FIRST COMMUNITY CORP SC

Previous wording

The following discussion describes our results of operations for the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023 and analyzes our financial condition as of June 30, 2024 as compared to December 31, 2023. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary sources of funds for making these loans and investments are our deposits and borrowings, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. There are risks inherent in all loans, so we maintain an allowance for credit losses to absorb our estimate of expected credit losses on existing loans that may become uncollectible. We establish and maintain this allowance by recording a provision for or release of credit losses against our earnings. In the following section, we have included a detailed discussion of this process.

Current wording

The following discussion describes our results of operations for the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 30, 2023 and analyzes our financial condition as of September 30, 2024 as compared to December 31, 2023. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary sources of funds for making these loans and investments are our deposits and borrowings, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. There are risks inherent in all loans, so we maintain an allowance for credit losses to absorb our estimate of expected credit losses on existing loans that may become uncollectible. We establish and maintain this allowance by recording a provision for or release of credit losses against our earnings. In the following section, we have included a detailed discussion of this process.

Previous wording

Effective July 1, 2024, J. Ted Nissen became the Chief Executive Officer of the Bank while still retaining in the role of President and he also joined the Company’s and the Bank’s boards of directors. Michael C. Crapps continues in his role as President and Chief Executive Officer of the Company. In his role as Chief Executive Officer of the Bank, Mr. Nissen is responsible for the leadership of day-to-day operations of the Bank including its mortgage and financial planning lines of business. Mr. Crapps will continue to focus on board governance, investor relations, strategy development and growth decisions, client retention and prospecting, and leadership development.

Current wording

Effective July 1, 2024, J. Ted Nissen became the Chief Executive Officer of the Bank while still retaining the role of President and he also joined the Company’s and the Bank’s boards of directors. Michael C. Crapps continues in his role as President and Chief Executive Officer of the Company. In his role as Chief Executive Officer of the Bank, Mr. Nissen is responsible for the leadership of day-to-day operations of the Bank including its mortgage and financial planning lines of business. Mr. Crapps will continue to focus on board governance, investor relations, strategy development and growth decisions, client retention and prospecting, and leadership development.

Previous wording

Effective December 31, 2024, Tanya A. Butts intends to retire from her roles as Executive Vice President and Chief Operations/Risk Officer of the Company and Bank. The search for her successor is in process and it is anticipated that there will be an opportunity for an overlap to ensure a smooth transition.

Current wording

Effective December 31, 2024, Tanya A. Butts intends to retire from her roles as Executive Vice President and Chief Operations/Risk Officer of the Company and Bank. We selected Sarah Donley, our Senior Vice President and Controller and a 27-year employee, as Ms. Butts’ successor following a transition period.

Previous wording

Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments, deposits and borrowings through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member banks’ deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies. During 2023, market interest rates increased 1.00% due to an increase in inflation. The target range of federal funds was 5.25% - 5.50% at June 30, 2024 compared to 5.00% - 5.25% at June 30, 2023. Changes in market interest rates can have a significant impact on the level of income and expense recorded on a large portion of our interest-earning assets and interest-bearing liabilities, and on the market value of all interest-earning assets, other than those possessing a short term to maturity. Furthermore, changes in market interest rates can have a significant impact on the level of mortgage originations and related mortgage banking income.

Current wording

Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments, deposits and borrowings through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member banks’ deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies. During 2023, market interest rates increased 1.00% due to an increase in inflation. The target range of federal funds was 5.25% - 5.50% from July 26, 2023 to September 17, 2024. On September 18, 2024, the FOMC reduced the target range of federal funds by 0.50% to 4.75% - 5.00%. The target range of federal funds was 4.75% - 5.00% at September 30, 2024 compared to 5.25% - 5.50% at September 30, 2023. Changes in market interest rates can have a significant impact on the level of income and expense recorded on a large portion of our interest-earning assets and interest-bearing liabilities, and on the market value of all interest-earning assets, other than those possessing a short term to maturity. Furthermore, changes in market interest rates can have a significant impact on the level of mortgage originations and related mortgage banking income.

Previous wording

Our net income for the three months ended June 30, 2024 decreased $62,000 to $3.3 million, or $0.42 diluted earnings per common share, as compared to $3.3 million, or $0.43 diluted earnings per common share, for the three months ended June 30, 2023. The $62,000 decline in net income between the two periods is primarily due to a $268,000 increase in provision for credit losses and a $1.1 million increase in total non-interest expense, partially offset by a $557,000 increase in net interest income, a $591,000 increase in total non-interest income, and a $146,000 decrease in income tax expense.

Current wording

Our net income for the three months ended September 30, 2024 increased $2.1 million to $3.9 million, or $0.50 diluted earnings per common share, as compared to $1.8 million, or $0.23 diluted earnings per common share, for the three months ended September 30, 2023. The $2.1 million increase in net income between the two periods is primarily due to a $1.3 million increase in net interest income, a $490,000 decrease in provision for credit losses, and a $1.7 million increase in total non-interest income, partially offset by a $718,000 increase in total non-interest expense and a $682,000 increase in income tax expense.

Previous wording

Net interest income increased $557,000, or 4.6%, to $12.7 million for the three months ended June 30, 2024 from $12.1 million for the three months ended June 30, 2023. Our net interest margin decreased by eight basis points to 2.92% during the three months ended June 30, 2024 from 3.00% during the three months ended June 30, 2023. Our net interest margin, on a taxable equivalent basis, was 2.93% for the three months ended June 30, 2024 compared to 3.02% for the three months ended June 30, 2023. Average earning assets were $1.7 billion for the three months ended June 30, 2024 and $1.6 billion in the same period of 2023.

