First US Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2024

DESCRIPTION OF THE BUSINESS

First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its subsidiary, the “Company”), is a bank holding company formed in 1983 registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancshares operates one wholly owned banking subsidiary, First US Bank, an Alabama banking corporation (the “Bank”). Bancshares and the Bank are headquartered in Birmingham, Alabama. Previously, the Bank operated two additional wholly owned subsidiaries, Acceptance Loan Company and FUSB Reinsurance, Inc., both of which were legally dissolved in 2023, and all remaining assets and liabilities of these entities were transferred to the Bank prior to December 31, 2023.

The Bank conducts a general commercial banking business and offers banking services such as demand, savings, individual retirement account and time deposits, personal and commercial loans, safe deposit box services and remote deposit capture. The Bank operates and serves its customers through 15 full-service banking offices located in Birmingham, Butler, Calera, Centreville, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama; Knoxville and Powell, Tennessee; and Rose Hill, Virginia; as well as loan production offices in Mobile, Alabama and the Chattanooga, Tennessee area. The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals. The Bank also performs indirect lending through third-party retailers and currently conducts this lending in 17 states, including Alabama, Arkansas, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. The Bank is the Company’s only reportable operating segment upon which management makes decisions regarding how to allocate resources and assess performance.

Delivery of the best possible financial services to customers remains an overall operational focus of the Company. The Company recognizes that attention to detail and responsiveness to customers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 155 full-time equivalent employees (as of June 30, 2024), to ensure customer satisfaction and convenience.

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with critical accounting estimates. These estimates are necessary to comply with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general banking practices. A description of the Company's critical accounting estimates, which significantly affect the determination of the Company’s consolidated financial position, results of operations and cash flows, is set forth in Part II, Item 7 - Critical Accounting Estimates in the Company's 2023 Form 10-K.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of June 30, 2024 to December 31, 2023, while comparing income and expense for the six months ended June 30, 2024 and 2023. All yields and ratios presented and discussed herein are recorded and presented on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated.

This information should be read in conjunction with the Company’s unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company's 2023 Form 10-K. As used in the following discussion, the words “we,” “us,” “our” and the “Company” refer to Bancshares and its consolidated subsidiaries, unless the context indicates otherwise.

RECENT MARKET CONDITIONS

During the six months ended June 30, 2024, the banking industry continued to be impacted by economic volatility and the higher interest rate environment that has persisted since 2022. Following a reduction in January 2024, the U.S. inflation rate increased in the latter two months of the first quarter, but decreased during the second quarter. As of June 30, 2024, inflation remained elevated above the Federal Reserve Bank’s (“FRB”) longer run target of 2%; however, it had eased considerably since the highs reached in late 2022. Throughout the first six months of 2024, the FRB maintained the target federal funds rate in a range from 5.25% to 5.50% where it has remained since July 2023. Recent economic indicators suggested that economic activity in the U.S. continued to expand in the second quarter of 2024. In addition, the unemployment rate increased slightly during the second quarter of 2024; however, it remained at a relatively low level (approximately 4.0%) as the quarter came to a close. In assessing monetary policy, FRB officials continued to indicate a commitment to maintaining the federal funds target range until greater confidence is gained that inflation is moving sustainably toward 2%.

U.S. Treasury rates increased modestly during the second quarter of 2024 compared to the first quarter of 2024 due to changing sentiment in interest rate expectations, and as of June 30, 2024, the U.S. Treasury curve remained inverted. Competitive pressures in the banking industry remained elevated due to the higher interest rate environment, particularly with respect to deposit pricing. The elevated interest rate environment, combined with higher inflation levels sustained for a longer period of time, could put additional strain on borrowers, as well as the Company’s own costs of goods and services, including the cost of salaries and benefits. These uncertainties, combined with ongoing geopolitical uncertainty, provide a difficult operating environment throughout the banking industry. Management continues to carefully navigate the Company’s course through these challenges, and believes the Company is well positioned to respond effectively in multiple operating environments. However, additional inflationary pressure, higher interest rates, and a fiercely competitive environment could put downward pressure on the Company’s positioning and results of operations.

