop new business. This is accomplished through an ongoing calling program whereby account officers contact existing and potential customers to discuss the products and services offered. The Bank conducts advertising through television commercials, radio ads, newspaper ads, printed materials, electronic materials, billboards, emails, and social media posts.

LENDING POLICIES

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

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

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

24

constituting a quorum). The Director’s Loan Committee also reviews and approves changes to the Bank’s Loan Policy as presented by management. The following sections discuss the major loan categories within the total loan portfolio:

One-to-Four-Family Residential Real Estate Lending

Residential lending activity may be generated by the Bank’s loan officer solicitations, referrals by real estate professionals, and existing or new bank customers. Loan applications are taken by a Bank loan officer. As part of the application process, information is gathered concerning income, employment and credit history of the applicant. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Directors Loan Committee. In connection with residential real estate loans, the Bank requires title insurance, hazard insurance and, if applicable, flood insurance. In addition to traditional residential mortgage loans secured by a first or junior lien on the property, the Bank offers home equity lines of credit.

Commercial Real Estate Lending

Commercial real estate loans are secured by various types of commercial real estate in the Bank’s market area, including multi-family residential buildings, commercial buildings and offices, small shopping centers and churches. Commercial real estate loan originations are obtained through broker referrals, direct solicitation of developers and continued business from customers. In its underwriting of commercial real estate, the Bank’s loan to original appraised value ratio is generally 80% or less. Commercial real estate lending entails significant additional risk as compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or the economy, in general. The Bank’s commercial real estate loan underwriting criteria require an examination of debt service coverage ratios, the borrower’s creditworthiness, prior credit history and reputation, and the Bank typically requires personal guarantees or endorsements of the borrowers’ principal owners.

Construction and Land Development Lending

The Bank makes local construction loans and land acquisition and development loans. The construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The average life of most construction loans is less than one year and the Bank offers both fixed and variable rate interest structures. The interest rate structure offered to customers depends on the total amount of these loans outstanding and the impact of the interest rate structure on the Bank’s overall interest rate risk. There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of the estimated appraised value of the finished property. The Bank also obtains a first lien on the property as security for its construction loans and typically requires personal guarantees from the borrower’s principal owners. Finally, the Bank performs inspections of the construction projects to ensure that the percentage of construction completed correlates with the amount of draws on the construction line of credit.

Commercial and Industrial Lending

Commercial business loans generally have more risk than residential mortgage loans but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of its business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate. Refer to the Marine Lending section below for discussion of additional commercial and industrial lending.

Consumer Lending

The Bank offers various secured and unsecured consumer loans, which include personal installment loans, personal lines of credit, automobile loans, and credit card loans. The Bank generally originates its consumer loans within its geographic market area and these loans are largely made to customers with whom the Bank has an existing relationship. Consumer loans

25

generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral on a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and from any verifiable secondary income. Although creditworthiness of the applicant is the primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.

Marine Lending

Through August 22, 2023, the Bank’s marine lending unit included originated retail loans, classified as commercial and industrial loans or consumer loans, depending on the borrower, and dealer floor plan loans, classified as commercial and industrial loans. The Company’s relationships were limited to well established dealers of global premium brand manufacturers with the top three manufacturer customers in business between 30 and 100 years. Retail loans were generally limited to premium manufacturers with established relationships with the Company which have a vested interest in the secondary market pricing of their respective brand due to the limited inventory available for resale. Consequently, while not contractually committed, manufacturers will often support secondary resale values which can have the effect of reducing losses from non-performing retail marine loans. Retail borrowers generally have very high credit scores, substantial down payments, substantial net worth, personal liquidity, and excess cash flow. See additional discussion under the heading "Business Segments" as well as Note 27 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

CRITICAL ACCOUNTING POLICIES

The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within these statements is, to a significant extent, based on measurements of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change.

Allowance for Credit Losses on Loans

The Company establishes the allowance for credit losses through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance 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. The measurement of the allowance for credit losses is based in part on forecasts of unemployment, inflation, as well as the consumer price index, and may also consider other factors, which we believe to be indicative of risk factors related to collectability. Management also assesses the risk of credit losses arising from changes in economic conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances; lending policy and procedures; credit administration and lending staff; loan review; concentrations of credit and the value of underlying collateral in determining the recorded balance of the allowance for credit losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the allowance, we consider a range of possible assumptions and outcomes related to the various factors identified above. Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the 2023 Form 10-K, provides additional information concerning the determination of the allowance for credit losses on loans.

26

FORWARD LOOKING STATEMENTS

The Company makes forward looking statements in this report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:

•
difficult market conditions in our industry;

•
effects of soundness of other financial institutions;

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

•
the ability to successfully manage growth or implement growth strategies if the Bank is unable to identify attractive markets, locations or opportunities to expand in the future, expand into new markets, or successfully implement new product lines;

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

•
the successful management of interest rate risk;

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

•
changes in general economic and business conditions in the market area;

•
reliance on the management team, including the ability to attract and retain key personnel;

•
changes in interest rates and interest rate policies;

•
maintaining capital levels adequate to support growth;

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

•
demand, development and acceptance of new products and services;

•
deposit flows;

•
problems with technology utilized by the Bank;

•
changing trends in customer profiles and behavior;

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

•
the Company’s potential exposure to fraud, negligence, computer theft, and cyber-crime

•
changes in accounting policies and banking and other laws and regulations; and

•
other factors described in Item 1A., “Risk Factors,” above.

Because of these uncertainties, actual future results may be materially different from the results indicated by these forward looking statements. In addition, past results of operations do not necessarily indicate future results.

27

RESULTS OF OPERATIONS

Net Income

Net income for 2023 was $9.4 million, a decrease of $5.2 million or 35.56% from 2022’s net income of $14.5 million. Basic and diluted earnings per share were $2.66 and $4.17 for 2023 and 2022, respectively.

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, was 0.54% and 1.02% for 2023 and 2022, respectively.

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 the shareholders. The ROE for the Company was 9.05% and 14.06% for 2023 and 2022, respectively.

Net Interest Income

Net interest income, the difference between total interest income and total interest expense, is the Company’s primary source of earnings. Net interest income was $50.3 million for 2023 and $49.2 million for 2022, which represents an increase of $1.1 million or 2.19%. Net interest income is derived from the volume of earning assets and the rates earned on those assets as compared to the cost of funds. Total interest income was $83.1 million for 2023 and $54.7 million for 2022, which represents an increase of $28.4 million or 52.01% for 2023. Total interest expense was $32.8 million for 2023 and $5.5 million for 2022, which represents an increase of $27.4 million or 499.98% in 2023. The increase in total interest income, total interest expense and net interest income during 2023 was driven by the growth in interest-earning assets, interest-bearing liabilities and the rising interest rate environment. Refer to the table titled “Volume and Rate Analysis” for further detail.

The table titled “Average Balances, Income and Expenses, Yields and Rates” displays the composition of interest earnings assets and interest bearing liabilities and their respective yields and rates for the years ended December 31, 2023 and 2022.