Current wording

Net interest income increased $1.3 million, or 10.8%, to $13.4 million for the three months ended September 30, 2024 from $12.1 million for the three months ended September 30, 2023. Our net interest margin remained flat at 2.95% during the three months ended September 30, 2024 compared to 2.95% during the three months ended September 30, 2023. Our net interest margin, on a taxable equivalent basis, was 2.96% for the three months ended September 30, 2024 compared to 2.96% for the three months ended September 30, 2023. Average earning assets were $1.8 billion for the three months ended September 30, 2024 and $1.6 billion in the same period of 2023.

Previous wording

Average loans increased $161.1 million, or 15.8%, to $1.2 billion for the three months ended June 30, 2024 from $1.0 billion for the same period in 2023. Average loans represented 67.4% of average earning assets during the three months ended June 30, 2024 compared to 62.7% of average earning assets during the same period in 2023. Our loan (including loans held-for-sale) to deposit ratio on average during the three months ended June 30, 2024 was 75.1%, as compared to 72.2% during same period in 2023. The loan to deposit ratio (including loans held-for-sale) increased to 74.5% at June 30, 2024 as compared to 73.5% at June 30, 2023. The yield on loans increased 74 basis points to 5.60% during the three months ended June 30, 2024 from 4.86% during the same period in 2023 due to an increase in market interest rates and the Pay-Fixed Swap Agreement.

Current wording

Average loans increased $134.5 million, or 12.6%, to $1.2 billion for the three months ended September 30, 2024 from $1.1 billion for the same period in 2023. Our loan (including loans held-for-sale) to deposit ratio on average during the three months ended September 30, 2024 was 74.0%, as compared to 74.4% during same period in 2023. The yield on loans increased 59 basis points to 5.73% during the three months ended September 30, 2024 from 5.14% during the same period in 2023 due to an increase in market interest rates.

Previous wording

Average securities for the three months ended June 30, 2024 decreased $71.4 million, or 12.7%, to $491.2 million from $562.7 million during the same period in 2023. Short-term investments and CDs increased $37.4 million to $80.0 million during the three months ended June 30, 2024 from $42.6 million during the same period in 2023. The increase in short-term investments was due to our decision to hold excess liquidity in interest bearing deposits at the Federal Reserve Bank. The yield on our securities portfolio increased to 3.66% for the three months ended June 30, 2024 from 3.27% for the same period in 2023. The yield on our short-term investments declined to 5.32% for the three months ended June 30, 2024 from 5.58%.

Current wording

Average securities for the three months ended September 30, 2024 decreased $45.5 million, or 8.5%, to $487.6 million from $533.1 million during the same period in 2023. Short-term investments and CDs increased $88.5 million to $118.0 million during the three months ended September 30, 2024 from $29.5 million during the same period in 2023. The increase in short-term investments was due to our decision to hold excess liquidity in interest bearing deposits at the Federal Reserve Bank. The yield on our securities portfolio increased to 3.53% for the three months ended September 30, 2024 from 3.42% for the same period in 2023. The yield on our short-term investments improved to 5.23% for the three months ended September 30, 2024 from 4.51%.

Previous wording

The yields on earning assets for the three months ended June 30, 2024 and 2023 were 5.04% and 4.33%, respectively.

Current wording

The yields on earning assets for the three months ended September 30, 2024 and 2023 were 5.10% and 4.56%, respectively.

Previous wording

The cost of interest-bearing liabilities was 2.94% during the three months ended June 30, 2024 compared to 1.88% during the same period in 2023. The cost of deposits, including demand deposits, was 1.98% during the three months ended June 30, 2024 compared to 97 basis points during the same period in 2023. The cost of funds, including demand deposits, was 2.17% during the three months ended June 30, 2024 compared to 1.34% during the same period in 2023. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, and IRAs) plus customer cash management repurchase agreements as these accounts tend to be low-cost funding and assist us in controlling our overall cost of funds. During the three months ended June 30, 2024, pure deposits plus customer cash management repurchase agreements averaged 82.9% of total deposits plus customer cash management repurchase agreements as compared to 91.7% during the same period of 2023. This reduction is related to a higher rate of growth in our certificates of deposit compared to pure deposits due to the higher interest rate environment and strong loan growth. The growth in certificates of deposit is related to both customer certificates of deposit and brokered certificates of deposit. We began issuing brokered certificates of deposit during the third quarter of 2023 to supplement our funding mix. As of June 30, 2024, we had $42.9 million in brokered certificates of deposit ranging in initial terms from one year to three years, with the three year term callable after six months. We had $48.1 million and zero in brokered certificates of deposit at December 31, 2023 and at June 30, 2023, respectively.

Current wording

The cost of interest-bearing liabilities was 2.96% during the three months ended September 30, 2024 compared to 2.27% during the same period in 2023. The cost of deposits, including demand deposits, was 2.03% during the three months ended September 30, 2024 compared to 1.32% during the same period in 2023. The cost of funds, including demand deposits, was 2.21% during the three months ended September 30, 2024 compared to 1.64% during the same period in 2023. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, and IRAs) plus customer cash management repurchase agreements as these accounts tend to be low-cost funding and assist us in controlling our overall cost of funds. Average pure deposits plus customer cash management repurchase agreements increased $47.0 million or 3.5% to $1.4 billion during the three months ended September 30, 2024 from $1.3 billion during the same period in 2023. During the three months ended September 30, 2024, pure deposits plus customer cash management repurchase agreements averaged 82.6% of total deposits plus customer cash management repurchase agreements as compared to 89.7% during the same period of 2023. This reduction is related to a higher rate of growth in our certificates of deposit compared to pure deposits due to the higher interest rate environment. The growth in certificates of deposit is related to both customer certificates of deposit and brokered certificates of deposit. We began issuing brokered certificates of deposit during the third quarter of 2023 to supplement our funding mix. As of September 30, 2024, we had $22.4 million in brokered certificates of deposit ranging in initial terms from 18 months to three years, with the three year term callable after six months. We had $48.1 million and $48.1 million in brokered certificates of deposit at December 31, 2023 and at September 30, 2023, respectively.