EXECUTIVE OVERVIEW

The Company earned net income of $2.1 million, or $0.34 per diluted common share, during the three months ended June 30, 2024, compared to $2.0 million, or $0.31 per diluted common share, for the three months ended June 30, 2023. For the six months ended June 30, 2024, net income totaled $4.2 million, or $0.68 per diluted common share, compared to $4.1 million, or $0.64 per diluted common share, for the six months ended June 30, 2023.

Summarized condensed consolidated statements of operations are included below for the three and six months ended June 30, 2024 and 2023.

(Dollars in Thousands, Except Per Share Data)

The discussion that follows summarizes the most significant activity that drove changes in the Company’s operating results during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.

Net Interest Income and Margin

Net interest income decreased by $0.5 million, or 2.9%, comparing the six months ended June 30, 2024 to the six months ended June 30, 2023.The reduction in net interest income resulted from net interest margin compression that totaled 33 basis points as interest-bearing liabilities repriced at a faster pace than interest-bearing assets comparing the two periods. In the wake of the rising interest rate environment that began in 2022, the Company’s net interest margin compressed for five consecutive quarters through the first quarter of 2024, before expanding by 4 basis points in the second quarter of 2024. The expansion of margin in the second quarter of 2024 compared to the first quarter of 2024 was attributable to increases in both average investment securities and yields on investment securities that enabled interest-earning assets to reprice at a faster pace than interest-bearing liabilities during the quarter. Net interest margin was 3.69% in the second quarter of 2024, compared to 3.65% in the first quarter of 2024, and 3.88% in the second quarter of 2023. For the six months ended June 30, 2024, net interest margin was 3.67%, compared to 4.00% for the six months ended June 30, 2023.

Provision for Credit Losses

No provision for credit losses was recorded during the six months ended June 30, 2024, compared to $0.6 million during the six months ended June 30, 2023. The Company’s determination that no provisioning was required during the first six months of 2024 was due to loan portfolio balance reductions (in particular, consumer balances which generally contain higher loss ratios) combined with a decrease in unfunded lending commitments. As of June 30, 2024, the Company’s allowance for credit losses on loans and leases as a percentage of total loans was 1.25%, compared to 1.28% as of December 31, 2023.

Non-interest Income

Non-interest income remained relatively consistent, totaling $1.7 million and $1.6 million for the six months ended June 30, 2024 and 2023, respectively.

Non-interest Expense

Non-interest expense totaled $14.4 million for both the six months ended June 30, 2024 and 2023. While non-interest expense remained consistent comparing the two six month periods, in 2024 the Company experienced increased expenses associated with occupancy and equipment and professional services that were offset by decreased salaries and employee benefits and other expense. The increases associated with occupancy and equipment and professional services during the first six months of 2024 compared to the first six months of 2023 resulted from a variety of activities, including increased costs associated with growth in banking centers, as well as increased legal, accounting and auditing fees. The reduction in salaries and benefits during the first six months of 2024 compared to the prior year period resulted from the ongoing effects of reductions in staff levels attained through strategic initiatives implemented by the Company in prior years.

Total Assets

As of June 30, 2024, the Company’s assets totaled $1,083.3 million, compared to $1,072.9 million as of December 31, 2023, an increase of 1.0%.

Loans

Total loans decreased by $2.7 million, or 0.3%, as of June 30, 2024, compared to December 31, 2023. All loan categories decreased since December 31, 2023, with the exception of the multi-family residential and non-farm, non-residential categories. The total loan volume decrease is consistent with an overall economic slowing that has manifested during the first six months of 2024.