The net interest margin was 2.96% for 2023 and 3.68% for 2022. The net interest margin is calculated by dividing tax-equivalent net interest income by total average earnings assets. 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 the federal statutory rate of 21%. The table titled “Tax-Equivalent Net Interest Income” reconciles net interest income to tax-equivalent net interest income, which is not a measurement under GAAP, for the years ended December 31, 2023 and 2022.

Net interest income and net interest margin may experience some decline due to additional deposit pricing pressure as interest rates continue to increase or remain at the current level and increased competition for new deposits is experienced. These combined also could result in the Company having to borrow wholesale funding to fund asset growth which is more expensive than deposits.

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Average Balances, Income and Expenses, Yields and Rates

(dollars in thousands)

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[[/GREPCENT_TABLE]]

(1)
Income and yields are reported on a tax-equivalent basis using the federal tax rate of 21%.

(2)
Interest and yields on loans include the amortization/accretion of origination costs/fees as well as any purchase premiums or discounts.

29

Tax-Equivalent Net Interest Income

(dollars in thousands)

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended"],["","","December 31,"],["","","2023","","","2022"],["","","(in thousands)"],["GAAP Financial Measurements:"],["Interest Income - Loans","","$","75,520","","","$","50,682"],["Interest Income - Securities and Other Interest-Earnings Assets","","","7,608","","","","4,004"],["Interest Expense - Deposits","","","23,630","","","","2,941"],["Interest Expense - Other Borrowings","","","9,207","","","","2,532"],["Total Net Interest Income","","$","50,291","","","$","49,213"],["Non-GAAP Financial Measurements:"],["Add: Tax Benefit on Tax-Exempt Interest Income - Loans (1)","","$","104","","","$","45"],["Add: Tax Benefit on Tax-Exempt Interest Income - Securities (1)","","","4","","","","59"],["Total Tax Benefit on Tax-Exempt Interest Income","","$","108","","","$","104"],["Tax-Equivalent Net Interest Income","","$","50,399","","","$","49,317"]]
[[/GREPCENT_TABLE]]

(1)
Tax benefit was calculated using the federal statutory tax rate of 21%.

The tax-equivalent yield on earning assets increased 81 basis points from 2022 to 2023. The tax-equivalent yield on securities increased 41 basis points from 2022 to 2023. The tax-equivalent yield on loans increased 79 basis points from 2022 to 2023. The increase in the tax-equivalent yield on earning assets resulted mostly from the increase in the tax-equivalent yield on loans. The increase in the tax-equivalent yield on loans as compared to the corresponding period in the prior year was due to a combination of increase of volume of loans and the rising interest rate environment.

The average rate on interest-bearing liabilities increased 210 basis points from 2022 to 2023. The average rate on total interest-bearing deposits increased 200 basis points from 2022 to 2023. The Federal Reserve's interest rate increases beginning early 2022 and continuing into 2023 heightened interest rates paid on deposit accounts. In general, deposit pricing is done in response to monetary policy actions and yield curve changes. Local competition for funds also affects the cost of time deposits, which are primarily comprised of certificates of deposit. The Company prefers to rely most heavily on non-maturity deposits when possible, which include NOW accounts, money market accounts, and savings accounts. The average balance of non-maturity interest-bearing deposits increased $29.1 million or 4.65% from $624.3 million during 2022 to $653.3 million in 2023. The Company also actively pursued time deposits during 2023 adding $210.2 million, or 28.03%, in average balances, primarily in amounts less than $250,000. These time deposits were obtained through pricing and, to a lesser extent, entering into a $30.0 million brokered account during the first quarter. The cost of total time deposits increased to 4.08% during 2023 from 0.79% during 2022. The cost of interest-bearing liabilities was also higher during 2023 due increased usage of FHLB advances, which had a 148 basis point, or 45.3%, increase in cost combined with a $123.0 million increase in average balance.

The table titled “Volume and Rate Analysis” provides information about the effect of changes in financial assets and liabilities and changes in rates on net interest income.

Tax-equivalent net interest income increased $1.1 million during 2023. The net increase in tax-equivalent net interest income during 2023 is comprised of an increase due to volume of $6.7 million and a decrease due to rate of $5.6 million. The increase in tax-equivalent net interest income during 2023 was largely affected by the increased volume of taxable loans, as well as increases in rates earned from interest-earning assets. This increase was mostly offset by the increased volume in borrowing and time deposits and increases in rates paid on interest bearing liabilities.

30

Volume and Rate Analysis (Tax-Equivalent Basis)

(dollars in thousands)

[[GREPCENT_TABLE]]
[["","","2023 vs 2022 Increase (Decrease) Due to Changes in:"],["","","Volume","","","Rate","","","Total"],["Earning Assets:"],["Securities:"],["Taxable","","$","(310",")","","$","572","","","$","262"],["Tax-exempt","","","(342",")","","","83","","","","(259",")"],["Loans:"],["Taxable","","","14,814","","","","9,804","","","","24,618"],["Tax-exempt","","","205","","","","74","","","","279"],["Federal funds sold and interest-bearing deposits in other banks","","","2,097","","","","1,449","","","","3,546"],["Total earning assets","","$","16,464","","","$","11,982","","","$","28,446"],["Interest-Bearing Liabilities:"],["NOW accounts","","$","368","","","$","4,207","","","$","4,575"],["Money market accounts","","","(54",")","","","3,390","","","","3,336"],["Savings accounts","","","(15",")","","","70","","","","55"],["Time deposits:"],["$250,000 and more","","","800","","","","3,396","","","","4,196"],["Less than $250,000","","","2,871","","","","5,656","","","","8,527"],["Total interest-bearing deposits","","$","3,970","","","$","16,719","","","$","20,689"],["Federal funds purchased","","","(132",")","","","32","","","$","(100",")"],["Federal Home Loan Bank advances","","","5,608","","","","817","","","","6,425"],["Subordinated debt","","","348","","","","2","","","","350"],["Total interest-bearing liabilities","","$","9,794","","","$","17,570","","","$","27,364"],["Change in net interest income","","$","6,670","","","$","(5,588",")","","$","1,082"]]
[[/GREPCENT_TABLE]]

Provision for Credit Losses

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 Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data. The provision for credit losses was $1.6 million for 2023 and $1.8 million for 2022. 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 amount of provision for credit losses during each period reflects the results of the Company’s analysis used to determine the adequacy of the allowance for credit losses. The provision for credit losses in 2023 reflects loan growth during the year, largely in the residential and commercial real estate portfolios. Net charge-offs during 2023 totaled $443 thousand. The provision for loan losses in 2022 reflects loan growth in the portfolio partially offset by net recoveries of $601 thousand during 2022. The Company is committed to maintaining an allowance that it believes will adequately absorb the current expected losses in the loan portfolio. This commitment is more fully discussed in the “Asset Quality” section.

31

Noninterest Income

Total noninterest income was $14.7 million and $13.3 million during 2023 and 2022, respectively. This represents an increase of $1.4 million or 10.49% for 2023. Management reviews the activities which generate noninterest income on an ongoing basis.