Previous wording

Non-interest income during the three months ended June 30, 2024 increased $591,000 to $3.6 million from $3.1 million during the same period in 2023. The increase in non-interest income was primarily related to increases of $288,000 in mortgage banking income and $427,000 in investment advisory fees and non-deposit commissions, partially offset by decreases of $105,000 in gain on sale of other assets and $26,000 in non-recurring income.

Current wording

Non-interest income during the three months ended September 30, 2024 increased $1.7 million to $3.6 million from $1.9 million during the same period in 2023. The increase in non-interest income was primarily related to increases of $64,000 in mortgage banking income, $408,000 in investment advisory fees and non-deposit commissions, $38,000 in other non-interest income, and a decrease of $1.2 million in loss on sale of securities, partially offset by decreases of $12,000 in deposit service charges and $41,000 in gain on sale of other assets.

Previous wording

Mortgage banking income increased $288,000 to $659,000 during the three months ended June 30, 2024 from $371,000 during the same period in 2023. Total production in the mortgage line of business in the three months ended June 30, 2024 was $49.0 million, which was comprised of $22.7 million in secondary market loans, $14.6 million in adjustable rate mortgages (ARMs), and $11.7 million in commitments for new construction residential real estate loans. Fee revenue from the mortgage line of business was $659,000 for the three months ended June 30, 2024, which includes $655,000 associated with the secondary market loans with a gain-on-sale margin of 2.89%. This compares to production year-over-year of $32.3 million which was comprised of $12.9 million in secondary market loans, $5.7 million in ARMs, and $13.7 million in commitments for new construction residential real estate loans during the three months ended June 30, 2023. Fee revenue associated with the secondary market loans during the three months ended June 30, 2023 was $371,000 with a gain-on-sale margin of 3.07%.

Current wording

Mortgage banking income increased $64,000 to $575,000 during the three months ended September 30, 2024 from $511,000 during the same period in 2023. Total production in the mortgage line of business in the three months ended September 30, 2024 was $38.1 million, which was comprised of $19.5 million in secondary market loans, $8.7 million in adjustable rate mortgages (ARMs), and $9.9 million in commitments for new construction residential real estate loans. Fee revenue from the mortgage line of business was $575,000 for the three months ended September 30, 2024, which includes $571,000 associated with the secondary market loans with a gain-on-sale margin of 2.92%. This compares to production year-over-year of $41.7 million which was comprised of $17.3 million in secondary market loans, $11.4 million in ARMs, and $13.0 million in commitments for new construction residential real estate loans during the three months ended September 30, 2023. Fee revenue from the mortgage line of business was $511,000, which includes $508,000 associated with the secondary market loans with a gain-on-sale margin of 2.93% during the three months ended September 30, 2023.

Previous wording

Investment advisory fees rose $427,000 to $1.5 million during the three months ended June 30, 2024 from $1.1 million during the same period in 2023. Total assets under management increased to $865.6 million at June 30, 2024 compared to $755.4 million at December 31, 2023 and $675.4 million at June 30, 2023. Our net new assets were $6.9 million during the three months ended June 30, 2024. Furthermore, our investment performance for the three months ended June 30, 2024 was 3.1% compared to 3.9% for the S&P 500; and our investment performance for the 12-month period ended June 30, 2024 was 22.0% compared to 22.7% for the S&P 500.

Current wording

Investment advisory fees rose $408,000 to $1.6 million during the three months ended September 30, 2024 from $1.2 million during the same period in 2023. Total assets under management increased to $901.6 million at September 30, 2024 compared to $755.4 million at December 31, 2023 and $674.5 million at September 30, 2023. Our net new assets were $6.0 million during the three months ended September 30, 2024. Furthermore, our investment performance for the three months ended September 30, 2024 was 3.5% compared to 5.5% for the S&P 500; and our investment performance for the 12-month period ended September 30, 2024 was 29.2% compared to 34.4% for the S&P 500. Our customers’ assets under management are not fully invested in only equities. Our assets under management include bonds and cash.

Previous wording

Gain on sale of other assets declined $105,000 to zero during the three months ended June 30, 2024 from $105,000 during the same period in 2023 due to a sale of other real estate owned during the three months ended June 30, 2023.

Current wording

Gain on sale of other assets declined $41,000 to $5,000 during the three months ended September 30, 2024 from $46,000 during the same period in 2023 due to a sale of other real estate owned during the three months ended September 30, 2023.

Previous wording

Non-interest expense increased $1.1 million during the three months ended June 30, 2024 to $11.8 million compared to $10.8 million during the same period in 2023. The $1.1 million increase in non-interest expense is primarily due to increases in salaries and employee benefits, FDIC insurance assessments, other real estate expense, and other expense partially offset by decreases in occupancy, equipment, and marketing and public relations.

Current wording

Non-interest expense increased $718,000 during the three months ended September 30, 2024 to $12.0 million compared to $11.3 million during the same period in 2023. The $718,000 increase in non-interest expense is primarily due to increases in salaries and employee benefits, occupancy, FDIC insurance assessments, partially offset by decreases in equipment, marketing and public relations, other real estate expense, net, and other non-interest expense.

Previous wording

We incurred income tax expense of $774,000 and $920,000 for the three months ended June 30, 2024 and 2023, respectively. Our effective tax rate was 19.16% and 21.66% for the three months ended June 30, 2024 and 2023, respectively. The reduction in the effective tax rate was due to a non-recurring adjustment of $249,000 during the three months ended June 30, 2024.

