SOUTHERN FIRST BANCSHARES INC

Previous wording

The following discussion reviews our results of operations for the three month period ended March 31, 2024 as compared to the three month period ended March 31, 2023 and assesses our financial condition as of March 31, 2024 as compared to December 31, 2023. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 2023 included in our Annual Report on Form 10-K for that period. Results for the three month period ended March 31, 2024 are not necessarily indicative of the results for the year ending December 31, 2024 or any future period.

Current wording

The following discussion reviews our results of operations for the three and six month periods ended June 30, 2024 as compared to the three and six month periods ended June 30, 2023 and assesses our financial condition as of June 30, 2024 as compared to December 31, 2023. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and the related notes and the consolidated financial statements and the related notes for the year ended December 31, 2023 included in our Annual Report on Form 10-K for that period. Results for the three and six month periods ended June 30, 2024 are not necessarily indicative of the results for the year ending December 31, 2024 or any future period.

Previous wording

At March 31, 2024, we had total assets of $4.11 billion, a 1.2% increase from total assets of $4.06 billion at December 31, 2023. The largest component of our total assets is loans which were $3.64 billion and $3.60 billion at March 31, 2024 and December 31, 2023, respectively. Our liabilities and shareholders’ equity at March 31, 2024 totaled $3.79 billion and $315.3 million, respectively, compared to liabilities of $3.74 billion and shareholders’ equity of $312.5 million at December 31, 2023. The principal component of our liabilities is deposits which were $3.46 billion and $3.38 billion at March 31, 2024 and December 31, 2023, respectively.

Current wording

At June 30, 2024, we had total assets of $4.11 billion, a 1.3% increase from total assets of $4.06 billion at December 31, 2023. The largest component of our total assets is loans which were $3.62 billion and $3.60 billion at June 30, 2024 and December 31, 2023, respectively. Our liabilities and shareholders’ equity at June 30, 2024 totaled $3.79 billion and $318.7 million, respectively, compared to liabilities of $3.74 billion and shareholders’ equity of $312.5 million at December 31, 2023. The principal component of our liabilities is deposits which were $3.46 billion and $3.38 billion at June 30, 2024 and December 31, 2023, respectively.

Previous wording

Our net income to common shareholders was $2.5 million and $2.7 million for the three months ended March 31, 2024 and 2023, respectively. Diluted earnings per share (“EPS”) was $0.31 for the first quarter of 2024 as compared to $0.33 for the same period in 2023. The decrease in net income was primarily driven by a decrease in net interest income resulting from an increase in deposit and funding costs.

Current wording

Our net income to common shareholders was $3.0 million and $2.5 million for the three months ended June 30, 2024 and 2023, respectively. Diluted earnings per share (“EPS”) was $0.37 for the second quarter of 2024 as compared to $0.31 for the same period in 2023. The increase in net income was primarily driven by an increase in

Previous wording

Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was $18.6 million for the first quarter of 2024, an 8.7% decrease over net interest income of $20.4 million for the first quarter of 2023, driven primarily by an $11.8 million increase in interest expense on our deposit accounts, partially offset by a $10.0 million increase in interest income. In addition, our net interest margin, on a tax-equivalent basis (TE), was 1.94% for the first quarter of 2024 compared to 2.36% for the same period in 2023.

Current wording

Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. Our net interest income was $19.5 million for the second quarter of 2024, a 3.7% increase over net interest income of $18.8 million for the second quarter of 2023, driven primarily by a $7.9 million increase in interest income on our interest-earning assets, partially offset by a $7.2 million increase in interest expense. In addition, our net interest margin, on a tax-equivalent basis (TE), was 1.98% for the second quarter of 2024 compared to 2.05% for the same period in 2023.

Previous wording

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three month periods ended March 31, 2024 and 2023. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” tables demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.

Current wording

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances, Income and Expenses, Yields and Rates” table reflects the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three and six month periods ended June 30, 2024 and 2023. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” tables demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts.