The following table provides the components of noninterest income for the twelve months ended December 31, 2023 and 2022, which are included within the respective Consolidated Statements of Income headings. The following paragraphs provide information about activities which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

[[GREPCENT_TABLE]]
[["","","December 31,"],["(dollars in thousands)","","2023","","","2022","","","$ Change","","","% Change"],["Wealth management fees","","$","4,926","","","$","4,149","","","$","777","","","","18.73","%"],["Service charges on deposit accounts","","","1,810","","","","1,618","","","","192","","","","11.87","%"],["Other service charges and fees","","","4,413","","","","3,943","","","","470","","","","11.92","%"],["Gain on the sale of marine finance assets","","","435","","","","\u2014","","","","435","","","NM"],["Gain (loss) on the sale and disposal of bank premises and equipment","","","14","","","","(11",")","","","25","","","","(227.27",")%"],["(Loss) on sale of securities","","","\u2014","","","","(737",")","","","737","","","","(100.00",")%"],["Gain on sale of loans","","","1,428","","","","1,875","","","","(447",")","","","(23.84",")%"],["Bank owned life insurance income","","","713","","","","626","","","","87","","","","13.90","%"],["Other operating income","","","1,006","","","","1,882","","","","(876",")","","","(46.55",")%"],["Total noninterest income","","$","14,745","","","$","13,345","","","$","1,400","","","","10.49","%"]]
[[/GREPCENT_TABLE]]

NM - Not Meaningful

Wealth management fees increased from 2022 to 2023. 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 wealth management fees is determined by the number of active accounts and total assets under management. New business efforts in addition to fee increases and one-time fees for estates and other services have contributed to the year over year increase in revenue.

Services charges on deposit accounts increased when comparing the year ended December 31, 2023 to 2022. This increase is mainly due to increases in overdraft charges. Overdraft charges can fluctuate based on changes in customer activity and number of accounts.

Other service charges and fees increased during the twelve months ended December 31, 2023 compared to the same period in 2022. This increase can be attributed to increased ATM fee income. ATM fee income can fluctuate based on ATM usage by non-customers.

Gain on the sale of marine finance assets was $435 thousand for the year ended December 31, 2023. On August 23, 2023, the Company completed the sale of certain marine finance division assets. Refer to additional discussion of marine lending under the heading "Lending Policies" in Item 7 above and in Notes 1 and 27 to the Consolidated Financial Statements.

The Company recorded a net loss of $737 thousand on its sale $15.4 million in available for sale securities during 2022. There were no sales of available for sale securities during the year ended December 31, 2023.

During 2023, the Company sold $32.1 million in mortgage loans on the secondary market, $51.7 million of loans from the commercial and consumer loan portfolios and $8.0 million in Small Business Association ("SBA") loans. During 2022, the Company sold $12.2 million in mortgage loans on the secondary market, $155.0 million of loans from the commercial and consumer loan portfolios and $2.8 million in SBA loans. These loan sales resulted in gains of $1.4 million and $1.9 million during the years ended December 31, 2023 and 2022, respectively.

Bank owned life insurance ("BOLI") fee income increased during 2023 when compared to 2022 as a result of an investment of $5 million into BOLI by the Company during the fourth quarter of 2023.

32

Other operating income decreased during 2023. The fluctuation from 2022 to 2023 is mostly attributed to cash distributions received from investments in Small Business Investment Companies during 2022 that were not received during 2023 and loan swap fee income. The decrease in loan swap fee income was attributable to less loan swap fee income recognized during 2023 compared to 2022. Loan swap agreements with initial notional balances of $20.9 million and $21.2 million were entered into during the years ended December 31, 2023 and 2022, respectively. In 2022, the Bank also earned a fee for its participation in a loan swap agreement with an outside lead bank.

Noninterest Expenses

Total noninterest expenses were $52.8 million and $43.1 million during 2023 and 2022, respectively. This represents an increase of $9.7 million or 22.52% during 2023.

The following table provides the components of noninterest expense for the twelve months ended December 31, 2023 and 2022, which are included within the respective Consolidated Statements of Income headings. The following paragraphs provide information about activities which are included within the respective Consolidated Statements of Income headings. Variances that the Company believes require explanation are discussed below the table.

[[GREPCENT_TABLE]]
[["","","December 31,"],["(dollars in thousands)","","2023","","","2022","","","$ Change","","","% Change"],["Salaries and employee benefits","","$","30,306","","","$","25,730","","","$","4,576","","","","17.78","%"],["Occupancy expenses","","","2,202","","","","2,068","","","","134","","","","6.48","%"],["Equipment expenses","","","1,299","","","","1,121","","","","178","","","","15.88","%"],["Advertising and marketing expenses","","","1,157","","","","770","","","","387","","","","50.26","%"],["Stationery and supplies","","","191","","","","199","","","","(8",")","","","(4.02",")%"],["ATM network fees","","","1,563","","","","1,313","","","","250","","","","19.04","%"],["Other real estate owned expense","","","5","","","","34","","","","(29",")","","","(85.29",")%"],["(Gain) on other real estate owned","","","(7",")","","","\u2014","","","","(7",")","","NM"],["FDIC assessment","","","1,585","","","","614","","","","971","","","","158.14","%"],["Computer software expense","","","1,360","","","","960","","","","400","","","","41.67","%"],["Bank franchise tax","","","1,255","","","","886","","","","369","","","","41.65","%"],["Professional fees","","","2,540","","","","2,019","","","","521","","","","25.80","%"],["Data processing fees","","","1,935","","","","1,779","","","","156","","","","8.77","%"],["Other operating expenses","","","7,363","","","","5,564","","","","1,799","","","","32.33","%"],["Total noninterest expenses","","$","52,754","","","$","43,057","","","$","9,697","","","","22.52","%"]]
[[/GREPCENT_TABLE]]

NM - Not Meaningful

The Company’s growth has had an impact on noninterest expenses. Total assets have grown by $208.9 million or 12.9% from December 31, 2022 to December 31, 2023. This growth has required investments to be made in the Company’s infrastructure, causing increases in salaries and employee benefits, occupancy expenses, equipment expenses, advertising and marketing expenses, computer software expense, and other operating expenses. In addition, increases in asset size and capital levels have impacted both the FDIC assessment and bank franchise tax amounts.

Salaries and employee benefits expense increased during 2023. Annual pay increases, staffing changes, increasing insurance costs and enhanced employee incentive plans have attributed to these increases. The Company had 241 full-time equivalent employees (FTEs) at both December 31, 2022 and December 31, 2023. As part of the sale of the marine finance assets during the third quarter, the Company reduced its workforce associated with the marine lending division as it expects to cease accepting new marine lending business. While additional expenses were incurred at the time of the sale, the workforce reduction will have a positive impact on salaries and employee benefits expense going forward.

Advertising and marketing expenses increased during 2023 reflecting the Company's continued marketing and branding campaigns, including its recognition of receiving a Great Place to Work® certified. designation. In addition expenses in 2023 were higher due to the rebranding that occurred in early 2023.

ATM network fees increased during the year ended December 31, 2023 compared to the year ended December 31, 2022. This is mainly due to fluctuations in customer usage.

