First US Bancshares, Inc.: Form 10-Q for the period ended Mar 31, 2025

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.

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 147 full-time equivalent employees (as of March 31, 2025), 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 2024 Form 10-K.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of March 31, 2025 to December 31, 2024, while comparing income and expense for the three months ended March 31, 2025 and 2024. 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 2024 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

The banking industry continued to be impacted by economic volatility during the three months ended March 31, 2025. The U.S. inflation rate, as measured by the consumer price index, slowed to 2.4% in March 2025, however, it remained elevated above the Federal Reserve Bank’s (“FRB”) longer run target of 2%. The U.S. unemployment rate moved up modestly to 4.2% in March 2025. The Open Market Committee of the FRB did not change the federal funds rate during the period, keeping the rate at a level of 4.25% to 4.50%. Treasury rates generally trended lower during the period, indicating sentiment of further rate reductions to come later in 2025. U.S. gross domestic product (“GDP”) contracted during the first quarter of 2025 for the first time since 2022, decreasing 0.3% on an annualized basis, due primarily to a surge in imports during the quarter. The combination of the continued heightened inflation level with negative GDP provides a difficult environment in which to predict future movement in the federal funds rate. Remarks from the Open Market Committee following its March 2025 meetings remained cautious, noting that uncertainty around its economic outlook had increased and that it would “carefully assess incoming data, the evolving outlook, and the balance of risks” in its consideration of the extent and timing of additional adjustments to the federal funds rate.

In addition, the Company continues to monitor the potential impact of evolving trade policies, including the impact of additional tariffs imposed by the U.S. While no specific tariffs were implemented during the reporting period that materially affected the Company’s operations, the potential for future changes in cross-border trade arrangements and import/export duties contributes to broader economic uncertainty. Should the impact of tariffs lead to higher inflation levels or higher interest rates for a sustained period, the Company’s financial position and result of operations could be negatively impacted.

EXECUTIVE OVERVIEW

The Company earned net income of $1.8 million, or $0.29 per diluted common share, during the three months ended March 31, 2025, compared to $2.1 million, or $0.34 per diluted common share, for the three months ended March 31, 2024.

Summarized condensed consolidated statements of operations are included below for the three months ended March 31, 2025 and 2024.

(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 three months ended March 31, 2025, as compared to the three months ended March 31, 2024.

Net Interest Income and Margin

Net interest income decreased by $0.1 million, or 1.6%, comparing the three months ended March 31, 2025 to the three months ended March 31, 2024. Net interest margin was 3.53% for the three months ended March 31, 2025, compared to 3.65% for the three months ended March 31, 2024. The decrease in net interest income and margin comparing the three months ended March 31, 2025 to the three months ended March 31, 2024 resulted primarily from yield reductions on loans that occurred following the reduction of the federal funds rate during the latter part of 2024. The reduction in interest income was partially offset by an increase in average earning asset volumes, particularly investment securities, as well as reductions in expense on interest-bearing liabilities.

Provision for Credit Losses

For the three months ended March 31, 2025, the Company recorded a provision for credit losses of $0.5 million, compared to the three months ended March 31, 2024, in which no provision for credit losses was recorded. The increase in the provision for credit losses comparing the three months ended March 31, 2025 to the three months ended March 31, 2024 was primarily attributable to loan growth during the quarter. As of March 31, 2025, the Company’s allowance for credit losses ("ACL") on loans and leases as a percentage of total loans was 1.23%, compared to 1.24% as of December 31, 2024.

Non-interest Income

Non-interest income remained relatively consistent, totaling $0.9 million for both the three months ended March 31, 2025 and 2024.

Non-interest Expense

For the three months ended March 31, 2025, non-interest expense totaled $6.9 million, compared to $7.1 million for the three months ended March 31, 2024. The expense reduction comparing the three months ended March 31, 2025 to the three months ended March 31, 2024 resulted primarily from decreases in salaries and benefits and fees for professional services. These reductions were partially offset by an increase in other expense that resulted primarily from a recovery of check fraud expense that occurred during the three months ended March 31, 2024, but was not repeated during the three months ended March 31, 2025.