Previous wording

Our net interest margin (TE) decreased 42 basis points to 1.94% during the first quarter of 2024, compared to the first quarter of 2023, primarily due to our deposit and borrowing costs increasing faster than our loan yield as our interest-bearing liabilities have been more sensitive to changes in the federal funds rate over the past two years. Our average interest-bearing liabilities grew by $432.7 million during the first quarter of 2024 from the prior year, while the rate on these liabilities increased 115 basis points to 3.98%. In contrast, our average interest-earning assets grew by $344.5 million during the first quarter of 2024 from the prior year, while the average yield on these assets increased by only 60 basis points to 5.02% during the same period.

Current wording

Our net interest margin (TE) decreased seven basis points to 1.98% during the second quarter of 2024, compared to the second quarter of 2023, primarily due to our deposit and borrowing costs increasing faster than our loan yield as our interest-bearing liabilities have been more sensitive to changes in the federal funds rate over the past two years. Our average interest-bearing liabilities grew by $320.6 million during the second quarter of 2024 from the prior year, while the rate on these liabilities increased 58 basis points to 4.04%. In contrast, our average interest-earning assets grew by $287.4 million during the second quarter of 2024 from the prior year, while the average yield on these assets increased by only 47 basis points to 5.12% during the same period.

Previous wording

The increase in our average interest-bearing liabilities during the first quarter of 2024 resulted primarily from a $209.6 million increase in our interest-bearing deposits from the prior year, while the 115 basis point increase in rate on our interest-bearing liabilities was driven by a 119 basis point increase in deposit rates.

Current wording

The increase in our average interest-bearing liabilities during the second quarter of 2024 resulted primarily from a $216.4 million increase in our interest-bearing deposits from the prior year, while the 58 basis point increase in rate on our interest-bearing liabilities was driven by a 64 basis point increase in deposit rates.

Previous wording

The increase in average interest-earning assets for the first quarter of 2024 related primarily to an increase of $288.4 million in our average loan balances from the prior year. The 60 basis point increase in yield on our interest-earning assets was driven by a 58 basis point increase in loan yield as our loan portfolio has repriced at rates higher than historical rates for the majority of the past 12 months.

Current wording

The increase in average interest-earning assets for the second quarter of 2024 related primarily to an increase of $134.4 million in our average loan balances from the prior year and a $115.6 million increase in average federal funds sold and interest-bearing deposits with banks. The 47 basis point increase in yield on our interest-earning assets was driven by a 54 basis point increase in yield on federal funds sold and interest-bearing deposits with banks and a 45 basis point increase in loan yield.

Previous wording

Our net interest spread was 1.04% for the first quarter of 2024 compared to 1.59% for the same period in 2023. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 115 basis point increase in the rate on our interest-bearing liabilities was partially offset by a 60 basis point increase in yield on our interest-earning assets, resulting in a 55 basis point decrease in our net interest spread for the 2024 period. We anticipate continued pressure on our net interest spread

Current wording

Our net interest spread was 1.08% for the second quarter of 2024 compared to 1.19% for the same period in 2023. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The 58 basis point increase in the rate on our interest-bearing liabilities was partially offset by a 47 basis point increase in yield on our interest-earning assets, resulting in a 11 basis point decrease in our net interest spread for the 2024 period. We anticipate continued pressure on our net interest spread

Previous wording

Net interest income, the largest component of our income, was $18.6 million for the first quarter of 2024 and $20.4 million for the first quarter of 2023, a $1.8 million, or 8.7%, decrease year over year. The decrease during 2024 was driven by an $11.8 million increase in interest expense primarily due to higher rates on our interest-bearing deposits, combined with an increase in average FHLB advances and other borrowings. Partially offsetting the increase in interest expense was a $10.0 million increase in interest income which was primarily driven by an increase in yield on our loan portfolio, combined with a $288.4 million increase in average loan balances for the first quarter of 2024.

Current wording

Net interest income, the largest component of our income, was $19.5 million for the second quarter of 2024 and $18.8 million for the second quarter of 2023, a $703,000, or 3.7%, increase year over year. The increase during 2024 was driven by a $7.9 million increase in interest income primarily due to higher yields on our loan portfolio and an increase in average loan balances and average federal funds sold and interest-bearing deposits with banks. Partially offsetting the increase in interest income was a $7.2 million increase in interest expense which was primarily driven by higher rates on our interest-bearing deposits.