Asset Quality

Nonperforming assets, including loans in non-accrual status and OREO, totaled $2.9 million as of June 30, 2024, compared to $3.0 million as of December 31, 2023. As a percentage of total assets, nonperforming assets totaled 0.27% as of June 30, 2024, compared to 0.28% as of December 31, 2023. Annualized net charge-offs as a percentage of average loans during the six months ended June 30, 2024 totaled 0.10%, compared to 0.14% during the corresponding period of 2023.

Deposit Growth

Deposits totaled $954.5 million as of June 30, 2024, compared to $950.2 million as of December 31, 2023. The increase since December 31, 2023 was due primarily to increased interest-bearing time deposits, partially offset by decreased non-interest bearing and interest-bearing direct deposit accounts. The shift to interest-bearing time deposits is consistent with deposit holders seeking to maximize interest earnings, a condition that has persisted in the current interest rate environment. The increase in interest-bearing time deposits was partially offset by a reduction in wholesale brokered time deposits of $10.3 million during the six months ended June 30, 2024. Core deposits, which exclude time deposits of $250 thousand or more and all wholesale brokered deposits, totaled $813.4 million, or 85.2% of total deposits, as of June 30, 2024, compared to $819.5 million, or 86.2% of total deposits, as of December 31, 2023.

Deployment of Funds

As of June 30, 2024, the Company held cash and federal funds sold balances totaling $63.7 million, or 5.9% of total assets, compared to $59.8 million, or 5.6% of total assets, as of December 31, 2023. Investment securities, including both the available-for-sale and held-to-maturity portfolios, totaled $144.9 million as of June 30, 2024, compared to $136.7 million as of December 31, 2023. During the six months ended June 30, 2024, $27.5 million was invested in taxable U.S. agency-sponsored bonds, resulting in improved yields in the investment portfolio. As of June 30, 2024, the expected average life of securities in the investment portfolio was 4.3 years, compared to 3.9 years as of December 31, 2023. In the current higher interest rate environment, management continues to seek opportunities to reconfigure the investment portfolio with higher yielding assets as cash flows become available.

Shareholders’ Equity

Shareholders’ equity increased by $3.2 million, or 3.6%, as of June 30, 2024, compared to December 31, 2023. The increase in shareholders’ equity during the six months ended June 30, 2024 resulted primarily from earnings, net of dividends paid and repurchases of shares of the Company's common stock.

Cash Dividends

The Company declared cash dividends totaling $0.10 per share on its common stock during both the six months ended June 30, 2024 and 2023.

Share Repurchases

During the six months ended June 30, 2024, the Company repurchased 77,000 shares of its common stock at a weighted average price of $10.60 per share. The repurchases were completed under the Company’s previously announced share repurchase program. As of June 30, 2024, 382,313 shares remained available for repurchase under the program.

Regulatory Capital

During the six months ended June 30, 2024, the Bank continued to maintain capital ratios at higher levels than required to be considered a “well-capitalized” institution under applicable banking regulations. As of June 30, 2024, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 11.28%. Its total capital ratio was 12.47%, and its Tier 1 leverage ratio was 9.46%.

Liquidity

As of June 30, 2024, the Company continued to maintain excess funding capacity sufficient to provide adequate liquidity for loan growth, capital expenditures and ongoing operations. The Company benefits from a strong core deposit base, a liquid investment securities portfolio and access to funding from a variety of sources, including federal funds lines with other banking institutions, Federal Home Loan Bank (FHLB) advances, the discount window of the Federal Reserve Bank (FRB), and brokered deposits.

Interest Rate Risk Management

During the first quarter of 2024, the Company purchased a notional amount of $50 million in interest rate floors to assist in mitigating a portion of the Company’s risk in down rate scenarios. The Company did not purchase any additional derivative contracts during the second quarter of 2024.

