SOUTHERN FIRST BANCSHARES INC

Previous 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.

Current wording

The following discussion reviews our results of operations for the three- and nine-month periods ended September 30, 2024 as compared to the three- and nine-month periods ended September 30, 2023 and assesses our financial condition as of September 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 nine-month periods ended September 30, 2024 are not necessarily indicative of the results for the year ending December 31, 2024 or any future period.

Previous wording

This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-

Current wording

This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking

Previous wording

looking statements may relate to our financial condition, results of operations, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “seek to,” “strive,” “focus,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to:

Current wording

statements may relate to our financial condition, results of operations, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “seek to,” “strive,” “focus,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to:

Previous 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.

Current wording

At September 30, 2024, we had total assets of $4.17 billion, a 2.9% 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 September 30, 2024 and December 31, 2023, respectively. Our liabilities and shareholders’ equity at September 30, 2024 totaled $3.85 billion and $326.5 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 $3.52 billion and $3.38 billion at September 30, 2024 and December 31, 2023, respectively.

Previous 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

Current wording

Our net income to common shareholders was $4.4 million and $4.1 million for the three months ended September 30, 2024 and 2023, respectively. Diluted earnings per share (“EPS”) was $0.54 for the third quarter of 2024 as compared to $0.51 for the same period in 2023. The increase in net income was primarily driven by an increase in

Previous wording

net interest income resulting from additional interest income on our interest-earning assets combined with an increase in noninterest income, partially offset by an increase in noninterest expenses.

Current wording

net interest income resulting from additional interest income on our loan portfolio combined with an increase in noninterest income, partially offset by an increase in noninterest expenses.

Previous wording

Our net income to common shareholders was $5.5 million and $5.2 million for the six months ended June 30, 2024 and 2023, respectively. Diluted EPS was $0.68 for the six months ended June 30, 2024 as compared to $0.64 for the same period in 2023. The increase in net income was primarily driven by the additional interest income on our interest-earning assets.

Current wording

Our net income to common shareholders was $9.9 million and $9.3 million for the nine months ended September 30, 2024 and 2023, respectively. Diluted EPS was $1.22 for the nine months ended September 30, 2024 as compared to $1.15 for the same period in 2023. The increase in net income was primarily driven by the additional interest income on our interest-earning assets.

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 $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.

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 $20.6 million for the third quarter of 2024, a 6.4% increase over net interest income of $19.3 million for the third quarter of 2023, driven primarily by a $3.7 million increase in interest income on our interest-earning assets, partially offset by a $2.5 million increase in interest expense. In addition, our net interest margin, on a tax-equivalent (TE) basis, was 2.08% for the third quarter of 2024 compared to 1.97% 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 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.

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 nine-month periods ended September 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 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.

Current wording

Our net interest margin (TE) increased 11 basis points to 2.08% during the third quarter of 2024, compared to the third quarter of 2023, primarily due to an increase in our interest-earning assets, as well as an increase in the yield on our interest-earning assets. Our average interest-earning assets grew by $40.1 million during the third quarter of 2024 from the prior year, while the average yield on these assets increased by 34 basis points to 5.18%. Our average interest-bearing liabilities grew by $29.0 million during the third quarter of 2024 from the prior year, while the rate on these liabilities increased 30 basis points to 4.02%.

Previous 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.

Current wording

The increase in average interest-earning assets for the third quarter of 2024 related primarily to an increase of $74.6 million in our average loan balances from the prior year, partially offset by a $23.6 million decrease in average federal funds sold and interest-bearing deposits with banks. The 34 basis point increase in yield on our interest-earning assets was driven by a 35 basis point increase in loan yield and a 24 basis point increase in yield on federal funds sold and interest-bearing deposits with banks.

Previous 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.

Current wording

The increase in our average interest-bearing liabilities during the third quarter of 2024 resulted primarily from a $53.1 million increase in our interest-bearing deposits from the prior year, while the 30 basis point increase in rate on our interest-bearing liabilities was driven by a 31 basis point increase in deposit rates.