Previous wording

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded commitments at levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. We review the adequacy of the allowance for credit losses on a quarterly basis. Please see the discussion included in Note 4 – Loans and Allowance for Credit Losses for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.

Current wording

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses and reserve for unfunded commitments at levels consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. We review the adequacy of the allowance for credit losses on a quarterly basis. Please see the discussion included in Note 4 –

Previous wording

Noninterest income was $2.7 million for the first quarter of 2024, a $620,000, or 30.3%, increase from noninterest income of $2.0 million for the first quarter of 2023. Mortgage banking income continues to be the largest component of our noninterest income at $1.2 million for the first quarter of 2024. The increase in noninterest income resulted primarily from a $542,000, or 87.1%, increase in mortgage banking income over the prior year which was driven by higher mortgage volume during the first quarter of 2024.

Current wording

Noninterest income was $3.5 million for the second quarter of 2024, a $787,000, or 28.8%, increase from noninterest income of $2.7 million for the second quarter of 2023. Mortgage banking income continues to be the largest component of our noninterest income at $1.9 million for the second quarter of 2024 an increase of $586,000, or 43.8%, over the prior year. The increase was driven by higher mortgage volume during the second quarter of 2024.

Previous wording

Noninterest expense was $18.1 million for the first quarter of 2024, a $996,000, or 5.8%, increase from noninterest expense of $17.1 million for the first quarter of 2023. The increase in noninterest expense was driven primarily by the following:

Current wording

Noninterest expense was $18.6 million for the second quarter of 2024, a $1.3 million, or 7.2%, increase from noninterest expense of $17.4 million for the second quarter of 2023. The increase in noninterest expense was driven primarily by the following:

Previous wording

Our efficiency ratio was 84.9% for the first quarter of 2024, compared to 76.1% for the first quarter of 2023. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income. The higher ratio during the first quarter of 2024, compared to the first quarter of 2023, relates primarily to the decrease in net interest income combined with higher noninterest expenses.

Current wording

Our efficiency ratio was 80.9% for the second quarter of 2024, compared to 80.7% for the second quarter of 2023. The efficiency ratio represents the percentage of one dollar of expense required to be incurred to earn a full dollar of revenue and is computed by dividing noninterest expense by the sum of net interest income and noninterest income.

Previous wording

We incurred income tax expense of $862,000 and $836,000 for the three months ended March 31, 2024 and 2023, respectively. Our effective tax rate was 25.5% and 23.6% for the three months ended March 31, 2024 and 2023, respectively. The higher tax rate during the first quarter of 2024 was driven by the effect of equity compensation transactions during the quarter.

Current wording

We incurred income tax expense of $909,000 and $800,000 for the three months ended June 30, 2024 and 2023, respectively, and $1.8 million and $1.6 million for the six months ended June 30, 2024 and 2023, respectively. Our effective tax rate was 24.3% and 24.1% for the six months ended June 30, 2024 and 2023, respectively. The higher tax rate during the first half of 2024 was driven by the effect of equity compensation transactions during the period.

Previous wording

At March 31, 2024, the $144.5 million in our investment securities portfolio represented approximately 3.5% of our total assets. Our available for sale investment portfolio included corporate bonds, US treasuries, US government agency securities, state and political subdivisions, asset-backed securities and mortgage-backed securities with a fair value of $126.0 million and an amortized cost of $140.9 million, resulting in an unrealized loss of $14.9 million. At December 31, 2023, the $154.6 million in our investment securities portfolio represented approximately 3.8% of our total assets, including investment securities with a fair value of $134.7 million and an amortized cost of $149.1 million for an unrealized loss of $14.4 million. In addition, other investments, which include FHLB Stock and other nonmarketable investments, decreased $1.4 million from December 31, 2023 to $18.5 million at March 31, 2024.