Banking Center Growth

As part of the Company’s overall growth strategy, during the second quarter of 2024, the Company opened a new banking center in the Bearden area of Knoxville, Tennessee that replaced the Bank’s previously existing Knoxville-Bearden location. It is anticipated that the new location will provide more favorable exposure to potential customers, while at the same time improving access to most of the Bank’s existing customers in the area. In addition, during the second quarter of 2024, the Company commenced renovation of a banking center office in Daphne, Alabama that was purchased from another financial institution during the first quarter of 2024. This location is expected to serve as the Bank’s initial deposit gathering facility in the Daphne/Mobile area, and it is anticipated that the location will open to the public in early 2025.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is calculated as the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company’s earning assets consist of loans, taxable and tax-exempt investments, Federal Home Loan Bank stock, federal funds sold by the Bank and interest-bearing deposits in banks. Interest-bearing liabilities consist of interest-bearing demand deposits and savings and time deposits, as well as short- and long-term borrowings.

The following tables show the average balances of each principal category of assets, liabilities and shareholders’ equity for the three and six months ended June 30, 2024 and 2023. Additionally, the tables provide an analysis of interest revenue or expense associated with each category, along with the accompanying yield or rate percentage. Net interest margin is calculated for each period presented as net interest income divided by average total interest-earning assets.

(1) For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. These loans averaged $2.2 million and $1.5 million for the three months ended June 30, 2024 and 2023, respectively.

(2) Loan fees are included in interest amounts presented. Loan fees totaled $0.2 million for both the three months ended June 30, 2024 and 2023.

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(1) For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. These loans averaged $2.3 million and $1.5 million for the six months ended June 30, 2024 and 2023, respectively.

(2) Loan fees are included in interest amounts presented. Loan fees totaled $0.3 million for both the six months ended June 30, 2024 and 2023.

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The following tables summarize the impact of variances in volume and rate of interest-earning assets and interest-bearing liabilities on components of net interest income.

(Dollars in Thousands)

Interest income increased by $3.9 million, comparing the six months ended June 30, 2024 to the six months ended June 30, 2023. Of the increase, $2.5 million was attributable to higher average yields on interest-earning assets, while $1.3 million was attributable to growth in interest-earning assets comparing the two periods. The increase in average yield was attributable to the rise in market interest rates that began in 2022, continued in 2023 and held relatively consistent in 2024.

The increase in interest income was offset by an increase in interest expense of $4.4 million, comparing the six months ended June 30, 2024 to the six months ended June 30, 2023. Of the increase, $3.8 million was attributable to the rise in market interest rates, while $0.6 million was attributable to growth in interest-bearing liabilities, primarily savings and time deposits.

The rising market interest rate environment has had, and continues to have, a significant impact on the Company and the banking industry in general. Beginning in March 2022 and through July 2023, the FRB raised the federal funds rate by a total of 525 basis points. Since July 2023, the FRB has maintained the federal funds rate in a range of 5.25% to 5.50%. Statements by FRB officials have indicated that the FRB remains committed to maintaining the federal funds rate at this level until greater confidence is gained that inflation is moving sustainably toward the FRB’s long-run goal of 2%. Due to the pace of interest rate increases that occurred in the period from March 2022 to July 2023, the Company’s net interest margin declined in 2023 as the cost of interest-bearing liabilities increased at a faster pace than interest-earning assets. In the wake of the rising interest rate environment that began in 2022, the Company’s net interest margin compressed for five consecutive quarters through the first quarter of 2024, before expanding by 4 basis points in the second quarter of 2024. The expansion of margin in the second quarter of 2024 compared to the first quarter of 2024 was attributable to increases in both average investment securities and yields on investment securities that enabled interest-earning assets to reprice at a faster pace than interest-bearing liabilities during the quarter. Net interest margin was 3.69% in the second quarter of 2024, compared to 3.65% in the first quarter of 2024. While this increase in net interest margin is notable, the sustained higher interest rate environment has continued to intensify competition for deposits within the Company’s service territories during the first six months of 2024. This increased competition, coupled with continued economic volatility, adds uncertainty into the market. Should market interest rates continue to increase or decrease at significant levels, the Company’s net interest income could be negatively impacted.