FDIC assessment and bank franchise taxes both increased in 2023 reflecting growth in the Company. 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.

Computer software expense increased during 2023 over 2022, largely due to investments in software platforms to improve operating efficiencies and customer experience with bank products and services.

33

Professional fees increased during 2023. There are several factors that contributed to the increase of professional fees during 2023. Expenses related to the ESOP termination and the new stock incentive plan caused increases to legal expense, while the outsourcing of a portion of the internal audit function related to FDICIA testing caused increases to audit expenses.

Other operating expenses increased during 2023. This increase is due primarily to a change in control agreement related to the workforce reduction described above and increased loan related expenses due to a higher loan origination volume. Also reflected in the year-over-year increase were a greater amount of charitable contributions and costs for education, training and travel.

The efficiency ratio of the Company was 81.55% and 67.90% for 2023 and 2022, respectively. The efficiency ratio is calculated by dividing total noninterest expenses by the sum of tax-equivalent net interest income and total noninterest income, excluding gains and losses on investment portfolio sales and other gains/losses from OREO, repossessed assets, sale or disposals of bank assets, etc. The tax rate utilized is 21%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency. A reconciliation of tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income is presented within the Net Interest Income section above.

The calculation of the efficiency ratio for the twelve months ended December 31, 2023 and 2022 was as follows:

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022"],["","","(in thousands)"],["Summary of Operating Results:"],["Noninterest expenses","","$","52,754","","","$","43,057"],["Less: (Gain) on other real estate owned","","","(7",")","","","\u2014"],["Adjusted noninterest expenses","","$","52,761","","","$","43,057"],["Net interest income","","$","50,291","","","$","49,213"],["Noninterest income","","$","14,745","","","$","13,345"],["Less: (Loss) on sales of securities","","","\u2014","","","","(737",")"],["Less: Gain on the sale of marine finance assets","","","435","","","","\u2014"],["Less: Gain (loss) on the sale and disposal of premises and equipment","","","14","","","","(11",")"],["Adjusted noninterest income","","$","14,296","","","$","14,093"],["Tax equivalent adjustment (1)","","","108","","","","104"],["Total net interest income and noninterest income, adjusted","","$","64,695","","","$","63,410"],["Efficiency ratio","","","81.55","%","","","67.90","%"]]
[[/GREPCENT_TABLE]]

(1)
Includes tax-equivalent adjustments on loans and securities using the federal statutory tax rate of 21%.

Income Taxes

Income tax expense was $1.3 million and $3.2 million for the years ended December 31, 2023 and 2022, respectively. These amounts correspond to an effective tax rate of 12.00% and 17.83% for 2023 and 2022, respectively. The effective tax rate is below the statutory rate of 21%, due primarily to tax credits on qualified affordable housing project investments as discussed in Note 25 to the Consolidated Financial Statements as well as qualified rehabilitation credits. During 2023, one of the Company's rehabilitation tax credit investments was finalized and the total amount of credits to be received was determined and certified. The effective tax rate is also impacted by tax-exempt income on investment securities and loans. Note 9 to the Consolidated Financial Statements provides a reconciliation between income tax expense computed using the federal statutory income tax rate and the Company’s actual income tax expense during 2023 and 2022.

34

Business Segments

The Company has three reportable operating segments: community banking, marine lending and wealth management. Revenue from community banking operations consist primarily of net interest income related to investments in non-marine loans and securities and outstanding deposits and borrowings, fees earned on deposit accounts and debit card interchange activity. Revenue from marine lending operations consist primarily of net interest income related to commercial and consumer marine loans and gains on sales of loans. The wealth management division's net revenues are comprised primarily of income from offering wealth management services and insurance products through third-party service providers.

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.

Financial information for the parent company is included in the "All Other" category. The parent company's operating results are comprised primarily of interest expense associated with subordinated debt. Refer to Notes 1 and 27 of the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.

35

The following table provides income and asset information as of and for the twelve months ended December 31, 2023 and 2022, which are included within the Consolidated Balance Sheets and Consolidated Statements of Income. Variances that the Company believes require explanation are discussed below the table.

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended"],["","","December 31, 2023"],["","","Community Banking","","","Marine Lending","","","Wealth Management","","","All Other","","","Eliminations","","","Consolidated"],["","","(in thousands)"],["Interest Income","","$","67,990","","","$","15,138","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","83,128"],["Interest Expense","","","25,850","","","","5,570","","","","\u2014","","","","1,417","","","","\u2014","","","","32,837"],["Net Interest Income (Expense)","","","42,140","","","","9,568","","","","\u2014","","","","(1,417",")","","","\u2014","","","","50,291"],["Gain on sales of loans","","","1,117","","","","311","","","","\u2014","","","","\u2014","","","","\u2014","","","","1,428"],["Other noninterest income","","","7,313","","","","1,078","","","","4,926","","","","\u2014","","","","\u2014","","","","13,317"],["Net Revenue","","","50,570","","","","10,957","","","","4,926","","","","(1,417",")","","","\u2014","","","","65,036"],["Provision for credit losses","","","2,051","","","","(402",")","","","\u2014","","","","\u2014","","","","\u2014","","","","1,649"],["Noninterest expense","","","44,479","","","","5,106","","","","2,646","","","","523","","","","\u2014","","","","52,754"],["Income before taxes","","","4,040","","","","6,253","","","","2,280","","","","(1,940",")","","","\u2014","","","","10,633"],["Income tax expense (benefit)","","","(103",")","","","1,313","","","","479","","","","(413",")","","","\u2014","","","","1,276"],["Net Income","","$","4,143","","","$","4,940","","","$","1,801","","","$","(1,527",")","","$","\u2014","","","$","9,357"],["Other data:"],["Capital expenditures","","$","1,035","","","$","36","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","1,071"],["Depreciation and amortization","","","1,573","","","","224","","","","126","","","","67","","","","\u2014","","","","1,990"],["","","Twelve Months Ended"],["","","December 31, 2022"],["","","Community Banking","","","Marine Lending","","","Wealth Management","","","All Other","","","Eliminations","","","Consolidated"],["","","(in thousands)"],["Interest Income","","$","47,554","","","$","7,132","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","54,686"],["Interest Expense","","","4,026","","","","380","","","","\u2014","","","","1,067","","","","\u2014","","","","5,473"],["Net Interest Income (Expense)","","","43,528","","","","6,752","","","","\u2014","","","","(1,067",")","","","\u2014","","","","49,213"],["Gain on sales of loans","","","478","","","","1,397","","","","\u2014","","","","\u2014","","","","\u2014","","","","1,875"],["Other noninterest income","","","7,222","","","","99","","","","4,149","","","","\u2014","","","","\u2014","","","","11,470"],["Net Revenue","","","51,228","","","","8,248","","","","4,149","","","","(1,067",")","","","\u2014","","","","62,558"],["Provision for credit losses","","","1,059","","","","771","","","","\u2014","","","","\u2014","","","","\u2014","","","","1,830"],["Noninterest expense","","","36,401","","","","3,695","","","","2,590","","","","371","","","","\u2014","","","","43,057"],["Income before taxes","","","13,768","","","","3,782","","","","1,559","","","","(1,438",")","","","\u2014","","","","17,671"],["Income tax expense (benefit)","","","2,343","","","","794","","","","328","","","","(315",")","","","\u2014","","","","3,150"],["Net Income","","$","11,425","","","$","2,988","","","$","1,231","","","$","(1,123",")","","$","\u2014","","","$","14,521"],["Other data:"],["Capital expenditures","","$","829","","","$","9","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","838"],["Depreciation and amortization","","","1,499","","","","236","","","","124","","","","51","","","","\u2014","","","","1,910"],["","","Community Banking","","","Marine Lending","","","Wealth Management","","","All Other","","","Eliminations","","","Consolidated"],["Total assets at December 31, 2023","","$","1,562,600","","","$","261,011","","","$","1,080","","","$","906","","","$","\u2014","","","$","1,825,597"],["Total assets at December 31, 2022","","","1,377,461","","","","237,595","","","","1,206","","","","455","","","","\u2014","","","","1,616,717"]]
[[/GREPCENT_TABLE]]