Total Assets

As of March 31, 2025, the Company’s assets totaled $1,127.0 million, compared to $1,101.1 million as of December 31, 2024, an increase of 2.4%.

Loans

Total loans increased by $25.3 million, or 3.1%, as of March 31, 2025, compared to December 31, 2024. The increase was driven primarily by growth of $41.3 million in consumer indirect loans during the quarter. The indirect lending platform focuses on recreational and equipment consumer lending on the higher end of the credit spectrum. Collateral financed in the indirect portfolio primarily includes boats, recreational vehicles, campers, horse trailers and cargo trailers. The weighted average credit score of new indirect loans financed during the quarter reached 800, while the weighted average credit score for the entire portfolio was 779. In addition to the indirect portfolio, the Company also grew its multi-family residential real estate and commercial and industrial lending categories during the quarter by $5.3 million and $0.9 million, respectively. Loan growth during the quarter was partially offset by reductions of $22.2 million in other lending categories, primarily construction and non-residential commercial real estate. Total loan volume averaged $824.5 million during the three months ended March 31, 2025, compared to $822.0 million during the three months ended March 31, 2024.

Asset Quality

Nonperforming assets, including loans in non-accrual status and other real estate owned, totaled $5.0 million as of March 31, 2025, compared to $5.5 million as of December 31, 2024. As a percentage of total assets, nonperforming assets totaled 0.44% as of March 31, 2025, compared to 0.50% as of December 31, 2024. Net charge-offs as a percentage of average loans totaled 0.13% during the three months ended March 31, 2025, compared to 0.09% during the three months ended March 31, 2024.

Deposits

Total deposits decreased by $10.6 million, or 1.1%, during the three months ended March 31, 2025, due primarily to reductions in interest-bearing demand deposit accounts, and to a lesser extent, reductions in non-interest-bearing demand deposit accounts. These reductions resulted in part from lower deposit pricing implemented by management during the quarter in an effort to improve net interest margin. Core deposits, which exclude time deposits of $250 thousand or more and all wholesale brokered deposits, totaled $813.9 million, or 84.6% of total deposits, as of March 31, 2025, compared to $837.7 million, or 86.1% of total deposits, as of December 31, 2024.

Short-term Borrowings

As of March 31, 2025, the Company had $45.0 million in short-term borrowings outstanding, compared to $10.0 million outstanding as of December 31, 2024. The short-term borrowings were held as part of the Company’s efforts to maintain on-balance sheet liquidity levels while repricing deposits at lower rates. As of both March 31, 2025 and December 31, 2024, all outstanding short-term borrowings had remaining maturities of less than 30 days. The amount outstanding as of March 31, 2025 included $25.0 million borrowed from the Federal Home Loan Bank of Atlanta (“FHLB”) and $20.0 million borrowed from the Federal Reserve Bank’s (“FRB”) discount window. As of December 31, 2024, all short-term borrowings outstanding were borrowed exclusively from the FHLB.

Deployment of Funds

As of March 31, 2025, the Company held cash, federal funds sold and securities purchased under reverse repurchase agreements totaling $61.5 million, or 5.5% of total assets, compared to $52.9 million, or 4.8% of total assets, as of December 31, 2024. Investment securities, including both the available-for-sale and held-to-maturity portfolios, totaled $161.9 million as of March 31, 2025, compared to $168.6 million as of December 31, 2024. As of March 31, 2025, the expected average life of securities in the investment portfolio was 4.0 years, compared to 3.6 years as of December 31, 2024.