Current wording

At June 30, 2024, the $140.0 million in our investment securities portfolio represented approximately 3.4% of our total assets. Our available for sale investment portfolio included corporate bonds, US treasuries, US government agency securities, state and political subdivisions, asset-backed securities and mortgage-backed securities with a fair value of $121.4 million and an amortized cost of $136.4 million, resulting in an unrealized loss of $15.0 million. At December 31, 2023, the $154.6 million in our investment securities portfolio represented approximately 3.8% of our total assets, including investment securities with a fair value of $134.7 million and an amortized cost of $149.1 million for an unrealized loss of $14.4 million. In addition, other investments, which include FHLB Stock and other nonmarketable investments, decreased $1.3 million from December 31, 2023 to $18.7 million at June 30, 2024.

Previous wording

Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans, excluding mortgage loans held for sale, for the three months ended March 31, 2024 and 2023 were $3.62 billion and $3.33 billion, respectively. Before the allowance for credit losses, total loans outstanding at March 31, 2024 and December 31, 2023 were $3.64 billion and $3.60 billion, respectively.

Current wording

Since loans typically provide higher interest yields than other types of interest earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans, excluding mortgage loans held for sale, for the six months ended June 30, 2024 and 2023 were $3.63 billion and $3.42 billion, respectively. Before the allowance for credit losses, total loans outstanding at June 30, 2024 and December 31, 2023 were $3.62 billion and $3.60 billion, respectively.

Previous wording

The principal component of our loan portfolio is loans secured by real estate mortgages. As of March 31, 2024, our loan portfolio included $3.07 billion, or 84.3%, of real estate loans, compared to $3.05 billion, or 84.8%, at December 31, 2023. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. Home equity lines of credit totaled $184.7 million as of March 31, 2024, of which approximately 48% were in a first lien position, while the remaining balance was second liens. At December 31, 2023, our home equity lines of credit totaled $183.0 million, of which approximately 46% were in first lien positions, while the remaining balance was in second liens. The average home equity loan had a balance of approximately $86,000 and a loan to value of 70% as of March 31, 2024, compared to an average loan balance of $85,000 and a loan to value of approximately 73% as of December 31, 2023. Further, 0.3% and 0.8% of our total home equity lines of credit were over 30 days past due as of March 31, 2024 and December 31, 2023, respectively.

Current wording

The principal component of our loan portfolio is loans secured by real estate mortgages. As of June 30, 2024, our loan portfolio included $3.05 billion, or 84.3%, of real estate loans, compared to $3.05 billion, or 84.8%, at December 31, 2023. Most of our real estate loans are secured by residential or commercial property. We obtain a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans to coincide with the appropriate regulatory guidelines. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral and business types. Home equity lines of credit totaled $189.3 million as of June 30, 2024, of which approximately 46% were in a first lien position, while the remaining balance was second liens. At December 31, 2023, our home equity lines of credit totaled $183.0 million, of which approximately 46% were in first lien positions, while the remaining balance was in second liens. The average home equity loan had a balance of approximately $86,000 and a loan to value of 71% as of June 30, 2024, compared to an average loan balance of $85,000 and a loan to value of approximately 73% as of December 31, 2023. Further, 0.4% and 0.8% of our total home equity lines of credit were over 30 days past due as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

Following is a summary of our loan composition at March 31, 2024 and December 31, 2023. During the first three months of 2024, our loan portfolio increased by $41.1 million, or 1.14%, with a $28.1 million increase in commercial loans while consumer loans increased by $13.0 million during the period. The majority of the increase was in loans secured by real estate. Our level of non-owner occupied commercial real estate and multi-family loans represents 271.4% of the Bank’s total risk-based capital at March 31, 2024. Our consumer real estate portfolio grew by $19.1 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $468,000, a term of 23 years, and an average rate of 4.18% as of March 31, 2024, compared to a principal balance of $469,000, a term of 23 years, and an average rate of 4.10% as of December 31, 2023.