36

The decrease in community banking segment net income for the year ended December 31, 2023 compared to the year ended December 31, 2022 was due to impact of the rising interest rate environment as the cost of interest-bearing liabilities outpaced income earned on interest-earning assets along with an increase in noninterest expenses. Interest expense increased by $21.8 million, or 542.1%, compared to an increase in interest income of $20.4 million, or 43.0%. The year-over-year decrease was also impacted by the increase in noninterest expense, partially offset by an increase in noninterest income and a decrease in income tax expense. The increase in noninterest expense is largely due to the Bank's growth and an increase in the allocated cost of funding. This growth has required investments to be made in the Bank’s infrastructure, causing increases in salaries and employee benefits, occupancy expenses, equipment expenses, advertising and marketing expenses, computer software expenses, and other operating expenses. In addition, increases in asset size and capital levels have impacted both the FDIC assessment and bank franchise tax amounts.

The increase in marine lending segment net income for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to higher interest income resulting from loan growth, as well as the effects of rising interest rates on asset yields. The average balance of marine loans increased $108.1 million, or 65.18% during 2023. The increase in interest income was partially offset by higher interest expense and salaries and employee benefits expense.

FINANCIAL CONDITION

Assets, Liabilities and Shareholders’ Equity

The Company’s total assets were $1.83 billion at December 31, 2023, an increase of $208.9 million or 12.92% from $1.62 billion at December 31, 2022. Securities decreased $11.7 million or 7.85% between 2022 and 2023. Loans, net of the allowance for credit losses, increased by $135.6 million or 10.33% from 2022 to 2023. Total liabilities were $1.72 billion at December 31, 2023, compared to $1.51 billion at December 31, 2022. Total shareholders’ equity at year end 2023 and 2022 was $108.4 million and $101.7 million, respectively.

Securities

Total securities, excluding restricted stock, were $137.4 million and $149.2 million for the years ended December 31, 2023 and December 31, 2022, respectively. The Company did not purchase any securities during 2023. The Company had $14.5 million in maturities, calls, and principal repayments on securities during 2023. This amount includes $728 thousand or 5.03% in obligations of U.S. government corporations and agencies, $12.9 million or 89.17% in mortgage-backed securities, and $840 thousand or 5.80% in obligations of states and political subdivisions. Note 2 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio as of December 31, 2023 and 2022.

The ability to dispose of available for sale securities prior to maturity provides management more options to react to future rate changes and provides more liquidity, when needed, to meet short-term obligations. The Company had net unrealized losses on available for sale securities of $22.8 million and $25.9 million at December 31, 2023 and 2022, respectively. 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 table titled “Maturity Distribution and Yields of Securities” shows the maturity period and average yield for the different types of securities in the portfolio at December 31, 2023. The weighted average yield is calculated based on the relative amortized costs of the securities. Although mortgage-backed securities have definitive maturities, they provide monthly principal curtailments which can be reinvested at a prevailing rate and for a different term.

Maturity Distribution and Yields of Securities

[[GREPCENT_TABLE]]
[["","","December 31, 2023"],["","","Due in one year or less","","","Due after 1 through 5 years","","","Due after 5 through 10 years","","","Due after 10 years","","","Total"],["Securities available for sale:"],["Obligations of U.S. government corporations and agencies","","","\u2014","%","","","2.15","%","","","2.65","%","","","\u2014","%","","","2.60","%"],["Mortgage-backed securities","","","\u2014","%","","","\u2014","%","","","1.10","%","","","1.74","%","","","1.73","%"],["Obligations of states and political subdivisions, taxable","","","3.57","%","","","2.93","%","","","3.01","%","","","\u2014","%","","","3.10","%"],["Subordinated debt","","","\u2014","%","","","\u2014","%","","","4.28","%","","","\u2014","%","","","\u2014","%"],["Total taxable","","","3.57","%","","","2.69","%","","","2.55","%","","","1.74","%","","","1.92","%"],["Obligations of states and political subdivisions, tax-exempt (1)","","","\u2014","%","","","\u2014","%","","","4.01","%","","","\u2014","%","","","\u2014","%"],["Total","","","3.57","%","","","2.69","%","","","2.59","%","","","1.74","%","","","1.92","%"]]
[[/GREPCENT_TABLE]]

37

(1)
Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 21%.

Loan Portfolio

The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Gross loans net of net deferred costs and premiums were $1.46 billion and $1.32 billion at December 31, 2023 and 2022, respectively. This represents an increase of $138.8 million or 10.55% for 2023. The ratio of net loans to deposits decreased during the year from 104.72% to 97.10% at December 31, 2022 and December 31, 2023, respectively.

Loans secured by real estate were $1.04 billion, or 71.51%, and $928.3 million, or 70.52%, of total loans at December 31, 2023 and 2022, respectively. This represents an increase of $112.3 million or 12.10% for 2023. Consumer installment loans were $42.4 million, or 2.92%, and $44.8 million, or 3.41%, of total loans at December 31, 2023 and 2022, respectively. This represents an decrease of $2.4 million or 5.40% for 2023. Commercial and industrial loans were $107.8 million, or 7.41%, and $99.6 million, or 7.57%, of total loans at December 31, 2023 and 2022, respectively. This represents an increase of $8.2 million, or 8.21%, for 2023. Marine loans were $251.2 million, or 17.26%, and $230.9 million, or 17.54%, of total loans at December 31, 2023 and 2022, respectively. All other loans were $13.1 million and $12.7 million at December 31, 2023 and 2022, respectively. This represents an increase of $427 thousand or 3.36%.

During the year ended December 31, 2023, loan growth was mainly concentrated in residential and commercial real estate loans, due largely to the continued expansion of the Bank's current market area. Marine loan growth was also strong during the first half of 2023. 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. Subsequent to the sale of these assets, the Company retained ownership of marine vessel retail loans, which had a balance of $251.2 million as of December 31, 2023. At present, the Company expects to hold the retained outstanding loans until they are ultimately repaid.