Provision for Credit Losses

No provision for credit losses was recorded during the six months ended June 30, 2024, compared to a provision of $0.6 million during the six months ended June 30, 2023. The Company’s determination that no provisioning was required during the first six months of 2024 was due to loan portfolio balance reductions (in particular, consumer balances which generally contain higher loss ratios) combined with a decrease in unfunded lending commitments. As of June 30, 2024, the Company’s allowance for credit losses on loans and leases as a percentage of total loans was 1.25%, compared to 1.28% as of December 31, 2023.

Net charge-offs were relatively consistent, totaling $0.4 million for the six months ended June 30, 2024, compared to $0.5 million for the six months ended June 30, 2023. However, the ongoing timing of charge-offs, economic developments, and other factors that could impact the provision for credit losses cannot be fully predicted with certainty. Sustained levels of high inflation, combined with the recent rapid rise in market interest rates, could negatively impact the Company’s borrowers, which could lead to increased provisions for credit losses in the future.

Non-Interest Income

Non-interest income represents fees and income derived from sources other than interest-earning assets. The following table presents the major components of non-interest income for the periods indicated:

(Dollars in Thousands)

(Dollars in Thousands)

The Company’s non-interest income increased by $72 thousand comparing the six months ended June 30, 2024 to the six months ended June 30, 2023.

Non-Interest Expense

Non-interest expense represents expenses incurred from sources other than interest-bearing liabilities. The following table presents the major components of non-interest expense for the periods indicated:

(Dollars in Thousands)

(Dollars in Thousands)

Non-interest expense totaled $14.4 million during both the six months ended June 30, 2024 and 2023. While non-interest expense remained consistent comparing the two six month periods, in 2024 the Company experienced increased expenses associated with occupancy and equipment and professional services that were offset by decreased salaries and employee benefits and other expense. The increases associated with occupancy and equipment and professional services during the first six months of 2024 compared to the first six months of 2023 resulted from a variety of activities, including increased costs associated with growth in banking centers, as well as increased legal, accounting and auditing fees. The reduction in salaries and benefits during the first six months of 2024 compared to the first six months of 2023 resulted from the ongoing effects of reductions in staff levels attained through strategic initiatives implemented by the Company in prior years.

Provision for Income Taxes

The provision for income taxes was $1.3 million for both the six months ended June 30, 2024 and 2023, and the Company’s effective tax rate was 23.0% and 24.1%, respectively, for the same periods.

The effective tax rate is impacted by recurring items, such as changes in tax-exempt interest income earned from bank-qualified municipal bonds and loans and the cash surrender value of bank-owned life insurance. Management makes decisions about whether to invest in tax-exempt instruments on a case-by-case basis after considering a number of factors, including investment return, credit quality and the consistency of such investments with the Company’s overall strategy. The Company’s effective tax rate is expected to fluctuate commensurate with the level of these investments as compared to total pre-tax income.

BALANCE SHEET ANALYSIS

Investment Securities

The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering the duration, composition and/or balance of the portfolio. The expected average life of securities in the investment portfolio was 4.3 years and 3.9 years as of June 30, 2024 and December 31, 2023, respectively.

Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive loss, a separate component of shareholders’ equity. As of June 30, 2024, available-for-sale securities totaled $144.0 million, or 99.4% of the total investment portfolio, compared to $135.6 million, or 99.2% of the total investment portfolio, as of December 31, 2023. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, corporate bonds, obligations of U.S. government-sponsored agencies, and obligations of state and political subdivisions.

Held-to-maturity securities are recorded at amortized cost and represent securities that the Company both intends and has the ability to hold to maturity. As of June 30, 2024, held-to-maturity securities totaled $0.9 million, or 0.6% of the total investment portfolio, compared to $1.1 million, or 0.8% of the total investment portfolio, as of December 31, 2023. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies, and obligations of state and political subdivisions.

