What changed in FIRST US BANCSHARES, INC.'s 10-K — 2022 vs 2023
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Paragraph-level year-over-year comparison of FIRST US BANCSHARES, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.
+302 added−306 removedSource: 10-K (2024-03-14) vs 10-K (2023-03-10)
Top changes in FIRST US BANCSHARES, INC.'s 2023 10-K
302 paragraphs added · 306 removed · 159 edited across 6 sections
- Item 7. Management's Discussion & Analysis+191 / −195 · 87 edited
- Item 1. Business+47 / −54 · 30 edited
- Item 1A. Risk Factors+54 / −47 · 33 edited
- Item 5. Market for Registrant's Common Equity+7 / −7 · 7 edited
- Item 7A. Quantitative and Qualitative Disclosures About Market Risk+2 / −2 · 1 edited
Item 1. Business
Business — how the company describes what it does
30 edited+17 added−24 removed110 unchanged
Item 1. Business
Business — how the company describes what it does
30 edited+17 added−24 removed110 unchanged
2022 filing
2023 filing
Biggest changeEven so, the CFPB has adopted a number of rules that impact our lending practices, including, among other things, (1) requiring financial institutions to make a “reasonable and good faith determination” that a consumer has a “reasonable ability” to repay a residential mortgage loan before making such a loan, (2) requiring sponsors of asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities (and generally prohibiting sponsors from transferring or hedging that credit risk), and (3) imposing a number of new and enhanced requirements on the mortgage servicing industry, including rules regarding communications with borrowers, maintenance of customer account records, procedures for responding to written borrower requests and complaints of errors, servicing delinquent loans, and conducting foreclosure proceedings, among other measures.
Biggest changeEven so, the CFPB has adopted a number of rules that impact our lending practices, including, among other things, (1) requiring financial institutions to make a “reasonable and good faith determination” that a consumer has a “reasonable ability” to repay a residential mortgage loan before making such a loan, (2) requiring sponsors of asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities (and generally prohibiting sponsors from transferring or hedging that credit risk), and (3) imposing a number of new and enhanced requirements on the mortgage servicing industry, including rules regarding communications with borrowers, maintenance of customer account records, procedures for responding to written borrower requests and complaints of errors, servicing delinquent loans, and conducting foreclosure proceedings, among other measures. 13 Regulation of Deposit Operations Our deposit operations are subject to federal laws applicable to depository accounts, including, among others, the following: • Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; • Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts; • Electronic Fund Transfer Act and Regulation E, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and • Rules and regulations of the various agencies charged with the responsibility of implementing these laws.
Under the final rule, a bank holding company, such as the Company, and an FDIC-supervised insured depository institution, such as the Bank, are required to notify the Federal Reserve or FDIC, respectively, within 36 hours of incidents that have materially disrupted or degraded, or are reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer base, jeopardize the viability of key 12 operations of the banking organization, or impact the stability of the financial sector.
Under the final rule, a bank holding company, such as the Company, and an FDIC-supervised insured depository institution, such as the Bank, are required to notify the Federal Reserve or FDIC, respectively, within 36 hours of incidents that have materially disrupted or degraded, or are reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector.
As climate-related supervisory guidance is formalized, and relevant risk areas and corresponding control expectations are further refined, we may be required to expend significant capital and incur compliance, operating, maintenance and remediation costs in order to conform to such requirements. Website Information The Bank’s website address is https://www.fusb.com. Bancshares does not maintain a separate website.
As climate-related supervisory guidance is formalized, and relevant risk areas and corresponding control expectations are further refined, we may be required to expend significant capital and incur compliance, operating, maintenance and remediation costs in order to conform to such requirements. 14 Website Information The Bank’s website address is https://www.fusb.com. Bancshares does not maintain a separate website.
Among other things, Sarbanes-Oxley and its implementing regulations 11 established new membership requirements and additional responsibilities for audit committees, imposed restrictions on the relationships between public companies and their outside auditors (including restrictions on the types of non-audit services that auditors may provide), imposed additional responsibilities for public companies’ external financial statements on the chief executive officer and chief financial officer, and expanded the disclosure requirements for corporate insiders.