Current wording

We incurred income tax expense of $1.1 million and $464,000 for the three months ended September 30, 2024 and 2023, respectively. Our effective tax rate was 22.89% and 20.90% for the three months ended September 30, 2024 and 2023, respectively.

Previous wording

Comparison of Results of Operations for Six Months Ended June 30, 2024 to the Six Months Ended June 30, 2023

Current wording

Comparison of Results of Operations for Nine Months Ended September 30, 2024 to the Nine Months Ended September 30, 2023

Previous wording

Our net income for the six months ended June 30, 2024 decreased $928,000 to $5.9 million, or $0.76 diluted earnings per common share, from $6.8 million, or $0.89 diluted earnings per common share for the six months ended June 30, 2023. The decrease in net income between the two periods is primarily due to a $327,000 increase in provision for credit losses and a $2.5 million increase in total non-interest expense, partially offset by a $277,000 increase in net interest income, a $1.2 million increase in total non-interest income, and a $379,000 decrease in income tax expense.

Current wording

Our net income for the nine months ended September 30, 2024 increased $1.2 million to $9.7 million, or $0.14 diluted earnings per common share, from $8.5 million, or $1.12 diluted earnings per common share for the nine months ended September 30, 2023. The increase in net income between the two periods is primarily due to a $1.6 million increase in net interest income, a $163,000 decline in provision for credit losses, and a $2.9 million increase in total non-interest income, partially offset by a $3.2 million increase in total non-interest expense and a $303,000 increase in income tax expense.

Previous wording

Net interest income increased $277,000, or 1.1%, to $24.8 million for the six months ended June 30, 2024 from $24.5 million for the six months ended June 30, 2023. Our net interest margin decreased by 23 basis points to 2.85% during the six months ended June 30, 2024 from 3.08% during the six months ended June 30, 2023. Our net interest margin, on a taxable equivalent basis, was 2.86% for the six months ended June 30, 2024 compared to 3.10% for the six months ended June 30, 2023. Average earning assets increased $145.6 million, or 9.1%, to $1.7 billion for the six months ended June 30, 2024 compared to $1.6 billion in the same period of 2023.

Current wording

Net interest income increased $1.6 million, or 4.3%, to $38.2 million for the nine months ended September 30, 2024 from $36.6 million for the nine months ended September 30, 2023. Our net interest margin decreased by 15 basis points to 2.89% during the nine months ended September 30, 2024 from 3.04% during the nine months ended September 30, 2023. Our net interest margin, on a taxable equivalent basis, was 2.89% for the nine months ended September 30, 2024 compared to 3.06% for the nine months ended September 30, 2023. Average earning assets increased $156.2 million, or 9.7%, to $1.8 billion for the nine months ended September 30, 2024 compared to $1.6 billion in the same period of 2023.

Previous wording

Average loans increased $161.9 million, or 16.2%, to $1.2 billion for the six months ended June 30, 2024 from $1.0 billion for the same period in 2023. Our loan (including loans held-for-sale) to deposit ratio on average during the six months ended June 30, 2024 was 75.3%, as compared to 71.8% during the same period in 2023. Our average growth in loans during the six months ended June 30, 2024 from the same period in 2023 of $161.9 million exceeded our increase in deposits of $150.2 million during the same period. The yield on loans increased 80 basis points to 5.52% during the six months ended June 30, 2024 from 4.72% during the same period in 2023 due to an increase in market interest rates and the Pay-Fixed Swap Agreement.

Current wording

Average loans increased $152.6 million, or 14.9%, to $1.2 billion for the nine months ended September 30, 2024 from $1.0 billion for the same period in 2023. Our loan (including loans held-for-sale) to deposit ratio on average during the nine months ended September 30, 2024 was 74.9%, as compared to 72.7% during the same period in 2023. Our growth in average loans during the nine months ended September 30, 2024 from the same period in 2023 of $152.6 million was exceeded by our increase in deposits of $162.9 million during the same period. The yield on loans increased 72 basis points to 5.59% during the nine months ended September 30, 2024 from 4.87% during the same period in 2023 due to an increase in market interest rates and the Pay-Fixed Swap Agreement.

Previous wording

Average securities for the six months ended June 30, 2024 declined $68.6 million, or 12.2%, to $495.3 million from $563.9 million during the same period in 2023. The decline in securities was due to the deployment of lower yielding securities into higher yielding loans. Short-term investments increased $52.3 million to $88.7 million during the six months ended June 30, 2024 from $36.4 million during the same period in 2023. The increase in short-term investments was due to our decision to hold excess liquidity in interest bearing deposits at the Federal Reserve Bank. The yield on our securities portfolio increased to 3.66% for the six months ended June 30, 2024 from 3.23% for the same period in 2023. The yield on our short-term investments increased to 5.03% for the six months ended June 30, 2024 from 4.92% for the same period in 2023.

Current wording

Average securities for the nine months ended September 30, 2024 declined $60.8 million, or 11.0%, to $492.7 million from $553.5 million during the same period in 2023. The decline in securities was due to the deployment of lower yielding securities into higher yielding loans. Short-term investments increased $64.5 million to $98.5 million during the nine months ended September 30, 2024 from $34.1 million during the same period in 2023. The increase in short-term investments was due to our decision to hold excess liquidity in interest bearing deposits at the Federal Reserve Bank. The yield on our securities portfolio increased to 3.62% for the nine months ended September 30, 2024 from 3.29% for the same period in 2023. The yield on our short-term investments increased to 5.11% for the nine months ended September 30, 2024 from 4.80% for the same period in 2023.

Previous wording

The yields on earning assets for the six months ended June 30, 2024 and 2023 were 4.97% and 4.20%, respectively.

Current wording

The yields on earning assets for the nine months ended September 30, 2024 and 2023 were 5.01% and 4.33%, respectively.