Current wording

Following is a summary of our loan composition at June 30, 2024 and December 31, 2023. During the first six months of 2024, our loan portfolio increased by $19.9 million, or 0.55%, with a $6.0 million increase in commercial loans while consumer loans increased by $13.9 million during the period. The majority of the increase was in loans secured by real estate. Our level of non-owner occupied commercial real estate and multi-family loans represents 257.7% of the Bank’s total risk-based capital at June 30, 2024. Our consumer real estate portfolio grew by $43.7 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $467,000, a term of 23 years, and an average rate of 4.27% as of June 30, 2024, compared to a principal balance of $469,000, a term of 23 years, and an average rate of 4.10% as of December 31, 2023.

Previous wording

At March 31, 2024, nonperforming assets were $3.6 million, or 0.09% of total assets and 0.10% of gross loans. Comparatively, nonperforming assets were $4.0 million, or 0.10% of total assets and 0.11% of gross loans at December 31, 2023. Nonaccrual loans decreased $317,000 during the first three months of 2024 due primarily to two relationships that returned to accrual status and one relationship that paid off during the quarter.

Current wording

At June 30, 2024, nonperforming assets were $11.2 million, or 0.27% of total assets and 0.31% of gross loans. Comparatively, nonperforming assets were $4.0 million, or 0.10% of total assets and 0.11% of gross loans at December 31, 2023. Nonaccrual loans increased $7.3 million during the first six months of 2024 due primarily to two relationships totaling $6.9 million that went on nonaccrual during the second quarter.

Previous wording

The amount of foregone interest income on nonaccrual loans in the first three months of 2024 and 2023 was not material. At March 31, 2024 and December 31, 2023, the allowance for credit losses represented 1,109.13% and 1,026.55% of the total amount of nonperforming loans, respectively. A significant portion of the nonperforming loans at March 31, 2024 were secured by real estate. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses.

Current wording

The amount of foregone interest income on nonaccrual loans in the first six months of 2024 and 2023 was not material. At June 30, 2024 and December 31, 2023, the allowance for credit losses represented 357.95% and 1,026.58% of the total amount of nonperforming loans, respectively. A significant portion of the nonperforming loans at June 30, 2024 were secured by real estate. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses.

Previous wording

the loan and thus extend its maturity using similar credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonaccrual after evaluating the loan’s collateral value and financial strength of its guarantors. Nonaccrual loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases, we will generally seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms, we will typically seek performance under the guarantee.

Current wording

As a general practice, most of our commercial loans and a portion of our consumer loans are originated with relatively short maturities of less than ten years. As a result, when a loan reaches its maturity we frequently renew the loan and thus extend its maturity using similar credit standards as those used when the loan was first originated. Due to these loan practices, we may, at times, renew loans which are classified as nonaccrual after evaluating the loan’s collateral value and financial strength of its guarantors. Nonaccrual loans are renewed at terms generally consistent with the ultimate source of repayment and rarely at reduced rates. In these cases, we will generally seek additional credit enhancements, such as additional collateral or additional guarantees to further protect the loan. When a loan is no longer performing in accordance with its stated terms, we will typically seek performance under the guarantee.

Previous wording

In addition, at March 31, 2024, 84.3% of our loans were collateralized by real estate and 89.1% of our individually evaluated loans were secured by real estate. Included in our real estate portfolio at March 31, 2024 was $222.1 million of loans, or 6.1% of our total loan portfolio, collateralized by office properties, $172.6 million of loans, or 4.7%, collateralized by retail properties, $147.4 million of loans, or 4.0%, collateralized by hotels, and $112.6 million of loans, or 3.1%, collateralized by multifamily properties. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Individually evaluated loans are reviewed on a quarterly basis to determine the level of impairment. As of March 31, 2024, we did not have any individually evaluated real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for individually evaluated loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.