Among other things, Sarbanes-Oxley and its implementing regulations established new membership requirements and additional responsibilities for audit committees, imposed restrictions on the relationships between public companies and their outside auditors (including restrictions on the types of non-audit services that auditors may provide), imposed additional responsibilities for public companies’ external financial statements on the chief executive officer and chief financial officer, and expanded the disclosure requirements for corporate insiders.
In addition to healthy base wages, additional programs include bonus opportunities, Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, vacation and paid time off, family and military leave, flexible work schedules and employee assistance programs. The success of our business is fundamentally connected to the well-being of our people.
In addition to healthy base wages, additional programs include bonus opportunities, Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, vacation and paid time off, family and military leave, flexible work schedules and employee assistance programs. 5 The success of our business is fundamentally connected to the well-being of our people.
Our talent acquisition team uses internal and external resources to recruit highly skilled and talented workers across our markets, and we encourage employee referrals for open positions. 5 As part of our compensation philosophy, we believe that we must offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent.
Our talent acquisition team uses internal and external resources to recruit highly skilled and talented workers across our markets, and we encourage employee referrals for open positions. As part of our compensation philosophy, we believe that we must offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent.
Further, the Federal Reserve permits bank holding companies to pay dividends only out of current earnings and only if future retained earnings would be consistent with the company’s capital, asset quality and financial condition. 8 Since it has no significant independent sources of income, Bancshares’ ability to pay dividends depends on its ability to receive dividends from the Bank.
Further, the Federal Reserve permits bank holding companies to pay dividends only out of current earnings and only if future retained earnings would be consistent with the company’s capital, asset quality and financial condition. Since it has no significant independent sources of income, Bancshares’ ability to pay dividends depends on its ability to receive dividends from the Bank.
Moreover, the federal banking agencies have adopted a joint agency policy statement, noting that the adequacy and effectiveness of a bank’s interest rate risk management process and the level of its interest rate exposures are critical factors in the evaluation of the bank’s capital adequacy. In 2018, the U.S.
Moreover, the federal banking agencies have adopted a joint agency policy statement, noting that the adequacy and effectiveness of a bank’s interest rate risk management process and the level of its interest rate exposures are critical factors in the evaluation of the bank’s capital adequacy. 9 In 2018, the U.S.
For purposes of calculating these limits, loans to various business interests of the 7 borrower, including companies in which a substantial portion of the stock is owned or partnerships in which a person is a partner, must be aggregated with those made to the borrower individually.
For purposes of calculating these limits, loans to various business interests of the borrower, including companies in which a substantial portion of the stock is owned or partnerships in which a person is a partner, must be aggregated with those made to the borrower individually.
In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”), an independent bureau with broad authority to regulate the consumer finance industry, including regulated financial institutions, non-banks and others involved in extending credit to consumers. The CFPB has authority through rulemaking, orders, policy statements, guidance and enforcement actions to administer and enforce federal consumer financial laws.
In addition, the Dodd-Frank Act created the CFPB, an independent bureau with broad authority to regulate the consumer finance industry, including regulated financial institutions, non-banks and others involved in extending credit to consumers. The CFPB has authority through rulemaking, orders, policy statements, guidance and enforcement actions to administer and enforce federal consumer financial laws.
Our Board of Directors includes three females and one racially or ethnically diverse member (representing 36% of Directors). Women and individuals who are racially or ethnically diverse represent 31% of our senior management team, which includes our executive officers. Competition We face strong competition in making loans, acquiring deposits and attracting customers for investment services.
Our Board of Directors includes three females and one racially or ethnically diverse member (representing 36% of Directors). Women and individuals who are racially or ethnically diverse represent 21% of our senior management team, which includes our executive officers. Competition We face strong competition in making loans, acquiring deposits and attracting customers for investment services.
Specifically, the proposed amendments require current reporting about material cybersecurity incidents, periodic disclosures about a registrant’s policies and procedures to identify and manage cybersecurity risk, management’s role in implementing cybersecurity policies and procedures, and the board of directors’ cybersecurity expertise, if any, and its oversight of cybersecurity risk.