Previous 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

Current wording

Our net interest spread was 1.16% for the third quarter of 2024 compared to 1.12% 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 34 basis point increase in yield on our interest-earning assets was partially offset by a 30 basis point increase in the rate on our interest-bearing liabilities, resulting in a 4 basis point increase in our net interest spread for the 2024 period. We anticipate continued pressure on our net interest spread and net

Previous wording

During the first six months of 2024, our net interest margin (TE) decreased by 24 basis points to 1.96%, compared to 2.20% for the first six months of 2023, driven by the increase in yield on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $376.1 million from the prior year, with the average yield increasing by 85 basis points to 4.01%. In contrast, our average interest-earning assets grew by $315.5 million, while the rate on these assets increased 54 basis points to 5.08%.

Current wording

During the first nine months of 2024, our net interest margin (TE) decreased by 12 basis points to 2.00%, compared to 2.12% for the first nine months of 2023, driven by the increase in yield on our interest-bearing liabilities. Our average interest-bearing liabilities grew by $259.1 million from the prior year, with the average yield increasing by 66 basis points to 4.02%. In contrast, our average interest-earning assets grew by $222.6 million, while the rate on these assets increased 47 basis points to 5.11%.

Previous wording

The increase in average interest-bearing liabilities for the first half of 2024 was driven by an increase in interest-bearing deposits of $212.7 million and a $163.3 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a 92 basis point increase on our interest-bearing deposits.

Current wording

The increase in average interest-bearing liabilities for the first nine months of 2024 was driven by an increase in interest-bearing deposits of $159.0 million and a $100.1 million increase in FHLB advances and other borrowings, while the increase in cost was driven by a 71 basis point increase on our interest-bearing deposits.

Previous wording

The increase in average interest-earning assets for the first half of 2024 related primarily to a $210.9 million increase in our average loan balances and a $62.1 million increase in average federal funds sold and interest-bearing deposits with banks. The increase in yield on our interest-earning assets was driven by a 75 basis point increase in the yield on federal funds sold and interest-bearing deposits with banks and a 51 basis point increase in our loan yield.

Current wording

The increase in average interest-earning assets for the first nine months of 2024 related primarily to a $165.0 million increase in our average loan balances and a $33.2 million increase in average federal funds sold and interest-bearing deposits with banks. The increase in yield on our interest-earning assets was driven by a 47 basis point increase in the yield on federal funds sold and interest-bearing deposits with banks and a 46 basis point increase in our loan yield.

Previous wording

Our net interest spread was 1.06% for the first half of 2024 compared to 1.38% for the same period in 2023. The 32 basis point decrease in our net interest spread was driven by the 85 basis point increase in yield on our interest-bearing liabilities.

Current wording

Our net interest spread was 1.09% for the first nine months of 2024 compared to 1.28% for the same period in 2023. The 19 basis point decrease in our net interest spread was driven by the 66 basis point increase in yield on our interest-bearing liabilities.

Previous 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.

Current wording

Net interest income, the largest component of our income, was $20.6 million for the third quarter of 2024 and $19.3 million for the third quarter of 2023, a $1.2 million, or 6.4%, increase year over year. The increase during 2024 was driven by a $3.7 million increase in interest income primarily due to higher yields on our loan portfolio and an increase in average loan balances. Partially offsetting the increase in interest income was a $2.5 million increase in interest expense which was primarily driven by higher rates on our interest-bearing deposits.

Previous wording

Net interest income for the first half of 2024 was $38.2 million compared to $39.2 million for 2023, a $1.1 million, or 2.74%, decrease. The decrease in net interest income during 2024 was driven by a $19.0 million increase in interest expense, related primarily to higher rates on our interest-bearing deposits.

Current wording

Net interest income for the first nine months of 2024 was $58.8 million compared to $58.6 million for 2023, a $169,000, or 0.29%, increase. The increase in net interest income during 2024 was driven by a $21.6 million increase in interest income, offset by a $21.4 million increase in interest expense.

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 –

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 – 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.