The table titled “Maturity Schedule of Selected Loans” shows the different loan categories and the period during which they mature. For loans maturing in more than one year, the table also shows a breakdown between fixed rate loans and floating rate loans. The table indicates that $567.1 million or 38.97% of the loan portfolio matures within five years. The floating rate loans maturing after five years are primarily comprised of loans secured by 1-4 family residential properties.

Maturity Schedule of Selected Loans

(dollars in thousands)

[[GREPCENT_TABLE]]
[["","","December 31, 2023"],["","","Within 1 Year","","","After 1 Year Within 5 Years","","","After 5 Years Within 15 years","","","After 15 Years","","","Total"],["Loans secured by real estate:"],["Construction & Farmland","","$","23,834","","","$","26,032","","","$","25,485","","","$","8,794","","","$","84,145"],["Secured by 1-4 family residential properties","","","16,726","","","","81,821","","","","87,854","","","","169,715","","","","356,116"],["Commercial & Multifamily","","","16,052","","","","302,762","","","","271,816","","","","9,705","","","","600,335"],["Commercial and industrial loans","","","38,576","","","","41,537","","","","26,339","","","","1,376","","","","107,828"],["Marine","","","\u2014","","","","873","","","","69,906","","","","180,389","","","","251,168"],["Consumer installment loans","","","550","","","","13,753","","","","1,792","","","","26,324","","","","42,419"],["All other loans","","","1,741","","","","2,854","","","","6,521","","","","2,032","","","","13,148"],["","","$","97,479","","","$","469,632","","","$","489,713","","","$","398,335","","","$","1,455,159"],["For maturities over one year:"],["Floating rate loans","","","","","$","68,862","","","$","120,064","","","$","123,481","","","$","312,407"],["Fixed rate loans","","","","","","400,770","","","","369,649","","","","274,854","","","","1,045,273"],["","","","","","$","469,632","","","$","489,713","","","$","398,335","","","$","1,357,680"]]
[[/GREPCENT_TABLE]]

38

Asset Quality

The Company has policies and procedures designed to control credit risk and to maintain the quality of its loan portfolio. These include underwriting standards for new originations and ongoing monitoring and reporting of asset quality and adequacy of the allowance for credit losses. There were $6.1 million in total non-performing assets, which consist of nonaccrual loans, loans 90 days or more past due and still accruing, other real estate owned, and repossessed assets at December 31, 2023. This is an increase of $3.5 million when compared to the December 31, 2022 balance of $2.6 million. This increase resulted mostly from an increase in nonaccrual loans.

Nonaccrual loans were $5.6 million at December 31, 2023 and $2.2 million at the end of 2022. The gross amount of interest income that would have been recognized on nonaccrual loans was $140 thousand for 2023 and $93 thousand for 2022. None of this interest income was included in net income for 2023 or 2022. A total of 13 loans totaling $4.1 million were placed on nonaccrual during 2023. Two relationships totaling $3.4 million or 83.25% of loans placed on nonaccrual were added due to delinquent payments, however, these loans required no allowance for credit losses based on management's evaluation of the underlying collateral values. The remaining loans added to nonaccrual status during 2023 ranged from $8 thousand to $367 thousand with the average outstanding balance being $115 thousand. In addition, two loans totaling $294 thousand were removed from nonaccrual status during 2023. Both loans were removed from nonaccrual status due to charge off. Management evaluates the financial condition of these borrowers and the value of any collateral on these loans. The results of these evaluations are used to estimate the amount of losses which may be realized on the disposition of these nonaccrual loans. Nonaccrual loans that were individually evaluated for impairment at December 31, 2023 totaled $5.6 million, none of which required a specific allocation to be assigned.

Other real estate owned and repossessed assets increased from $108 thousand at December 31, 2022 to $304 thousand at December 31, 2023. One asset, a marine vessel, was repossessed during 2023 and placed into repossessed assets and the one property that was foreclosed on during 2022 was sold during 2023. The difference between the amount of other real estate owned and the settlement proceeds is recognized as a gain or loss on the sale of other real estate owned. A net gain of $7 thousand was recognized on the sale of other real estate owned during the twelve months ended December 31, 2023.

39

Nonperforming and Other Assets

Nonperforming assets consist of nonaccrual loans, loans past due 90 days and accruing interest, other real estate owned (foreclosed properties), and repossessed assets. The table titled “Nonperforming Assets and Credit Ratios” shows the amount of nonperforming assets and loans past due 90 days and accruing interest outstanding for the past two years. The table also shows the ratios for the allowance for credit losses on loans as a percentage of nonperforming assets and nonperforming assets as a percentage of loans outstanding and other real estate owned.

Loans are placed on non-accrual status when collection of principal and interest is doubtful, generally when a loan becomes 90 days past due. There are three negative implications for earnings when a loan is placed on non-accrual status. First, all interest accrued but unpaid at the date that the loan is placed on non-accrual status is either deducted from interest income or written off as a loss. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses that require additional provisions for credit losses to be charged against earnings.

For real estate loans, upon foreclosure, the properties are recorded at the fair value of the property based on current appraisals and other current market trends, less selling costs. If a write down of the OREO property is necessary at the time of foreclosure, the amount is charged-off against the allowance for credit losses on loans. A review of the recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair value, additional write downs of the property value are charged directly to operations. Gains on properties acquired through foreclosure where the fair value less costs to sell exceeds the related loan balance and there have been no prior charge-offs are recorded to current earnings.

In addition, the Company may, under certain circumstances, modify loans. Modifications made to a loan are considered when a borrower is experiencing financial difficulty and the modification constitutes a concession to the borrower that is not in line with market rates and/or terms. Modified terms are dependent upon the financial position and needs of the individual borrower. Generally, the modifications granted are extensions of terms, deferrals of payments for an extended period or interest rate reductions. There were two loan modifications to borrowers experiencing financial difficulty totaling $355 thousand during the year ended December 31, 2023.

Nonperforming Assets and Credit Ratios

(dollars in thousands)

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2023","","","2022"],["Nonaccrual loans","","$","5,645","","","$","2,162"],["Loans past due 90 days and accruing interest","","","181","","","","318"],["Other real estate owned and repossessed assets","","","304","","","","108"],["Total nonperforming assets","","$","6,130","","","$","2,588"],["Allowance for credit losses on loans","","$","14,493","","","$","11,218"],["Gross loans","","$","1,462,686","","","$","1,323,783"],["Allowance for credit losses on loans to nonperforming assets","","","236","%","","","433","%"],["Allowance for credit losses on loans to total loans","","","0.99","%","","","0.85","%"],["Allowance for credit losses on loans to nonaccrual loans","","","257","%","","","519","%"],["Nonaccrual loans to total loans","","","0.40","%","","","0.19","%"],["Non-performing assets to period end loans, other real estate owned and repossessed assets","","","0.42","%","","","0.20","%"]]
[[/GREPCENT_TABLE]]

Other potential problem loans are defined as performing loans that possess certain risks that management has identified that could result in the loans not being repaid in accordance with their terms. Accordingly, these loans are risk rated at a level of substandard or lower. At December 31, 2023, other potential problem loans totaled $2.4 million.