Current wording

In addition, at June 30, 2024, 84.3% of our loans were collateralized by real estate and 98.8% of our individually evaluated loans were secured by real estate. Included in our real estate portfolio at June 30, 2024 was $219.7 million of loans, or 6.1% of our total loan portfolio, collateralized by office properties, $172.6 million of loans, or 4.8%, collateralized by retail properties, $131.0 million of loans, or 3.6%, collateralized by hotels, and $109.1 million of loans, or 3.0%, collateralized by multifamily properties. We utilize third party appraisers to determine the fair value of collateral dependent loans. Our current loan and appraisal policies require us to obtain updated appraisals on an annual basis, either through a new external appraisal or an appraisal evaluation. Individually evaluated loans are reviewed on a quarterly basis to determine the level of impairment. As of June 30, 2024, we did not have any individually evaluated real estate loans carried at a value in excess of the appraised value. We typically charge-off a portion or create a specific reserve for individually evaluated loans when we do not expect repayment to occur as agreed upon under the original terms of the loan agreement.

Previous wording

At March 31, 2024, individually evaluated loans totaled $4.5 million with a reserve of approximately $697,000 allocated in the allowance for credit losses. Comparatively, individually evaluated loans totaled $4.8 million at December 31, 2023 for which $3.7 million of these loans had a reserve of approximately $688,000 allocated in the allowance for credit losses.

Current wording

At June 30, 2024, individually evaluated loans totaled $12.1 million with a reserve of approximately $1.7 million allocated in the allowance for credit losses. Comparatively, individually evaluated loans totaled $4.8 million at December 31, 2023 for which $3.7 million of these loans had a reserve of approximately $688,000 allocated in the allowance for credit losses.

Previous wording

The allowance for credit losses was $40.4 million, representing 1.11% of outstanding loans and providing coverage of 1,109.13% of nonperforming loans at March 31, 2024 compared to $40.7 million, or 1.13% of outstanding loans and 1,026.58% of nonperforming loans at December 31, 2023. At March 31, 2023, the allowance for credit losses was $40.4 million, or 1.18% of outstanding loans and 854.33% of nonperforming loans.

Current wording

The allowance for credit losses was $40.2 million, representing 1.11% of outstanding loans and providing coverage of 357.95% of nonperforming loans at June 30, 2024 compared to $40.7 million, or 1.13% of outstanding loans and 1,026.55% of nonperforming loans at December 31, 2023. At June 30, 2023, the allowance for credit losses was $41.1 million, or 1.16% of outstanding loans and 1,363.11% of nonperforming loans.

Previous wording

Our retail deposits represented $3.00 billion, or 86.7% of total deposits, while our wholesale deposits represented $459.8 million, or 13.3%, of total deposits at March 31, 2024. At December 31, 2023, retail deposits represented $3.00 billion, or 88.8%, of our total deposits and wholesale deposits were $379.4 million, representing 11.2% of our total deposits. Our loan-to-deposit ratio was 105% at March 31, 2024 and 107% at December 31, 2023.

Current wording

Our retail deposits represented $3.00 billion, or 86.6% of total deposits, while our wholesale deposits represented $463.7 million, or 13.4%, of total deposits at June 30, 2024. At December 31, 2023, retail deposits represented $3.00 billion, or 88.8%, of our total deposits and wholesale deposits were $379.4 million, representing 11.2% of our total deposits. Our loan-to-deposit ratio was 105% at June 30, 2024 and 107% at December 31, 2023.

Previous wording

Our primary focus is on increasing core deposits, which exclude out-of-market deposits and time deposits of $250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were stable at $2.81 billion at March 31, 2024 and December 31, 2023. In addition, at March 31, 2024 and December 31, 2023, we estimate that we have approximately $1.3 billion, or 37.8% and 38.7% of total deposits, respectively, in uninsured deposits, including related interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used by the FDIC for the Bank’s regulatory reporting requirements.

Current wording

Our primary focus is on increasing core deposits, which exclude out-of-market deposits and time deposits of $250,000 or more, in order to provide a relatively stable funding source for our loan portfolio and other earning assets. While our non-interest bearing deposits increased by $9.1 million from $674.2 million at December 31, 2023, our core deposits decreased to $2.79 billion from $2.81 billion at December 31, 2023. In addition, at June 30, 2024 and December 31, 2023, we estimate that we have approximately $1.3 billion, or 38.3% and 38.7% of total deposits, respectively, in uninsured deposits, including related interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, the amounts above are estimates and are based on the same methodologies and assumptions used by the FDIC for the Bank’s regulatory reporting requirements.