Previous wording

The cost of interest-bearing liabilities was 2.91% during the six months ended June 30, 2024 compared to 1.59% during the same period in 2023. The cost of deposits, including demand deposits, was 1.94% during the six months ended June 30, 2024 compared to 78 basis points during the same period in 2023. The cost of funds, including demand deposits, was 2.17% during the six months ended June 30, 2024 compared to 1.14% during the same period in 2023. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, and IRAs) plus customer cash management repurchase agreements as these accounts tend to be low-cost funding and assist us in controlling our overall cost of funds. During the six months ended June 30, 2024, pure deposits plus customer cash management repurchase agreements averaged 83.5% of total deposits plus customer cash management repurchase agreements as compared to 92.0% during the same period of 2023. This reduction is related to a higher rate of growth in our certificates of deposit compared to pure deposits due to the higher interest rate environment and strong loan growth. The growth in certificates of deposit is related to both customer certificates of deposit and brokered certificates of deposit. We began issuing brokered certificates of deposit during the third quarter of 2023 to supplement our funding mix. As of June 30, 2024, we had $42.9 million in brokered certificates of deposit ranging in initial terms from one year to three years, with the three year term callable after six months. We had $48.1 million and zero in brokered certificates of deposit at December 31, 2023 and at June 30, 2023, respectively.

Current wording

The cost of interest-bearing liabilities was 2.92% during the nine months ended September 30, 2024 compared to 1.83% during the same period in 2023. The cost of deposits, including demand deposits, was 1.97% during the nine months ended September 30, 2024 compared to 0.96% during the same period in 2023. The cost of funds, including demand deposits, was 2.18% during the nine months ended September 30, 2024 compared to 1.31% during the same period in 2023. We continue to focus on growing our pure deposits (demand deposits, interest-bearing transaction accounts, savings deposits, money market accounts, and IRAs) plus customer cash management repurchase agreements as these accounts tend to be low-cost funding and assist us in controlling our overall cost of funds. Average pure deposits plus customer cash management repurchase agreements increased $14.8 million or 1.1% to $1.4 billion during the nine months ended September 30, 2024 from $1.4 billion during the same period in 2023. During the nine months ended September 30, 2024, pure deposits plus customer cash management repurchase agreements averaged 83.2% of total deposits plus customer cash management repurchase agreements as compared to 91.2% during the same period of 2023. This reduction is related to a higher rate of growth in our certificates of deposit compared to pure deposits due to the higher interest rate environment. The growth in certificates of deposit is related to both customer certificates of deposit and brokered certificates of deposit. We began issuing brokered certificates of deposit during the third quarter of 2023 to supplement our funding mix. As of September 30, 2024, we had $22.4 million in brokered certificates of deposit ranging in initial terms from 18 months to three years, with the three year term callable after six months. We had $48.1 million and $48.1 million in brokered certificates of deposit at December 31, 2023 and at September 30, 2023, respectively.

Previous wording

Non-interest income during the six months ended June 30, 2024 increased $1.2 million to $6.8 million from $5.6 million during the same period in 2023. The increase in non-interest income was primarily related to increases in deposit service charges, mortgage banking income and investment advisory fees and non-deposit commissions partially offset by declines in gain on sale of other assets and other non-recurring income.

Current wording

Non-interest income during the nine months ended September 30, 2024 increased $2.9 million to $10.4 million from $7.5 million during the same period in 2023. The increase in non-interest income was primarily related to increases in deposit service charges, mortgage banking income, investment advisory fees and non-deposit commissions, and other non-interest income and a decline in loss on sale of other securities, partially offset by a decrease in gain on sale of other assets.

Previous wording

Deposit service charges increased $42,000 to $494,000 during the six months ended June 30, 2024 from $452,000 during the same period in 2023 due to higher service charges and NSF/OD fees.

Current wording

Deposit service charges increased $30,000 to $722,000 during the nine months ended September 30, 2024 from $692,000 during the same period in 2023 due to higher service charges and non-sufficient funds and overdraft fees.

Previous wording

Mortgage banking income increased by $558,000 to $1.1 million during the six months ended June 30, 2024 from $526,000 during the same period in 2023. Secondary mortgage production during the six months ended June 30, 2024 was $35.7 million compared to $18.1 million during the same period in 2023 while the gain on sale margin declined to 2.90% during the six months ended June 30, 2024 from 3.00% during the same period in 2023.

Current wording

Mortgage banking income increased by $619,000 to $1.7 million during the nine months ended September 30, 2024 from $1.0 million during the same period in 2023. Secondary mortgage production during the nine months ended September 30, 2024 was $55.3 million compared to $35.5 million during the same period in 2023 while the gain on sale margin increased to 2.97% during the nine months ended September 30, 2024 from 2.92% during the same period in 2023.

Previous wording

Investment advisory fees increased $718,000 to $2.9 million during the six months ended June 30, 2024 from $2.1 million during the same period in 2023. Total assets under management increased to $865.6 million at June 30, 2024 compared to $755.4 million at December 31, 2023 and $675.4 million at June 30, 2023. Our net new assets were $23.5 million during the six months ended June 30, 2024. Furthermore, our investment performance for the six-month period from December 31, 2023 to June 30, 2024 was 11.5% compared to 14.5% for the S&P 500; and our investment performance for the 12-month period from June 30, 2023 to June 30, 2024 was 22.0% compared to 22.7% for the S&P 500. We continue to focus on both the mortgage banking income as well as the investment advisory fees and commissions.