Shareholders’ Equity

Shareholders’ equity increased by $2.6 million, or 2.6%, as of March 31, 2025, compared to December 31, 2024. The increase in shareholders’ equity during the three months ended March 31, 2025 resulted primarily from earnings, net of dividends paid and repurchases of shares of the Company's common stock. In addition, shareholders' equity was positively impacted during the quarter by reductions in the Company's accumulated other comprehensive loss resulting from changes in market interest rates, as well as the maturity of lower yielding investment securities.

Cash Dividends

During the three months ended March 31, 2025, the Company declared a cash dividend of $0.07 per share on its common stock, consistent with the dividend paid in the previous quarter. The Company’s cash dividend was increased during the fourth quarter of 2024, compared to a dividend declared of $0.05 per share in each of the first three quarters of 2024.

Share Repurchases

During the three months ended March 31, 2025, the Company completed the repurchase of 40,000 shares of its common stock at a weighted average price of $13.38 per share. The repurchases were completed under the Company’s previously announced share repurchase program. As of March 31, 2025, 872,813 shares remained available for repurchase under the program.

Regulatory Capital

During the three months ended March 31, 2025, 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 March 31, 2025, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 11.08%. Its total capital ratio was 12.23%, and its Tier 1 leverage ratio was 9.55%.

Liquidity

As of March 31, 2025, the Company continued to maintain 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, FHLB advances, the FRB's discount window, and brokered deposits.

Banking Center Growth

During the three months ended March 31, 2025, the Company continued its renovation of a banking center office in Daphne, Alabama that was purchased from another financial institution. This location is expected to serve as the Bank’s initial deposit gathering facility in the Daphne/Mobile area. It is currently anticipated that the location will open to the public by the fourth quarter of 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, investment securities, Federal Home Loan Bank stock, federal funds sold by the Bank, securities purchased under reverse repurchase agreements 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 months ended March 31, 2025 and 2024. 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 $4.0 million and $2.4 million for the three months ended March 31, 2025 and 2024, respectively.

(2) Loan fees are included in interest amounts presented. Loan fees totaled $0.2 million and $0.1 million for the three months ended March 31, 2025 and 2024, respectively.

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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 decreased by $0.3 million, comparing the three months ended March 31, 2025 to the three months ended March 31, 2024. Of the decrease, $0.4 million was attributable to lower average yields on interest-earning assets, which was partially offset by $0.1 million growth in interest-earning assets comparing the two periods.

The decrease in interest income was offset by a decrease in interest expense of $0.1 million, comparing the three months ended March 31, 2025 to the three months ended March 31, 2024. The decrease was primarily attributable to the reductions in market interest rates.

The Company’s net interest income and net interest margin during the first three months of 2025 continued to be impacted by changes in the interest rate environment that occurred during the latter months of 2024. Notably, between September and December 2024, the federal funds rate was reduced by 100 basis points, and generally, the Company’s earning assets repriced more quickly than interest-bearing liabilities during the latter part of 2024, reducing the Company’s net interest margin to 3.41% during the three months ended December 31 2024. During the first quarter of 2025, management continued efforts to both maximize earning asset growth and reduce interest expense, resulting in an improvement in net interest margin by 12 basis points, comparing the first quarter of 2025 to the fourth quarter of 2024. While net interest margin improved compared to the prior quarter, it remained below the levels recorded during the earlier periods of 2024. For the three months ended March 31, 2025, net interest margin was 3.53%, compared to 3.65% for the three months ended March 31, 2024. While management is continuing efforts to improve net interest margin, the results of these efforts cannot be fully predicted. Should market interest rates increase or decrease at significant levels, particularly over a short period of time, the Company’s net interest margin and net interest income could be negatively impacted.

Provision for Credit Losses

The Company recorded a provision for credit losses of $0.5 million during the three months ended March 31, 2025, compared to the three months ended March 31, 2024, in which no provision for credit losses was recorded. The increase in the provision for credit losses comparing the three months ended March 31, 2025 to the corresponding period of 2024 was due primarily to an increase in loan volume. As of March 31, 2025, the Company’s ACL on loans and leases as a percentage of total loans was 1.23%, compared to 1.24% as of December 31, 2024.