Despite the elevated interest rate environment, during the six months ended June 30, 2024, gross unrealized losses decreased by $0.6 million primarily due to the decreasing duration of the Company's U.S. Treasury portfolio as of June 30, 2024, compared to the duration as of December 31, 2023. Gross unrealized losses in the available-for-sale portfolio totaled $9.5 million as of June 30, 2024, compared to $10.1 million as of December 31, 2023. Unrealized losses, net, within the available-for-sale portfolio were recognized, net of tax, in accumulated other comprehensive loss.

As of June 30, 2024, the Company evaluated both the available-for-sale and held-to-maturity portfolios for credit losses and concluded that no credit losses were included in either portfolio and that the unrealized losses in both portfolios resulted from the prevailing interest rate environment.

Loans and Leases

The Company’s total loan portfolio decreased by $2.7 million, or 0.3%, as of June 30, 2024, compared to December 31, 2023. The tables below summarize loan balances by portfolio category, as well as the allowance for credit losses, as of the end of each of the most recent five quarters as of June 30, 2024:

(Dollars in Thousands)

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Allowance for Credit Losses on Loans and Leases

The tables below summarize changes in the allowance for credit losses on loans and leases for each of the most recent five quarters as of June 30, 2024:

(Dollars in Thousands)

Allowance for Credit Losses on Unfunded Lending Commitments

Unfunded lending commitments are off-balance sheet arrangements that represent unconditional commitments of the Company to lend to a borrower that are unfunded as of the balance sheet date. These may include unfunded loan commitments, standby letters of credit, and financial guarantees. The CECL accounting guidance requires that an estimate of expected credit loss be measured on commitments in which an entity is exposed to credit risk via a present contractual obligation to extend credit unless the obligation is unconditionally cancellable by the issuer. For the Company, unconditional lending commitments generally include unfunded term loan agreements, home equity lines of credit, lines of credit, and demand deposit account overdraft protection. As of June 30, 2024 and December 31, 2023, the Company’s reserve for unfunded commitments, which is recorded in other liabilities in the Company’s consolidated balance sheets, totaled $0.5 million and $0.6 million, respectively.

Nonperforming Assets

Nonperforming assets at the end of the five most recent quarters as of June 30, 2024 were as follows:

(Dollars in Thousands)

Allocation of Allowance for Credit Losses on Loans and Leases

While no portion of the allowance for credit losses is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, the following table shows an allocation of the allowance for credit losses as of June 30, 2024 and December 31, 2023:

(Dollars in Thousands)

Deposits

Total deposits increased to $954.5 million as of June 30, 2024, from $950.2 million as of December 31, 2023, an increase of 0.4%. Core deposits, which exclude time deposits of $250 thousand or more and all brokered deposits, provide a relatively stable funding source that supports earning assets. Core deposits totaled $813.4 million, or 85.2% of total deposits, as of June 30, 2024, compared to $819.5 million, or 86.2% of total deposits, as of December 31, 2023.

Core deposits have historically been the Company’s primary source of funding and have enabled the Company to successfully meet both short-term and long-term liquidity needs. Management anticipates that core deposits will continue to be the Company’s primary source of funding in the future. Management will continue to monitor deposit levels closely to help ensure an adequate level of funding for the Company’s activities. However, various economic and competitive factors could affect this funding source in the future, including increased competition from other financial institutions in deposit gathering, national and local economic conditions and interest rate policies adopted by the FRB and other central banks.

Other Interest-Bearing Liabilities

Other interest-bearing liabilities that are used by the Company as an alternative source of funds consist of federal funds purchased, securities sold under agreements to repurchase, FHLB advances, and subordinated debt. As of June 30, 2024, other interest-bearing liabilities totaled 3.1% of total interest-bearing liabilities, compared to 2.5% as of December 31, 2023.

Shareholders’ Equity

As of June 30, 2024, shareholders’ equity totaled $93.8 million, or 8.7% of total assets, compared to $90.6 million, or 8.4% of total assets, as of December 31, 2023. The increase in shareholders’ equity during the six months ended June 30, 2024 resulted primarily from earnings, net of dividends paid and repurchases of shares of the Company's common stock.