Previous wording

We recorded a $500,000 provision for credit losses during the second quarter of 2024, compared to a $910,000 provision for credit losses in the second quarter of 2023. We recorded a provision expense of $325,000 and $2.7 million for the six months ended June 30, 2024 and June 30, 2023, respectively. The $500,000 provision in 2024, which included a $750,000 provision for credit losses and a $250,000 reversal for unfunded commitments, was driven by an increase in the level of charge-offs we experienced during the second quarter, combined with an increase in the specific reserve on individually assessed loans. During the second quarter of 2024, we charged-off $1.0 million related to one relationship associated with the assisted living industry. The reversal of the reserve for unfunded commitments was due to a decrease in the balance of unfunded commitments at June 30, 2024. The $325,000 provision expense for the first half of 2024 included $750,000 provision for credit losses and a $425,000 reversal for unfunded commitments. The $910,000 provision in 2023, which included a $1.1 million provision for credit losses and a $185,000 reversal for unfunded commitments, was driven by $119.7 million in loan growth during the second quarter. The $2.7 million provision expense for the first half of 2023 included a $3.0 million provision for credit losses and a $215,000 reversal for unfunded commitments.

Current wording

We did not record a provision for credit losses during the third quarter of 2024, compared to a reversal of $500,000 to the provision for credit losses in the third quarter of 2023. We recorded a provision expense of $325,000 and $2.2 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. No provision was recorded in the third quarter of 2024 due to low charge-offs and insignificant loan growth. The reversal of $500,000 in the third quarter of 2023, included a $100,000 reversal of provision for credit losses and a $400,000 reversal for unfunded commitments. The reversal of the provision for credit losses was driven by lower expected loss rates, while the reversal of the reserve for unfunded commitments was driven by a decrease in the balance of unfunded commitments at September 30, 2023, compared to the previous quarter and year. The $325,000 provision expense for the first nine months of 2024 included $750,000 provision for credit losses and a $425,000 reversal for unfunded commitments. The $2.2 million provision expense for the first nine months of 2023 included a $2.9 million provision for credit losses and a $615,000 reversal for unfunded commitments.

Previous 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.

Current wording

Noninterest income was $3.2 million for the third quarter of 2024, a $425,000, or 15.5%, increase from noninterest income of $2.8 million for the third quarter of 2023. Mortgage banking income continues to be the largest component of our noninterest income at $1.5 million for the third quarter of 2024, an increase of $241,000, or 20.0%, over the prior year. The increase was driven by higher mortgage volume during the third quarter of 2024. Service fees on deposit accounts increased $99,000, or 27.8%, over the prior year. The increase was driven by fee income on our commercial credit cards and additional wire fee income.

Previous wording

Noninterest income was $6.2 million for the first half of 2024, a $1.4 million, or 29.4%, increase from noninterest income of $4.8 million for the first half of 2023. Mortgage banking income increased by $1.1 million, or 57.6%, over the prior year while service fees on deposit accounts increased $154,000, or 23.5%, from the first half of 2023.

Current wording

Noninterest income was $9.4 million for the first nine months of 2024, a $1.8 million, or 24.4%, increase from noninterest income of $7.5 million for the first nine months of 2023. Mortgage banking income increased by $1.4 million, or 43.2%, over the prior year while service fees on deposit accounts increased $254,000, or 25.1%, from the first nine months of 2023.

Previous 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:

Current wording

Noninterest expense was $18.0 million for the third quarter of 2024, a $737,000, or 4.3%, increase from noninterest expense of $17.3 million for the third quarter of 2023. The increase in noninterest expense was driven primarily by the following:

Previous wording

Noninterest expense was $36.7 million for the first half of 2024, a $2.2 million, or 6.5%, increase from noninterest expense of $34.5 million for the first half of 2023. The increase in noninterest expense was driven primarily by the following:

Current wording

Noninterest expense was $54.8 million for the first nine months of 2024, a $3.0 million, or 5.8%, increase from noninterest expense of $51.8 million for the first nine months of 2023. The increase in noninterest expense was driven primarily by the following:

Previous wording

Partially offsetting these increases, professional fees decreased $169,000, or 22.5%, relating primarily to decreases in loan appraisal fees and consulting fees.