Net charge-offs totaled $0.3 million and $0.2 million for the three months ended March 31, 2025 and 2024, respectively. 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. Among other things, sustained levels of high inflation or an economic downturn in the Company's operating territories could negatively impact the Company’s borrowers, and 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)

The Company’s non-interest income remained relatively consistent, totaling $0.9 million for both the three months ended March 31, 2025 and 2024.

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)

Non-interest expense totaled $6.9 million and $7.1 million during the three months ended March 31, 2025 and 2024, respectively. The expense reduction comparing the three months ended March 31, 2025 to the three months ended March 31, 2024 resulted primarily from decreases in salaries and benefits and fees for professional services. These reductions were partially offset by an increase in other expense that resulted primarily from a recovery of check fraud expense that occurred during the three months ended March 31, 2024, but was not repeated during the three months ended March 31, 2025.

Provision for Income Taxes

The provision for income taxes was $0.6 million and $0.7 million for the three months ended March 31, 2025 and 2024, respectively. The Company’s effective tax rate was 23.8% and 23.6%, 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 4.0 years and 3.6 years as of March 31, 2025 and December 31, 2024, 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 March 31, 2025, available-for-sale securities totaled $161.3 million, or 99.6% of the total investment portfolio, compared to $167.9 million, or 99.6% of the total investment portfolio, as of December 31, 2024. 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 March 31, 2025, held-to-maturity securities totaled $0.6 million, or 0.4% of the total investment portfolio, compared to $0.7 million, or 0.4% of the total investment portfolio, as of December 31, 2024. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies, and obligations of state and political subdivisions.

Net unrealized losses in the available-for-sale portfolio totaled $4.0 million as of March 31, 2025, compared to $6.7 million as of December 31, 2024. Net unrealized losses within the available-for-sale portfolio were recognized, net of tax, in accumulated other comprehensive loss.

As of March 31, 2025, 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 increased by $25.3 million, or 3.1%, as of March 31, 2025, compared to December 31, 2024. The tables below summarize loan balances by portfolio category, as well as the ACL, as of the end of each of the most recent five quarters as of March 31, 2025:

(Dollars in Thousands)

As of March 31, 2025 and December 31, 2024, the composition of the non-residential commercial real estate loan portfolio was as follows:

(Dollars in Thousands)

As of March 31, 2025 and December 31, 2024, the composition of the construction, land development, and other land loans loan portfolio was as follows:

(Dollars in Thousands)

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The following table classifies the Company's fixed and variable rate loans as of March 31, 2025 according to contractual maturities of: (1) one year or less, (2) after one year through five years, (3) after five years through fifteen years, and (4) after fifteen years:

(Dollars in Thousands)

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Allowance for Credit Losses on Loans and Leases

The tables below summarize changes in the ACL on loans and leases for each of the most recent five quarters as of March 31, 2025:

(Dollars in Thousands)

Allowance for Credit Losses on Unfunded Lending Commitments

The Company records an ACL on unfunded lending commitments in which the Company is exposed to credit risk via a present contractual obligation to extend credit unless the obligation is unconditionally cancellable. 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 both March 31, 2025 and December 31, 2024, the Company’s reserve for unfunded commitments, which is recorded in other liabilities in the Company’s consolidated balance sheets, totaled $0.4 million.

Nonperforming Assets

Nonperforming assets at the end of the five most recent quarters as of March 31, 2025 were as follows:

(Dollars in Thousands)

Allocation of Allowance for Credit Losses on Loans and Leases

While no portion of the ACL 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 ACL as of March 31, 2025 and December 31, 2024:

(Dollars in Thousands)

Deposits

Total deposits decreased to $962.0 million as of March 31, 2025, from $972.6 million as of December 31, 2024, a decrease of 1.1%. The decrease was due primarily to reductions in interest-bearing demand deposit accounts, and to a lesser extent, reductions in non-interest-bearing demand deposit accounts. These reductions resulted in part from lower deposit pricing implemented by management during the quarter in an effort to improve net interest margin. 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 $813.9 million, or 84.6% of total deposits, as of March 31, 2025, compared to $837.7 million, or 86.1% of total deposits, as of December 31, 2024.