During the both the six months ended June 30, 2024 and 2023, the Company declared dividends totaling $0.10 per common share, or approximately $0.6 million in aggregate amount. Bancshares’ Board of Directors evaluates dividend payments based on the Company’s level of earnings and the desire to maintain a strong capital base, as well as regulatory requirements relating to the payment of dividends.

LIQUIDITY AND CAPITAL RESOURCES

The asset portion of the balance sheet provides liquidity primarily from the following sources: (1) excess cash and interest-bearing deposits in banks, (2) federal funds sold, (3) principal payments and maturities of loans and (4) principal payments and maturities from the investment portfolio. Loans maturing or repricing in one year or less amounted to $248.8 million as of June 30, 2024 and $241.2 million as of December 31, 2023. Investment securities forecasted to mature or reprice in one year or less were estimated to be $18.7 million and $12.9 million of the investment portfolio as of June 30, 2024 and December 31, 2023, respectively.

Although some securities in the investment portfolio have legal final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. The investment securities portfolio had an estimated average life of 4.3 years and 3.9 years as of June 30, 2024 and December 31, 2023, respectively. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

The liability portion of the balance sheet provides liquidity through interest-bearing and non-interest-bearing deposit accounts, which represent the Company’s primary sources of funds. In addition, federal funds purchased, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of available liquidity. Liquidity management involves the continual monitoring of the sources and uses of funds to maintain an acceptable cash position. Long-term liquidity management focuses on considerations related to the total balance sheet structure. The Bank manages the pricing of its deposits to maintain a desired deposit balance.

The Company had $15.0 million and $10.0 million of outstanding borrowings under FHLB advances as of June 30, 2024 and December 31, 2023, respectively. In addition, on October 1, 2021, the Company completed a private placement of $11.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that will mature on October 1, 2031. Net of unamortized debt issuance costs, the subordinated notes were recorded as long-term borrowings totaling $10.8 million as of both June 30, 2024 and December 31, 2023.

The Company had up to $276.1 million and $279.4 million in remaining unused credit from the FHLB (subject to available collateral, which may include eligible investment securities and loans) as of June 30, 2024 and December 31, 2023, respectively. In addition, the Company had $48.0 million in unused established federal funds lines as of both June 30, 2024 and December 31, 2023.

The Company also has access to the FRB’s discount window. The discount window allows borrowing on pledged collateral that includes eligible investment securities and loans. In response to heightened liquidity concerns in the banking industry, during 2023 management undertook measures designed to enhance the Company’s liquidity position. These procedures included holding higher levels of on-balance sheet cash, as well as enhancing the availability of off-balance sheet borrowing capacity. As part of these efforts, during the third quarter of 2023, the Company completed the establishment of additional borrowing capacity through the FRB's discount window, primarily via the pledging of the majority of the Company’s indirect loan portfolio as collateral. Including the pledging of these loans, along with selected securities, the Company had $158.3 and $161.7 million in borrowing capacity with the FRB’s discount window as of June 30, 2024 and December 31, 2023, respectively.

The table below provides information on the Company’s on-balance sheet liquidity, as well as readily available off-balance sheet sources of liquidity, as of both June 30, 2024 and December 31, 2023.

(Dollars in Thousands)

(Unaudited)

(Unaudited)

The table above calculates readily available liquidity by combining cash and cash equivalents, federal funds sold and unencumbered investment security values on the Company’s consolidated balance sheet with off-balance sheet liquidity that is readily available through unused collateral pledged to the FHLB and FRB, as well as unsecured lines of credit with other banks. Liquidity from pledgable investment securities and total readily available liquidity are non-GAAP measures used by management and regulators to analyze a portion of the Company's liquidity. Management uses these measures to evaluate the Company's liquidity position.