Allowance for Credit Losses on Loans

40

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. Additional information on the purpose and the methods for measuring the allowance for credit losses on loans are discussed in the Critical Accounting Policies section above.

Charged-off loans were $741 thousand and $659 thousand for 2023 and 2022, respectively. Recoveries were $298 thousand and $1.3 million for 2023 and 2022, respectively. Net charge-offs were $443 thousand for 2023. Net recoveries were $601 thousand for 2022. The year over year decline in net recoveries reflected strong recoveries in residential real estate during 2022, which were not also experienced in 2023. The allowance for credit losses as a percentage of loans was 0.99% and 0.85% at the end of 2023 and 2022, respectively. The increase in the allowance percentage year over year was attributable in large part to the adoption of ASC 326, which added $2.1 million to the allowance, as well as growth in the loan portfolio and an increase in nonaccrual loans. The ratio of net charge-offs/(recoveries) to average loans was 0.03% for 2023 and (0.05%) for 2022.

The provision for credit losses for the years ended December 31, 2023 and 2022 was $1.6 million and $1.8 million, respectively. The provision for credit losses in 2023 and 2022 reflected mainly loan growth in the portfolio.

The table titled “Allocation of Allowance for Credit Losses on Loans” shows the amount of the allowance for credit losses which is allocated to the indicated loan categories, along with that category’s percentage of total loans, at December 31, 2023 and 2022. The amount of allowance for credit losses allocated to each loan category is based on the amount of delinquent loans in that loan category, the status of nonperforming assets in that loan category, the historical losses for that loan category, the evaluation of qualitative factors impacting the portfolio and the financial condition of certain borrowers whose financial conditional is monitored on a periodic basis. Management believes that the allowance for credit losses is adequate to absorb the current expected losses in the loan portfolio.

Analysis of Allowance for Credit Losses

(dollars in thousands)

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","","2022"],["","","Net charge-offs (recoveries)","","Average loans outstanding (1)","","Net charge-offs (recoveries) to average loans outstanding","","","Net charge-offs (recoveries)","","Average loans outstanding (1)","","Net charge-offs (recoveries) to average loans outstanding"],["Construction and Farmland","","$","(8",")","$","89,340","","","(0.01",")%","","$","(9",")","$","83,928","","","(0.01",")%"],["Residential Real Estate","","","(18",")","","329,185","","","(0.01",")%","","","(879",")","","271,203","","","(0.32",")%"],["Commercial Real Estate","","","\u2014","","","597,275","","","\u2014","%","","","(197",")","","492,623","","","(0.04",")%"],["Commercial","","","269","","","95,159","","","0.28","%","","","191","","","72,682","","","0.26","%"],["Marine","","","126","","","273,831","","","0.05","%","","","\u2014","","","165,777","","","\u2014","%"],["Consumer","","","73","","","34,214","","","0.21","%","","","35","","","31,899","","","0.11","%"],["All Other Loans","","","1","","","13,476","","","0.01","%","","","258","","","11,338","","","2.28","%"],["Total","","$","443","","$","1,432,480","","","0.03","%","","$","(601",")","$","1,129,450","","","(0.05",")%"]]
[[/GREPCENT_TABLE]]

(1)
Averages as disclosed are based on the outstanding balances of the loans in each segment. These averages do not include net deferred costs and premiums

Allocation of Allowance for Credit Losses on Loans

(dollars in thousands)

[[GREPCENT_TABLE]]
[["","","December 31, 2023","","","December 31, 2022"],["","","Allowance for Credit Losses","","","Percent of Loans in Category to Total Loans","","","Allowance for Credit Losses","","","Percent of Loans in Category to Total Loans"],["Construction and Farmland","","$","772","","","","5.8","%","","$","2,714","","","","6.8","%"],["Residential Real Estate","","","4,725","","","","24.5","%","","","1,735","","","","22.1","%"],["Commercial Real Estate","","","6,224","","","","41.2","%","","","2,221","","","","41.6","%"],["Commercial","","","1,027","","","","7.4","%","","","2,222","","","","7.6","%"],["Marine","","","1,153","","","","17.3","%","","","1,555","","","","17.5","%"],["Consumer","","","198","","","","2.9","%","","","299","","","","3.4","%"],["All Other Loans","","","394","","","","0.9","%","","","472","","","","1.0","%"],["Total","","$","14,493","","","","100","%","","$","11,218","","","","100","%"]]
[[/GREPCENT_TABLE]]

41

Deposits

Total deposits were $1.51 billion and $1.26 billion at December 31, 2023 and 2022, respectively, which represents an increase of $242.2 million or 19.16% during 2023. The table titled “Average Deposits and Rates Paid” shows the average deposit balances and average rates paid for 2023 and 2022.

Average Deposits and Rates Paid

(dollars in thousands)

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","","2022"],["","","Amount","","","Rate","","","Amount","","","Rate"],["Noninterest-bearing","","$","442,539","","","","","","$","485,061"],["Interest-bearing:"],["NOW accounts","","","244,277","","","","2.14","%","","","173,843","","","","0.38","%"],["Money market accounts","","","257,496","","","","1.74","%","","","270,725","","","","0.43","%"],["Regular savings accounts","","","151,556","","","","0.12","%","","","179,709","","","","0.07","%"],["Time deposits:"],["$250,000 and more","","","116,077","","","","4.10","%","","","62,757","","","","0.89","%"],["Less than $250,000","","","219,809","","","","4.08","%","","","62,907","","","","0.69","%"],["Total interest-bearing","","$","989,215","","","","2.39","%","","$","749,941","","","","0.39","%"],["Total deposits","","$","1,431,754","","","","","","$","1,235,002"]]
[[/GREPCENT_TABLE]]

Noninterest-bearing demand deposits, which are comprised of checking accounts, decreased $42.1 million or 8.80% from $478.8 million at December 31, 2022 to $436.6 million at December 31, 2023. Interest-bearing deposits, which include NOW accounts, money market accounts, regular savings accounts and time deposits, increased $284.4 million or 36.21% from $785.3 million at December 31, 2022 to $1.07 billion at December 31, 2023. Total money market account balances decreased $1.7 million or 0.62% from $265.3 million at December 31, 2022 to $263.6 million at December 31, 2023 and regular savings accounts decreased $33.5 million or 19.39% from $173.0 million at December 31, 2022 to $139.5 million at December 31, 2023. Reciprocal deposit accounts balances (included in total money market account and NOW account balances) increased from $59.5 million to $115.7 million at December 31, 2022 and December 31, 2023, respectively. The reciprocal deposits balance at December 31, 2023 and December 31, 2022 consists of money market and NOW accounts obtained through the ICS network. The growth in deposits was mainly organic growth as we continue to expand and grow into newer market areas. Time deposits increased $255.4 million or 161.74% from $157.9 million at December 31, 2022 to $413.3 million at December 31, 2023, reflecting the Company’s pricing strategy and a $30.0 million brokered account entered into during the first quarter of 2023. Total estimated uninsured deposits at December 31, 2023 and December 31, 2022 were $389.3 million and $322.5 million, respectively.