Specifically, the amendments require current reporting about material cybersecurity incidents, periodic disclosures 12 about a registrant’s policies and procedures to identify and manage cybersecurity risk, management’s role in implementing cybersecurity policies and procedures, management's cybersecurity expertise, if any, and the board of directors' oversight of cybersecurity risk.
The FDIC has authority to increase insurance assessments. A significant increase in insurance assessments would likely have an adverse effect on our operating expense, results of operations, and cash flows. Management cannot predict what insurance assessment rates will be in the future.
A significant increase in insurance assessments would likely have an adverse effect on our operating expense, results of operations, and cash flows. Management cannot predict what insurance assessment rates will be in the future.
Under the FDIC’s assessment system for banks with less than $10 billion in assets, the assessment rate is determined based on a number of factors, including the Bank’s CAMELS (supervisory) rating, leverage ratio, net income, non-performing loan ratios, Other Real Estate Owned (OREO) ratios, core deposit ratios, one-year organic asset growth and a loan mix index.
Under the FDIC’s assessment system for banks with less than $10 billion in assets, the assessment rate is determined based on a number of factors, including the Bank’s CAMELS (supervisory) rating, leverage ratio, net income, non-performing loan ratios, Other Real Estate Owned (OREO) ratios, core deposit ratios, one-year organic asset growth and a loan mix index. 8 The FDIC has authority to increase insurance assessments.
We encourage a customer-focused orientation that meets the diverse needs of consumers and businesses in the communities in which we serve. As of December 31, 2022, 77% of our workforce was comprised of females, and 20% of our workforce was comprised of individuals who are racially or ethnically diverse.
We encourage a customer-focused orientation that meets the diverse needs of consumers and businesses in the communities in which we serve. As of December 31, 2023, 79% of our workforce was comprised of females, and 19% of our workforce was comprised of individuals who are racially or ethnically diverse.
In March 2022, the SEC proposed amendments to its rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies that are subject to the reporting requirements of the Exchange Act.
In July 2023, the SEC adopted amendments to its rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies that are subject to the reporting requirements of the Exchange Act.
In 2016, the Federal Reserve and the Office of Comptroller of the Currency also proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping. As of December 31, 2022, these rules have not been implemented.
In 2016, the Federal Reserve and the Office of Comptroller of the Currency also proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping.
As used herein, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Bancshares, as well as the Bank, ALC, and FUSB Reinsurance, collectively. The Bank owns all of the stock of ALC. ALC is a finance company headquartered in Mobile, Alabama.
As used herein, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Bancshares and the Bank, as well as ALC and FUSB Reinsurance (for periods prior to their dissolution), collectively. ALC was a finance company headquartered in Mobile, Alabama.
None of our employees are party to a collective bargaining agreement. Management believes that the Company’s employee relations are good. To facilitate talent attraction and retention, we strive to make the Company an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, health and welfare programs.
To facilitate talent attraction and retention, we strive to make the Company an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, health and welfare programs.
Community Reinvestment Act The Community Reinvestment Act (the “CRA”) requires the federal banking regulatory agencies to assess all financial institutions that they regulate to determine whether these institutions are meeting the credit needs of the communities that they serve, including their assessment area(s) (as established for these purposes in accordance with applicable regulations based principally on the location of the institution’s branch offices).
This classification is primarily for the purpose of applying the federal prompt corrective action provisions and is not intended to be, and should not be, interpreted as a representation of our overall financial condition or prospects. 10 Community Reinvestment Act The Community Reinvestment Act (the “CRA”) requires the federal banking regulatory agencies to assess all financial institutions that they regulate to determine whether these institutions are meeting the credit needs of the communities that they serve, including their assessment area(s) (as established for these purposes in accordance with applicable regulations based principally on the location of the institution’s branch offices).
Additionally, the proposed rules would require registrants to provide updates about previously reported cybersecurity incidents in their periodic reports. Regulation of Lending Practices Our lending practices are subject to a number of federal and state laws, as supplemented by the rules and regulations of the various agencies charged with the responsibility of implementing these laws.
Regulation of Lending Practices Our lending practices are subject to a number of federal and state laws, as supplemented by the rules and regulations of the various agencies charged with the responsibility of implementing these laws.