Current wording

Investment advisory fees increased $1.1 million to $4.5 million during the nine months ended September 30, 2024 from $3.3 million during the same period in 2023. Total assets under management increased to $901.6 million at September 30, 2024 compared to $755.4 million at December 31, 2023 and $674.5 million at September 30, 2023. Our net new assets were $29.4 million during the nine months ended September 30, 2024. Furthermore, our investment performance for the nine-month period from December 31, 2023 to September 30, 2024 was 15.5% compared to 20.8% for the S&P 500; and our investment performance for the 12-month period from September 30, 2023 to September 30, 2024 was 29.2% compared to 34.4% for the S&P 500. Our customers’ assets under management are not fully invested in only equities. Our assets under management include bonds and cash. We continue to focus on both the mortgage banking income as well as the investment advisory fees and commissions.

Previous wording

Gain on sale of other assets declined $105,000 to zero during the six months ended June 30, 2024 from $105,000 during the same period in 2023 due to a sale of other real estate owned during the six months ended June 30, 2023.

Current wording

Gain (loss) on sale of other assets declined $146,000 to a gain of $5,000 during the nine months ended September 30, 2024 from $151,000 during the same period in 2023 due an income tax recovery in 2024 on a previously sold other real estate owned property and due to a sale of other real estate owned during the nine months ended September 30, 2023.

Previous wording

Other non-recurring income declined $26,000 to $95,000 during the three months ended June 30, 2024 from $121,000 during the same period in 2023. Non-recurring income of $95,000 during the three months ended June 30, 2024 is related to a gain on insurance proceeds of $101,000 partially offset by a loss on disposition of assets on the closing of our downtown Augusta, Georgia banking office of $6,000. Non-recurring income of $121,000 during the three months ended June 30, 2023 is related to a bank owned life insurance claim of $93,000 and gains on insurance proceeds of $28,000.

Current wording

Other non-interest income increased $28,000 to $3.5 million during the nine months ended September 30, 2024 from $3.5 million during the same period in 2023. The $28,000 increase in other non-interest income was due to an increase in recurring bank owned life insurance of $43,000 partially offset by declines in ATM debit card income of $42,000 and other non-recurring noninterest income of $26,000. Other noninterest income non-recurring income declined $26,000 to $95,000 during the nine months ended September 30, 2024 from $121,000 during the same period in 2023. Non-recurring income of $95,000 during the nine months ended September 30, 2024 is related to a gain on insurance proceeds of $101,000 partially offset by a loss on disposition of assets on the closing of our downtown Augusta, Georgia banking office of $6,000. Non-recurring income of $121,000 during the nine months ended September 30, 2023 is related to a bank owned life insurance claim of $93,000 and gains on insurance proceeds of $28,000.

Previous wording

Non-interest expense increased $2.5 million during the six months ended June 30, 2024 to $23.6 million compared to $21.2 million during the same period in 2023. The $2.5 million increase in non-interest expense is primarily due to increases in salaries and employee benefits, marketing and public relations, FDIC insurance assessments, other real estate expense, and other expense partially offset by decreases in occupancy fees and equipment expense.

Current wording

Non-interest expense increased $3.2 million during the nine months ended September 30, 2024 to $35.6 million compared to $32.5 million during the same period in 2023. The increase in non-interest expense is primarily due to increases in salaries and employee benefits, FDIC insurance assessments, other real estate expense, and other expense partially offset by decreases in occupancy fees, equipment expense, and marketing and public relations expense.

Previous wording

The following table shows the components of non-interest expense for the six-month periods ended June 30, 2024 and June 30, 2023.

Current wording

The following table shows the components of non-interest expense for the nine months ended September 30, 2024 and September 30, 2023.

Previous wording

We incurred income tax expense of $1.5 million and $1.9 million for the six months ended June 30, 2024 and 2023, respectively. Our effective tax rate was 20.42% and 21.71% for the six months ended June 30, 2024 and 2023, respectively. The decrease in the effective tax rate was primarily due to a $149,000 non-recurring reduction to income tax expense during the six months ended June 30, 2024.

Current wording

We incurred income tax expense of $2.7 million and $2.3 million for the nine months ended September 30, 2024 and 2023, respectively. Our effective tax rate was 21.42% and 21.55% for the nine months ended September 30, 2024 and 2023, respectively. The decrease in the effective tax rate was primarily due to a $149,000 non-recurring reduction to income tax expense during the nine months ended September 30, 2024.

Previous wording

On January 1, 2023, we adopted CECL, which resulted in a day one reduction of $14,000 to the allowance for credit losses on loans offset by increases of $398,000 to the allowance for credit losses on unfunded commitments and $43,500 to the allowance for credit losses on held-to-maturity investments. Furthermore, deferred tax assets increased $90,000 and retained earnings declined $337,000. Compared to the day one CECL results, the allowance for credit losses on loans increased $945,000 to $12.3 million at December 31, 2023 from $11.3 million at January 1, 2023; the allowance for credit losses on unfunded commitments increased $199,000 to $597,000 as of December 31, 2023 from $398,000 as of January 1, 2023; and the allowance for credit losses on held-to-maturity investments declined $14,000 to $30,000 at December 31, 2023 from $43,500 at January 1, 2023. Compared to December 31, 2023, the allowance for credit losses on loans increased $665,000 to $12.8 million at June 30, 2024 from $12.3 million at December 31, 2023; the allowance for credit losses on unfunded commitments declined $107,000 to $490,000 as of June 30, 2024 from $597,000 as of December 31, 2023; and the allowance for credit losses on held-to-maturity investments declined $3,000 to $27,000 at June 30, 2024 from $30,000 at December 31, 2023. As of June 30, 2024, the combined allowance for credit losses for loans, unfunded commitments, and investments was $13.4 million compared to $12.9 million at December 31, 2023 and $12.0 million at June 30, 2023.