Pledgable investment securities are considered by management as a readily available source of liquidity since the Company has the ability to pledge the securities with the FHLB or FRB to obtain immediate funding. Both available-for-sale and held-for-maturity securities may be pledged at fair value with the FHLB and through the FRB discount window. The amounts shown as liquidity from pledgable investment securities represent total investment securities as recorded on the consolidated balance sheet, less reductions for securities already pledged and discounts expected to be taken by the lender to determine collateral value.

The unused lendable collateral value at the FHLB presented in the table represents only the amount immediately available to the Company from loans already pledged by the Company to the FHLB as of each consolidated balance sheet date presented. As of June 30, 2024 and December 31, 2023, the Company's total remaining credit availability with the FHLB was $276.1 million and $279.4 million, respectively, subject to the pledging of additional collateral which may include eligible investment securities and loans. In addition, the Company has access to additional sources of liquidity that generally could be obtained over a period of time. For example, the Company has access to unsecured brokered deposits through the wholesale funding markets. Management believes the Company’s on-balance sheet and other readily available liquidity provide strong indicators of the Company’s ability to fund obligations in a stressed liquidity environment.

Excluding wholesale brokered deposits, as of June 30, 2024, the Company had approximately 30 thousand deposit accounts with an average balance of approximately $30.0 thousand per account. Estimated uninsured deposits (calculated as deposit amounts per deposit holder in excess of $250 thousand, the maximum amount of federal deposit insurance, and excluding deposits secured by pledged assets) totaled $206.7 million, or 21.6% of total deposits, as of June 30, 2024. As of December 31, 2023, estimated uninsured deposits totaled $200.3 million, or 21.1% of total deposits.

Management believes that the Company has adequate sources of liquidity to cover its contractual obligations and commitments over the next twelve months.

The primary purpose of managing interest rate risk is to invest capital effectively and preserve the value created by the Company’s core banking business. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments, subject to liquidity and interest rate risk guidelines. Effective interest rate sensitivity management ensures that both assets and liabilities respond to changes in interest rates within an acceptable timeframe, thereby minimizing the effect of such interest rate movements on short- and long-term net interest margin and net interest income.

Financial simulation models are the primary tools used by the Asset/Liability Committee of the Bank’s board of directors to measure interest rate exposure. Using a wide range of scenarios, management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. In these simulations, assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of the Company’s balance sheet resulting from both strategic plans and customer behavior. Simulation models also incorporate management’s assumptions regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates paid on deposits and charged on loans. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

Assessing Short-Term Interest Rate Risk – Net Interest Margin Simulation

On a quarterly basis, management simulates how changes in short- and long-term interest rates will impact future profitability, as reflected by changes in the Bank’s net interest margin and net interest income. The tables below depict how, as of June 30, 2024, pre-tax net interest margin and net interest income are forecasted to change over timeframes of one year and two years under the six listed interest rate scenarios. The interest rate scenarios contemplate immediate and parallel shifts in short- and long-term interest rates.

Average Change in Net Interest Margin from Level Interest Rate Forecast (basis points, pre-tax):

Cumulative Change in Net Interest Income from Level Interest Rate Forecast (dollars in thousands, pre-tax):

During the first quarter of 2024, the Company acquired a notional amount of $50 million in interest rate floors to improve positioning in down rate scenarios. The Company did not purchase any additional derivative contracts during the second quarter of 2024.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Bancshares maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Bancshares’ reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to Bancshares’ management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Bancshares’ management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Bancshares’ disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2024, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based on that evaluation, Bancshares’ management concluded, as of June 30, 2024, that Bancshares’ disclosure controls and procedures were effective at the reasonable assurance level to ensure that the information required to be disclosed in Bancshares’ periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

A list of factors that could materially affect the Company’s business, financial condition and/or operating results is included in Part I, Item 1A, “Risk Factors” in the Company's 2023 Form 10-K. There have been no material changes to such risk factors. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.