Previous wording

During the first three months of 2024, our average transaction account balances decreased by $162.5 million, or 6.0%, from the prior year, while our average time deposit balances increased by $258.3 million, or 47.5%.

Current wording

During the first six months of 2024, our average transaction account balances decreased by $158.1 million, or 5.8%, from the prior year, while our average time deposit balances increased by $292.0 million, or 52.3%.

Previous wording

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at March 31, 2024 and December 31, 2023 were $653.2 million and $568.1 million, respectively. We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network.

Current wording

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at June 30, 2024 and December 31, 2023 were $671.6 million and $568.1 million, respectively. We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network.

Previous wording

At March 31, 2024, the Company had $240.0 million of convertible fixed rate FHLB advances with a weighted average rate of 3.65%, while at December 31, 2023, the Company had $275.0 million in FHLB Advances. Of the $275.0 million outstanding at December 31, 2023, $35.0 million was at a variable rate and $240.0 million was at fixed rates. The $240.0 million was secured with approximately $1.30 billion of mortgage loans and $14.6 million of stock in the FHLB at March 31, 2024. The $275.0 million was secured with approximately $1.25 billion of mortgage loans and $16.1 million of stock in the FHLB at December 31, 2023.

Current wording

At June 30, 2024, we had $240.0 million of convertible fixed rate FHLB advances with a weighted average rate of 3.76%, while at December 31, 2023, we had $275.0 million in FHLB Advances. Of the $275.0 million outstanding at December 31, 2023, $35.0 million was at a variable rate and $240.0 million was at fixed rates. The $240.0 million was secured with approximately $1.32 billion of mortgage loans and $14.6 million of stock in the FHLB at June 30, 2024. The $275.0 million was secured with approximately $1.25 billion of mortgage loans and $16.1 million of stock in the FHLB at December 31, 2023.

Previous wording

At March 31, 2024 and December 31, 2023, our cash and cash equivalents totaled $167.3 million and $156.2 million, respectively, or 4.1% and 3.9% of total assets, respectively. Our investment securities at March 31, 2024 and December 31, 2023 amounted to $144.5 million and $154.6 million, respectively, or 3.5% and 3.8% of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

Current wording

At June 30, 2024 and December 31, 2023, our cash and cash equivalents totaled $194.8 million and $156.2 million, respectively, or 4.7% and 3.9% of total assets, respectively. Our investment securities at June 30, 2024 and December 31, 2023 amounted to $140.0 million and $154.6 million, respectively, or 3.4% and 3.8% of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner.

Previous wording

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain five federal funds purchased lines of credit with correspondent banks totaling $108.5 million for which there were no borrowings against the lines of credit at March 31, 2024. We also had $236.1 million pledged and available with the Federal Reserve Discount Window at March 31, 2024. Comparatively, at December 31, 2023, we had $227.1 million pledged and available with the Federal Reserve Discount Window. At December 31, 2023, we had $13.0 million of marketable investment securities pledged in the Federal Reserve’s Bank Term Funding Program which closed on March 11, 2024.

Current wording

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, loan payoffs, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain six federal funds purchased lines of credit with correspondent banks totaling $128.5 million for which there were no borrowings against the lines of credit at June 30, 2024. We also had $235.1 million pledged and available with the Federal Reserve Discount Window at June 30, 2024. Comparatively, at December 31, 2023, we had $227.1 million pledged and available with the Federal Reserve Discount Window. At December 31, 2023, we had $13.0 million of marketable investment securities pledged in the Federal Reserve’s Bank Term Funding Program which closed on March 11, 2024.

Previous wording

We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at March 31, 2024 was $590.0 million, based primarily on the Bank’s qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at March 31, 2024 and December 31, 2023 we had $386.8 million and $388.3 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.