Current wording

On January 1, 2023, we adopted CECL, which resulted in a day one reduction of $14,000 to the allowance for credit losses on loans offset by increases of $398,000 to the allowance for credit losses on unfunded commitments and $43,500 to the allowance for credit losses on held-to-maturity investments. Furthermore, deferred tax assets increased $90,000 and retained earnings declined $337,000. Compared to the day one CECL results, the allowance for credit losses on loans increased $945,000 to $12.3 million at December 31, 2023 from $11.3 million at January 1, 2023; the allowance for credit losses on unfunded commitments increased $199,000 to $597,000 as of December 31, 2023 from $398,000 as of January 1, 2023; and the allowance for credit losses on held-to-maturity investments declined $14,000 to $30,000 at December 31, 2023 from $43,500 at January 1, 2023. Compared to December 31, 2023, the allowance for credit losses on loans increased $666,000 to $12.9 million at September 30, 2024 from $12.3 million at December 31, 2023; the allowance for credit losses on unfunded commitments declined $188,000 to $409,000 as of September 30, 2024 from $597,000 as of December 31, 2023; and the allowance for credit losses on held-to-maturity investments declined $6,000 to $24,000 at September 30, 2024 from $30,000 at December 31, 2023. As of September 30, 2024, the combined allowance for credit losses for loans, unfunded commitments, and investments was $13.4 million compared to $12.9 million at December 31, 2023 and $12.5 million at September 30, 2023.

Previous wording

The $583,000 provision for credit losses during the six months ended June 30, 2024 is primarily related to a $55.2 million increase in loans held-for-investment, a slight extension in the average life of the loan portfolio due to lower loan prepayments, and $27,000 in net charge-offs partially offset by 3.5 basis points of reduction in our qualitative factors primarily related to our forecast alternative scenarios qualitative factor and a $25.2 million reduction in our unfunded commitments net of unconditionally cancellable commitments. The $256,000 provision for credit losses during the six months ended June 30, 2023 is primarily related to a $51.3 million increase in loans held-for-investment, increases in our qualitative factors related to our new residential construction mortgage team and product and forecast alternative scenarios, partially offset by $1,000 in net recoveries and a reduction on our qualitative factor related to past due, rated, and non-accrual loans due to a $4.8 million reduction in non-accrual loans.

Current wording

The $567,000 provision for credit losses during the nine months ended September 30, 2024 is primarily related to a $62.6 million increase in loans held-for-investment, a slight extension in the average life of the loan portfolio due to lower loan prepayments, and $95,000 in net charge-offs partially offset by 2.0 basis points of reduction in our qualitative factors primarily related to our reasonable and supportable forecast alternative scenarios qualitative factor and a $48.3 million reduction in our unfunded commitments net of unconditionally cancellable commitments. The $730,000 provision for credit losses during the nine months ended September 30, 2023 is primarily related to a $110.8 million increase in loans held-for-investment, a $60.2 million increase in unfunded commitments net of unconditionally cancellable commitments, and an increase in our changes in staff, markets, and product qualitative factor related to our new residential construction mortgage team and product partially offset by a reduction in our qualitative factors for changes in staff, markets, and products due to the seasoning of our Rock Hill, South Carolina team and market, which was added in the first quarter of 2022, and a reduction in our qualitative factors due to a $4.8 million reduction in non-accrual loans.

Previous wording

The allowance for credit losses on loans as a percentage of total loans held-for-investment was 1.09% at June 30, 2024, 1.08% at December 31, 2023, and 1.12% at June 30, 2023.

Current wording

The allowance for credit losses on loans as a percentage of total loans held-for-investment was 1.08% at September 30, 2024, 1.08% at December 31, 2023, and 1.08% at September 30, 2023.

Previous wording

We have a significant portion of our loan portfolio with real estate as the underlying collateral. As of June 30, 2024 and December 31, 2023, approximately 91.7% and 91.7%, respectively, of the loan portfolio had real estate collateral. When loans, whether commercial or personal, are granted, they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for credit losses as estimated at any point in time or that provisions for credit losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.

Current wording

We have a significant portion of our loan portfolio with real estate as the underlying collateral. As of September 30, 2024 and December 31, 2023, approximately 91.5% and 91.7%, respectively, of the loan portfolio had real estate collateral. When loans, whether commercial or personal, are granted, they are based on the borrower’s ability to generate repayment cash flows from income sources sufficient to service the debt. Real estate is generally taken to reinforce the likelihood of the ultimate repayment and as a secondary source of repayment. We work closely with all our borrowers that experience cash flow or other economic problems, and we believe that we have the appropriate processes in place to monitor and identify problem credits. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for credit losses as estimated at any point in time or that provisions for credit losses will not be significant to a particular accounting period. The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions. Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.

Previous wording

The non-performing asset ratio was 0.04% of total assets with the nominal level of $717,000 in non-performing assets at June 30, 2024 compared to 0.05% and $864,000 at December 31, 2023. Non-accrual loans increased to $173,000 at June 30, 2024 from $27,000 at December 31, 2023. We had no accruing loans past due 90 days or more at June 30, 2024 compared to $215,000 at December 31, 2023. Loans past due 30 days or more represented 0.07% of the loan portfolio at June 30, 2024 compared to 0.06% at December 31, 2023. The ratio of classified loans plus OREO and repossessed assets declined to 1.21% of total bank regulatory risk-based capital at June 30, 2024 from 1.25% at December 31, 2023. During the six months ended June 30, 2024, we experienced net loan recoveries of $2,000 (charge-offs of $31,000 less recoveries of $33,000) and net overdraft charge-offs of $29,000 (charge-offs of $35,000 and recoveries of $6,000). In comparison, we experienced net loan recoveries of $29,000 and net overdraft charge-offs of $28,000 during the six months ended June 30, 2023.