Human Capital Resources Bancshares has no employees, other than the executive officers discussed in the information incorporated by reference in Part III, Item 10 of this report. As of December 31, 2022, the Bank had 149 full-time equivalent employees, and ALC had six full-time equivalent employees. FUSB Reinsurance has no employees.
Human Capital Resources Bancshares has no employees, other than the executive officers discussed in the information incorporated by reference in Part III, Item 10 of this report. As of December 31, 2023, the Bank had 153 full-time equivalent employees. None of our employees are party to a collective bargaining agreement. Management believes that the Company’s employee relations are satisfactory.
As required by Sarbanes-Oxley, we have adopted a Code of Business Conduct and Ethics applicable to our Board, executives and employees.
We and our Board of Directors have, as appropriate, adopted or modified our policies and practices in order to comply with these regulatory requirements and to enhance our corporate governance practices. 11 As required by Sarbanes-Oxley, we have adopted a Code of Business Conduct and Ethics applicable to our Board, executives and employees.
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 12 states, including Alabama, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.
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.
With assets of approximately $995 million, we currently would not be subject to the rules as presently proposed but would become subject to the rules if our assets increased to $1 billion. Lending Limits Under Alabama law, the amount of loans that may be made by a bank in the aggregate to one person is limited.
As of December 31, 2023, these rules have not been implemented. 7 Lending Limits Under Alabama law, the amount of loans that may be made by a bank in the aggregate to one person is limited.
The 2015 guidance also indicated that the agencies would pay special attention in the future to potential risks associated with CRE lending.
The 2015 guidance also indicated that the agencies would pay special attention in the future to potential risks associated with CRE lending. In June 2023, in response to the increased risk relating to commercial real estate loans, the federal banking agencies issued a final Interagency Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts.
The requirements are intended to allow stockholders to more easily and efficiently monitor the performance of companies and directors. We and our Board of Directors have, as appropriate, adopted or modified our policies and practices in order to comply with these regulatory requirements and to enhance our corporate governance practices.
The requirements are intended to allow stockholders to more easily and efficiently monitor the performance of companies and directors.
During the third quarter of 2021, the Company closed four banking offices located in Bucksville, Columbiana and south Tuscaloosa, Alabama, as well as Ewing, Virginia. The Bank has two wholly owned subsidiaries: Acceptance Loan Company, Inc., an Alabama corporation (“ALC”), and FUSB Reinsurance, Inc., an Arizona corporation (“FUSB Reinsurance”).
Previously, the Bank had two wholly owned subsidiaries: Acceptance Loan Company, Inc., an Alabama corporation (“ALC”), and FUSB Reinsurance, Inc., an Arizona corporation (“FUSB Reinsurance”). Both ALC and FUSB Reinsurance were dissolved in 2023, after all remaining assets and liabilities of these entities were transferred to the Bank.
The Bank received a “satisfactory” rating in its most recent CRA evaluation.
The Bank received a “satisfactory” rating in its most recent CRA evaluation. On October 24, 2023, the FDIC, the Federal Reserve Board, and the Office of the Comptroller of the Currency (the “OCC”) issued a final rule to strengthen and modernize the CRA regulations.
As of December 31, 2022, the Bank was “well-capitalized” under the prompt corrective action rules. This classification is primarily for the purpose of applying the federal prompt corrective action provisions and is not intended to be, and should not be, interpreted as a representation of our overall financial condition or prospects.
As of December 31, 2023, the Bank was “well-capitalized” under the prompt corrective action rules.
Removed
During the third quarter of 2021, ALC ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. ALC continues to service its remaining portfolio of loans from its headquarters in Mobile, Alabama.
Added
The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals.
Removed
FUSB Reinsurance was designed to reinsure or “underwrite” credit life and credit accident and health insurance policies sold to the Bank’s and ALC’s consumer loan customers. FUSB Reinsurance was responsible for the first level of risk on these policies up to a specified maximum amount, while the primary third-party insurer retained the remaining risk.
Added
The Bank will continue to manage the remaining loans from ALC’s portfolio, which totaled $10.5 million as of December 31, 2023, through final resolution. FUSB Reinsurance was designed to reinsure certain insurance policies sold to the Bank's and ALC's consumer loan customers.