Current wording

We are also a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. The unused borrowing capacity currently available from the FHLB at June 30, 2024 was $598.5 million, based primarily on the Bank’s qualifying mortgages available to secure any future borrowings. However, we are able to pledge additional securities to the FHLB in order to increase our available borrowing capacity. In addition, at June 30, 2024 and December 31, 2023 we had $393.4 million and $388.3 million, respectively, of letters of credit outstanding with the FHLB to secure client deposits.

Previous wording

use IntraFi to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, IntraFi can provide us with another funding option. Thus, it serves as a deposit-gathering tool and an additional liquidity management tool. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, a well capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered deposits.

Current wording

We have a relationship with IntraFi Promontory Network, allowing us to provide deposit customers with access to aggregate FDIC insurance in amounts exceeding $250,000. This gives us the ability, as and when needed, to attract and retain large deposits from insurance conscious customers. With IntraFi, we have the option to keep deposits on balance sheet or sell them to other members of the network. Additionally, subject to certain limits, the Bank can use IntraFi to purchase cost-effective funding without collateralization and in lieu of generating funds through traditional brokered CDs or the FHLB. In this manner, IntraFi can provide us with another funding option. Thus, it serves as a deposit-gathering tool and an additional liquidity management tool. Under the Economic Growth, Regulatory Relief, and Consumer Protection Act, a well capitalized bank with a CAMELS rating of 1 or 2 may hold reciprocal deposits up to the lesser of 20% of its total liabilities or $5 billion without those deposits being treated as brokered deposits.

Previous wording

Total shareholders’ equity was $315.3 million at March 31, 2024 and $312.5 million at December 31, 2023. The $2.8 million increase from December 31, 2023 is primarily related to net income of $2.5 million during the first three months of 2024 and stock option exercises and equity compensation expenses of $722,000, partially offset by a $455,000 loss in other comprehensive income related to our available for sale securities.

Current wording

Total shareholders’ equity was $318.7 million at June 30, 2024 and $312.5 million at December 31, 2023. The $6.3 million increase from December 31, 2023 is primarily related to net income of $5.5 million during the first six months of 2024 and stock option exercises and equity compensation expenses of $1.3 million, partially offset by a $524,000 increase in other comprehensive loss related to our available for sale securities.

Previous wording

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) annualized for the three months ended March 31, 2024 and the year ended December 31, 2023. Since our inception, we have not paid cash dividends.

Current wording

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), equity to assets ratio (average equity divided by average assets), and tangible common equity ratio (total equity less preferred stock divided by total assets) annualized for the six months ended June 30, 2024 and the year ended December 31, 2023. Since our inception, we have not paid cash dividends.

Previous wording

Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At March 31, 2024 unfunded commitments to extend credit were $710.7 million, of which $116.0 million were at fixed rates and $595.0 million were at variable rates. At December 31, 2023, unfunded commitments to extend credit were $724.6 million, of which approximately $145.6 million were at fixed rates and $579.0 million were at variable rates. A significant portion of the unfunded commitments related to commercial business loans and consumer home equity lines of credit. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. As of March 31, 2024, the reserve for unfunded commitments was $1.7 million or 0.23% of total unfunded commitments. As of December 31, 2023, the reserve for unfunded commitments was $1.8 million or 0.25% of total unfunded commitments.

Current wording

Commitments to extend credit are agreements to lend money to a client as long as the client has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At June 30, 2024 unfunded commitments to extend credit were $694.5 million, of which $88.2 million were at fixed rates and $606.3 million were at variable rates. At December 31, 2023, unfunded commitments to extend credit were $724.6 million, of which approximately $145.6 million were at fixed rates and $579.0 million were at variable rates. A significant portion of the unfunded commitments related to commercial business loans and consumer home equity lines of credit. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

Previous wording

At March 31, 2024 and December 31, 2023, there were commitments under letters of credit for $12.0 million and $16.1 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

Current wording

At June 30, 2024 and December 31, 2023, there were commitments under letters of credit for $13.0 million and $16.1 million, respectively. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

Previous wording

Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and

Current wording

Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023, for a description our significant accounting policies that use critical accounting estimates.