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 March 31, 2025, other interest-bearing liabilities totaled 6.5% of total interest-bearing liabilities, compared to 2.5% as of December 31, 2024.

Shareholders’ Equity

As of March 31, 2025, shareholders’ equity totaled $101.2 million, or 9.0% of total assets, compared to $98.6 million, or 9.0% of total assets, as of December 31, 2024. The increase in shareholders’ equity during the three months ended March 31, 2025 resulted primarily from earnings, net of dividends paid and repurchases of shares of the Company's common stock. In addition, shareholders' equity was positively impacted during the three months ended March 31, 2025 by reductions in the Company's accumulated other comprehensive loss resulting from changes in market interest rates, as well as the maturity of lower yielding investment securities.

During the three months ended March 31, 2025, the Company declared a cash dividend of $0.07 per share on its common stock, consistent with the dividend paid in the previous quarter. The Company’s cash dividend was increased during the fourth quarter of 2024, compared to a dividend declared of $0.05 per share in each of the first three quarters of 2024.

In addition, during the three months ended March 31, 2025, the Company completed the repurchase of 40,000 shares of its common stock at a weighted average price of $13.38 per share. The repurchases were completed under the Company’s previously announced share repurchase program. As of March 31, 2025, 872,813 shares remained available for repurchase under the program. No shares were repurchased by the Company during the three months ended March 31, 2024.

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 and securities purchased under reverse repurchase agreements, (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 $264.4 million as of March 31, 2025 and $279.0 million as of December 31, 2024. Investment securities forecasted to mature or reprice in one year or less were estimated to be $27.6 million and $29.6 million of the investment portfolio as of March 31, 2025 and December 31, 2024, 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 4.0 years and 3.6 years as of March 31, 2025 and December 31, 2024, 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 $25.0 million and $10.0 million of outstanding borrowings under FHLB advances as of March 31, 2025 and December 31, 2024, respectively. The Company's use of FHLB advances varies depending on fluctuations in deposits and other funding sources, as well as their use in interest rate hedging strategies. The Company had up to $285.3 million and $319.9 million in remaining unused credit from the FHLB (subject to available collateral, which may include eligible investment securities and loans) as of March 31, 2025 and December 31, 2024, respectively.

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. The Company maintains pledges of its consumer indirect loan portfolio and selected investment securities with the FRB as collateral to provide immediate access to funding through the discount window. As of March 31, 2025 and December 31, 2024 the Company had $160.0 and $165.1 million, respectively, in borrowing capacity with the FRB’s discount window. As of March 31, 2025 and December 31, 2024, the Bank had $20.0 million and zero, respectively, in outstanding federal funds purchased from the FRB's discount window.

In addition to collateralized funding sources through the FHLB and FRB, the Company had $48.0 million in unused established unsecured lines of credit with banks as of both March 31, 2025 and December 31, 2024.

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 $10.9 million as of both March 31, 2025 and December 31, 2024.

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 March 31, 2025 and December 31, 2024.

(Dollars in Thousands)

(Unaudited)

(Unaudited)

The table above calculates readily available liquidity by combining cash and cash equivalents, federal funds sold, securities purchased under reverse repurchase agreements 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 March 31, 2025 and December 31, 2024, the Company's total remaining credit availability with the FHLB was $285.3 million and $319.9 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 March 31, 2025, the Company had approximately 29 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 $202.6 million, or 21.1% of total deposits, as of March 31, 2025. As of December 31, 2024, estimated uninsured deposits totaled $216.8 million, or 22.2% 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 March 31, 2025, 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):

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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 March 31, 2025, 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 March 31, 2025, 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 March 31, 2025 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 2024 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.