The Company attempts to fund asset growth with deposit accounts and focus upon core deposit growth as its primary source of funding. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, and time deposits of less than $250,000. Core deposits totaled $1.31 billion or 86.67% and $1.19 billion or 93.88% of total deposits at December 31, 2023 and 2022, respectively.

The table titled “Maturities of Certificates of Deposit and Other Time Deposits of $250,000 and Greater” shows the amount of certificates of deposit of $250,000 and more maturing within the time periods indicated at December 31, 2023. The total amount maturing within one year is $155.5 million or 99.76% of the total amount outstanding.

Maturities of Certificates of Deposit and Other Time Deposits of $250,000 and Greater

(dollars in thousands)

[[GREPCENT_TABLE]]
[["","","Within Three Months","","","Three to Six Months","","","Six to Twelve Months","","","Over One Year","","","Total","","","Percent of Total Deposits"],["December 31, 2023","","$","40,372","","","$","44,333","","","$","70,761","","","$","380","","","$","155,846","","","","10.35","%"]]
[[/GREPCENT_TABLE]]

42

The table titled “Certificates of Deposit and Other Time Deposits Otherwise Uninsured" shows the balances of certificates of deposit that were in excess of the FDIC insurance limit at December 31, 2023. The total amount maturing within one year is $106.1 million or 99.88% of the total amount outstanding.

Certificates of Deposit and Other Time Deposits Otherwise Uninsured

(dollars in thousands)

[[GREPCENT_TABLE]]
[["","","Within Three Months","","","Three to Six Months","","","Six to Twelve Months","","","Over One Year","","","Total","","","Percent of Total Deposits"],["December 31, 2023","","$","27,686","","","$","33,392","","","$","44,972","","","$","130","","","$","106,180","","","","7.05","%"]]
[[/GREPCENT_TABLE]]

CAPITAL RESOURCES

Total shareholders’ equity on December 31, 2023 was $108.4 million, reflecting a percentage of total assets of 5.94% as compared to $101.7 million and 6.29% at December 31, 2022. Our common stock’s book value per share increased $1.63 or 5.60% to $30.78 per share at December 31, 2023 from $29.15 per share at December 31, 2022. During 2023, the Company paid $1.20 per share in dividends as compared to $1.15 per share for 2022. The Company has a Dividend Investment Plan that allows participating shareholders to reinvest the dividends in Company stock. During 2023, the Company purchased 8,531 shares of its Common Stock under its stock repurchase program at an average price of $35.34. During 2022, the Company purchased 4,442 shares of its Common Stock under its stock repurchase program at an average price of $34.79. At December 31, 2023, and 2022, Management believes the Bank met all capital adequacy requirements to which it was subject. Additionally, at December 31, 2023, the most recent notification from the Federal Reserve categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category.

Federal regulatory risk-based capital guidelines require percentages to be applied to various assets, including off-balance sheet assets, based on their perceived risk in order to calculate risk-weighted assets. Tier 1 capital consists of total shareholders’ equity plus qualifying trust preferred securities outstanding less net unrealized gains and losses on available for sale securities, goodwill and other intangible assets. Total capital is comprised of Tier 1 capital plus the allowable portion of the allowance for loan losses and any excess trust preferred securities that do not qualify as Tier 1 capital.

43

Effective January 1, 2015, the Federal Reserve issued final risk-based capital rules to align with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. In addition, a capital conservation buffer requirement of 2.5% was effective January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with any ratio (excluding the leverage ratio) above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The capital conservation buffer rule requires the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

In 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the Community Bank Leverage Ratio framework (CBLR), for qualifying community banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule became effective on January 1, 2020. The CBLR removes the requirement for qualifying banking organizations to calculate and report risk-based capital but rather only requires a Tier 1 to average assets (leverage) ratio. Qualifying banking organizations that elect to use the CBLR and that maintain a leverage ratio of greater than the required minimum will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. Under the regulatory capital rules, an institution electing to use the CBLR must maintain a minimum leverage ratio of 9%. Qualifying institutions are allowed a two-quarter grace period to correct a ratio that falls below the required amount, provided the institution maintains a ratio of more than 8%. At December 31, 2022, the Bank was a qualifying institution and elected to utilize the CBLR to measure capital adequacy. As such, the related amounts and ratios for December 31, 2022, are presented below using the CLBR. The Bank entered the CLBR two-quarter grace period on June 30, 2023, having fallen below the minimum ratio of 9%, and at December 31, 2023 its leverage ratio was 8.48%. Therefore, the amounts and ratios at December 31, 2023 are presented using the risk-based capital framework and not the CLBR.

Pursuant to the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the Company, are not subject to consolidated regulatory capital requirements.

44

Analysis of Bank Capital

(dollars in thousands)

[[GREPCENT_TABLE]]
[["","","December 31, 2023","","","December 31, 2022"],["Tier 1 Capital:"],["Common stock","","$","1,682","","","$","1,682"],["Capital surplus","","","9,773","","","","29,773"],["Retained earnings","","","144,151","","","","111,759"],["Nonmortgage servicing assets","","","(153",")","","","(684",")"],["Total Tier 1 capital","","$","155,453","","","$","142,530"],["Common equity tier 1 capital","","$","155,453","","","$","142,530"],["Tier 2 Capital:"],["Allowable portion of allowance for credit losses and reserve for off-balance sheet commitments","","$","13,472"],["Total Tier 2 capital","","$","13,472"],["Total risk-based capital","","$","168,925"],["Risk weighted assets","","$","1,513,802"],["Capital Ratios:"],["Common equity Tier 1 capital ratio","","","10.27","%","","n/a"],["Tier 1 risk-based capital ratio","","","10.27","%","","n/a"],["Total risk-based capital ratio","","","11.16","%","","n/a"],["Tier 1 leverage ratio","","","8.48","%","","","9.15","%"]]
[[/GREPCENT_TABLE]]

Note 15 to the Consolidated Financial Statements provides additional discussion and analysis of regulatory capital requirements.

LIQUIDITY

Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, unpledged securities classified as available for sale, and loans maturing within one year. At December 31, 2023 liquid assets totaled $367.7 million as compared to $303.8 million at December 31, 2022. These amounts represent 21.41% and 20.05% of total liabilities at December 31, 2023 and 2022, respectively. Securities provide a constant source of liquidity through paydowns and maturities. Also, the Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity. The Bank’s membership with the Federal Home Loan Bank of Atlanta also provides a source of borrowings with numerous rate and term structures. At December 31, 2023 and 2022, the Company had remaining credit availability in the amounts of $169.6 million and $105.7 million, respectively, with the Federal Home Loan Bank of Atlanta. The Company also had unused lines of credit with financial institutions of $78.0 million at December 31, 2023 and 2022. The Company’s senior management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Note 18 to the Consolidated Financial Statements provides information about the off-balance sheet arrangements which arise through the lending activities of the Company. These arrangements increase the degree of both credit and interest rate risk beyond that which is recognized through the financial assets and liabilities on the consolidated balance sheets.

45