Removed
While FUSB Reinsurance underwrote insurance contracts for both the Bank and ALC, in recent years, the majority of contracts were associated with ALC’s loans. Due to reduced contract volume, particularly following the cessation of business of ALC, during 2022, management of FUSB Reinsurance began procedures to terminate the entity’s activities.
Added
The new policy statement updates, expands on and supersedes existing guidance from 2009.
Removed
During 2022, FUSB Reinsurance ceased writing new insurance contracts, and reached an agreement with a third-party insurance provider to indemnify FUSB Reinsurance for all remaining liabilities associated with previously underwritten insurance policies.
Added
Most notably, it (i) adds a new discussion of short-term loan accommodations, (ii) expands guidance regarding the evaluation and assessment of guarantors to also encompass loan sponsors, (iii) incorporates information about changes to accounting principles since 2009, and (iv) updates and expands the illustrative examples of commercial real estate loan workouts.
Removed
As of December 31, 2022, the remaining assets and liabilities of FUSB Reinsurance were transferred to the Bank, and it is anticipated that FUSB Reinsurance will be legally dissolved during 2023.
Added
Furthermore, on December 18, 2023, the FDIC issued an advisory on Managing Commercial Real Estate Concentrations in a Challenging Economic Environment, which conveys certain key risk management practices for FDIC-supervised institutions to consider in managing commercial real estate loan concentrations in the current economic environment.
Removed
It is difficult to predict at this time when or how any 9 new standards under the Growth Act will ultimately be applied to us or what specific impact the Growth Act and the yet-to-be-written implementing rules and regulations will have on community banks.
Added
In July 2023, the federal banking regulators proposed revisions to the Basel III Capital Rules to implement the Basel Committee’s 2017 standards and make other changes to the Basel III Capital Rules. The proposal introduces revised credit risk, equity risk, operational risk, credit valuation adjustment risk and market risk requirements, among other changes.
Removed
Legislative and Regulatory Responses to the COVID-19 Pandemic The COVID-19 pandemic created extensive disruptions to the global economy, to businesses, and to the lives of individuals throughout the world.
Added
However, the revised capital requirements of the proposed rule would not apply to the Company or the Bank because they have less than $100 billion in total consolidated assets and trading assets and liabilities below the threshold for market risk requirements.
Removed
There have been a number of regulatory actions intended to help mitigate the adverse economic impact of the COVID-19 pandemic on borrowers, including several mandates from the bank regulatory agencies, requiring financial institutions to work constructively with borrowers affected by the pandemic. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law.
Added
Under the final rule, banks with assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years will be an “intermediate bank,” and banks with assets of at least $2 billion as of December 31 in both of the prior two calendar years will be a “large bank.” The agencies will evaluate large banks under four performance tests: the Retail Lending Test, the Retail Services and Products Test, the Community Development Financing Test, and the Community Development Services Test.
Removed
Several provisions within the CARES Act led to action from the bank regulatory agencies and there were also separate provisions within the legislation that directly impacted financial institutions.
Added
The agencies will evaluate intermediate banks under the Retail Lending Test and either the current community development test, referred to in the final rule as the Intermediate Bank Community Development Test, or, at the bank’s option, the Community Development Financing Test.
Removed
Section 4022 of the CARES Act allows, until the date the national emergency declared by the President terminates, borrowers with federally-backed one-to-four family mortgage loans experiencing a financial hardship due to the pandemic to request forbearance, regardless of delinquency status, for up to 360 days.
Added
The applicability date for the majority of the provisions in the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027.
Removed
Section 4022 also prohibited servicers of federally-backed mortgage loans from initiating foreclosures during the 60-day period beginning March 18, 2020. The FHFA announced that the FNMA and FHLMC would extend this single-family moratorium on foreclosures and evictions through December 31, 2020 and then through March 31, 2021.
Added
Additionally, the rules require registrants to provide updates about previously reported cybersecurity incidents in their periodic reports.