Current wording

Partially offsetting these increases, professional fees decreased $166,000, or 8.7%, relating primarily to decreases in loan appraisal fees, legal fees and other consulting fees.

Previous 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.

Current wording

Our efficiency ratio was 75.9% for the third quarter of 2024, compared to 78.3% for the third 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 improvement during the 2024 period is due to the higher level of net interest income recorded.

Previous 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.

Current wording

We incurred income tax expense of $1.3 million and $1.2 million for the three months ended September 30, 2024 and 2023, respectively, and $3.1 million and $2.8 million for the nine months ended September 30, 2024 and 2023, respectively. Our effective tax rate was 23.9% and 23.4% for the nine months ended September 30, 2024 and 2023, respectively. The higher tax rate during the first nine months of 2024 was driven by the effect of equity compensation transactions during the period.

Previous 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.

Current wording

At September 30, 2024, the $154.2 million in our investment securities portfolio represented approximately 3.7% 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 $134.6 million and an amortized cost of $146.1 million, resulting in an unrealized loss of $11.5 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 $299,000 from December 31, 2023 to $19.6 million at September 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 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.

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 nine months ended September 30, 2024 and 2023 were $3.62 billion and $3.46 billion, respectively. Before the allowance for credit losses, total loans outstanding at September 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 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.

Current wording

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 $195.4 million as of September 30, 2024, of which approximately 45% 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 $89,000 and a loan to value of 73% as of September 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, 0.3% and 0.8% of our total home equity lines of credit were over 30 days past due as of September 30, 2024 and December 31, 2023, respectively.

Previous 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.

Current wording

Following is a summary of our loan composition at September 30, 2024 and December 31, 2023. During the first nine months of 2024, our loan portfolio increased by $16.9 million, or 0.47%, primarily driven by a $15.5 million increase in consumer loans secured by real estate. Our consumer real estate portfolio grew by $49.9 million and includes high quality 1-4 family consumer real estate loans. Our average consumer real estate loan currently has a principal balance of $470,000, a term of 23 years, and an average rate of 4.33% as of September 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

Nonperforming assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure and loans on nonaccrual status. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of June 30, 2024 and December 31, 2023, we had no loans 90 days past due and still accruing.

Current wording

as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms and to show capacity to continue performing into the future before that loan can be placed back on accrual status. As of September 30, 2024 and December 31, 2023, we had no loans 90 days past due and still accruing.

Previous 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.

Current wording

At September 30, 2024, nonperforming assets were $11.6 million, or 0.28% of total assets and 0.32% 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 $7.6 million during the first nine months of 2024 due primarily to two relationships totaling $6.9 million that went on nonaccrual during the second quarter. The amount of foregone interest income on nonaccrual loans in the first nine months of 2024 and 2023 was $134,000 and $48,000, respectively.

Previous 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.

Current wording

At September 30, 2024 and December 31, 2023, the allowance for credit losses represented 346.78% and 1,026.58% of the total amount of nonperforming loans, respectively. A significant portion of the nonperforming loans at September 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

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.

Current wording

In addition, at September 30, 2024, 84.4% of our loans were collateralized by real estate and 98.8% of our individually evaluated loans were secured by real estate. 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 September 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 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.

Current wording

At September 30, 2024, individually evaluated loans totaled $12.4 million with a reserve of approximately $1.6 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 $40.2 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.

Current wording

The allowance for credit losses was $40.2 million, representing 1.11% of outstanding loans and providing coverage of 346.78% of nonperforming loans at September 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 September 30, 2023, the allowance for credit losses was $41.1 million, or 1.16% of outstanding loans and 953.25% of nonperforming loans.

Previous 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.

Current wording

Our retail deposits represented $2.93 billion, or 83.3% of total deposits, while our wholesale deposits represented $588.5 million, or 16.7%, of total deposits at September 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 103% at September 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. 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.

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 $15.6 million from $674.2 million at December 31, 2023, our core deposits decreased to $2.71 billion from $2.81 billion at December 31, 2023. In addition, at September 30, 2024 and December 31, 2023, we estimate that we have approximately $1.3 billion, or 36.3% 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.