Current wording

The non-performing asset ratio was 0.04% of total assets with the nominal level of $874,000 in non-performing assets at September 30, 2024 compared to 0.05% and $864,000 at December 31, 2023. Non-accrual loans increased to $119,000 at September 30, 2024 from $27,000 at December 31, 2023. We had one accruing loan past due 90 days or more at $211,000 at September 30, 2024 compared to $215,000 at December 31, 2023. Loans past due 30 days or more represented 0.11% of the loan portfolio at September 30, 2024 compared to 0.06% at December 31, 2023. The ratio of classified loans plus OREO and repossessed assets declined to 1.15% of total bank regulatory risk-based capital at September 30, 2024 from 1.25% at December 31, 2023. During the nine months ended September 30, 2024, we experienced net loan charge offs of $43,000 (charge-offs of $85,000 less recoveries of $42,000) and net overdraft charge-offs of $52,000 (charge-offs of $64,000 and recoveries of $12,000). In comparison, we experienced net loan recoveries of $40,000 and net overdraft charge-offs of $35,000 during the nine months ended September 30, 2023.

Previous wording

There were three loans totaling $173,000 (0.01% of total loans) included on non-performing status (non-accrual loans and loans past due 90 days and still accruing) at June 30, 2024. All of these loans were on non-accrual status. The largest loan of the three is $117,000 and is secured by real estate. The balance of the remaining two loans on non-accrual status is $56,000. One of these loans is secured by a second mortgage lien and the other one is secured by a customized truck trailer. We had no loans that were accruing loans past due 90 days or more at June 30, 2024. At both June 30, 2024 and December 31, 2023, we considered loan relationships exceeding $500,000 and on non-accrual status as individually assessed loans for the allowance for credit losses. At both June 30, 2024 and December 31, 2023, we had no individually assessed loans. The specific allowance for individually assessed loans is based on the fair value of collateral method or present value of expected cash flows method. For collateral dependent loans, the fair value of collateral method is used and the fair value is determined by an independent appraisal less estimated selling costs. There was no specific allowance for credit losses on our individually assessed loans at June 30, 2024 and December 31, 2023. At June 30, 2024, we had $853,000 in loans that were delinquent 30 days to 89 days representing 0.07% of total loans compared to $498,000 or 0.04% of total loans at December 31, 2023.

Current wording

There were three loans totaling $331,000 (0.03% of total loans) included on non-performing status (non-accrual loans and loans past due 90 days and still accruing) at September 30, 2024. Two of these loans were on non-accrual status. The largest loan of the two is $117,000 and is secured by real estate. The balance of the remaining loan on non-accrual status is $2,000. This loan is secured by a second mortgage lien. We had one loan that was accruing loans past due 90 days or more at September 30, 2024. At both September 30, 2024 and December 31, 2023, we considered loan relationships exceeding $500,000 and on non-accrual status as individually assessed loans for the allowance for credit losses. At both September 30, 2024 and December 31, 2023, we had no individually assessed loans. The specific allowance for individually assessed loans is based on the fair value of collateral method or present value of expected cash flows method. For collateral dependent loans, the fair value of collateral method is used and the fair value is determined by an independent appraisal less estimated selling costs. There was no specific allowance for credit losses on our individually assessed loans at September 30, 2024 and December 31, 2023. At September 30, 2024, we had $1.1 million in loans that were delinquent 30 days to 89 days representing 0.09% of total loans compared to $498,000 or 0.04% of total loans at December 31, 2023.

Previous wording

Assets increased $57.2 million, or 3.1% (6.3% annualized), to $1.9 billion at June 30, 2024 from $1.8 billion at December 31, 2023. The increase in assets was primarily due to increases in interest-bearing bank balances of $19.4 million, loans held-for-sale of $2.3 million, loans held-for-investment of $55.2 million, and other assets of $1.3 million, partially offset by decreases in cash and due from banks of $2.6 million, investment securities available for sale of $12.3 million, investment securities held-to-maturity of $3.5 million, and other investments, at cost of $1.8 million.

Current wording

Assets increased $115.9 million, or 6.3% (8.5% annualized), to $1.9 billion at September 30, 2024 from $1.8 billion at December 31, 2023. The increase in assets was primarily due to increases in interest-bearing bank balances of $77.6 million and loans held-for-investment of $62.6 million, partially offset by decreases in investment securities available-for-sale of $12.7 million, investment securities held-to-maturity of $5.0 million, and other assets of $2.3 million.

Previous wording

Loans held-for-sale increased to $6.7 million at June 30, 2024 from $4.4 million at December 31, 2023. Loans (excluding loans held-for-sale) increased $55.2 million, or 4.9% (9.8% annualized), to $1.2 billion at June 30, 2024 from $1.1 billion at December 31, 2023. Total loan production, excluding mortgage secondary market and new construction residential real estate, was $94.6 million during the six months ended June 30, 2024 compared to $83.2 million during the same period in 2023. Advances from unfunded commercial construction loans available for draws were $52.3 million during the six months ended June 30, 2024. Payoffs and paydowns totaled $48.3 million during the six months ended June 30, 2024 compared to $41.3 million during the same period in 2023.

Current wording

Loans held-for-sale decreased to $3.9 million at September 30, 2024 from $4.4 million at December 31, 2023. Loans (excluding loans held-for-sale) increased $62.6 million, or 5.5% (7.4% annualized), to $1.2 billion at September 30, 2024 from $1.1 billion at December 31, 2023. Total loan production, excluding mortgage secondary market and new construction residential real estate, was $138.3 million during the nine months ended September 30, 2024 compared to $147.1 million during the same period in 2023. Advances from unfunded commercial construction loans available for draws were $71.3 million during the nine months ended September 30, 2024. Payoffs and paydowns totaled $84.8 million during the nine months ended September 30, 2024 compared to $58.4 million during the same period in 2023.