Removed
In addition, under Section 4023 of the CARES Act, until the date the national emergency declared by the President terminates, borrowers with federally-backed multifamily mortgage loans whose payments were current as of February 1, 2020, but who have since experienced financial hardship due to COVID-19, may request a forbearance for up to 90 days.
Added
On October 19, 2023, the Consumer Financial Protection Bureau ("CFPB") announced a proposed rule to adopt a regulation regarding personal financial data rights that is designed to promote “open banking.” If enacted as proposed, the regulation would require, among other things, that data providers, including any financial institution, make available to consumers and certain authorized third parties upon request certain covered transaction, account and payment information.
Removed
Borrowers receiving such forbearance may not evict or charge late fees to tenants for its duration. On December 23, 2020, the FHFA announced an extension of forbearance programs for qualifying multifamily properties through March 31, 2021.
Added
On October 30, 2023, the current Presidential Administration issued an Executive Order on Safe, Secure and Trustworthy Development and Use of AI, emphasizing the need for transparency, accountability and fairness in the development and use of AI.
Removed
On January 30, 2023, the President announced his intent to end the national emergency related to the COVID-19 pandemic on May 11, 2023, but various regulatory and legislative actions may be expanded, extended and amended in the future.
Added
The order seeks to balance innovation with addressing risks associated with AI by providing eight guiding principles and priorities, such as ensuring that consumers are protected from fraud, discrimination and privacy risks related to AI.
Removed
The Paycheck Protection Program (“PPP”), originally established under the CARES Act and extended under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, authorized financial institutions to make federally-guaranteed loans to qualifying small businesses and non-profit organizations.
Added
The Executive Order also requires certain federal agencies, including the CFPB, to address potential discrimination in the housing and consumer financial markets relating to the use by financial institutions of AI technologies.
Removed
These loans carried an interest rate of 1% per annum and a maturity of 2 years for loans originated prior to June 5, 2020 and 5 years for loans originated on or after June 5, 2020.
Added
Prior to the issuance of the Executive Order, the CFPB published a report addressing the use by financial institutions of AI chatbots in the provision of financial products and services, which report also highlighted the limitations and various risks posed by such activity. States have also started to regulate the use of AI technologies.
Removed
The PPP provided that such loans may be forgiven if the borrowers met certain requirements with respect to maintaining employee headcount and payroll and the use of the loan proceeds after the loan was originated. The initial phase of the PPP, after being extended multiple times by Congress, expired on August 8, 2020.
Added
For example, the California Privacy Protection Agency ("CCPA") is currently in the process of finalizing regulations under the CCPA regarding the use of automated decision making.
Removed
However, on January 11, 2021, the SBA reopened the PPP for First Draw PPP loans to small business and 10 non-profit organizations that did not receive a loan through the initial PPP phase.
Removed
Further, on January 13, 2021, the SBA reopened the PPP for Second Draw PPP loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. The PPP ended on May 31, 2021, but additional governmental assistance programs may be implemented in the future.
Removed
In addition, the federal bank regulatory agencies issued several interim final rules throughout the course of 2020 to neutralize the regulatory capital and liquidity effects for banks that participate in the Federal Reserve liquidity facilities.
Removed
The interim final rule issued on April 9, 2020, clarified that a zero percent risk weight applies to loans covered by the PPP for capital purposes and the interim final rule issued on May 15, 2020, permitted depository institutions to choose to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the supplementary leverage ratio.
Removed
These interim final rules were finalized on September 29, 2020. On March 11 2021, the American Rescue Plan Act of 2021 (the “ARP Act”) was enacted, implementing a $1.9 trillion package of stimulus and relief proposals.
Removed
Among other things, the ARP Act provided (i) additional funding for the PPP program and an expansion of the program for the benefit of certain nonprofits, (ii) funding for the SBA to make targeted grants for restaurants and similar establishments, (iii) direct cash payments of up to $1,400 to individuals, subject to income provisions, (iv) an increase in the maximum annual Child Tax Credit, subject to income limitation provisions, (v) $300 a week in expanded unemployment insurance lasting through September 6, 2021 and made $10,200 in unemployment benefits tax free for households, subject to income limitation provisions, (vi) tax relief making any student loan forgiveness incurred between December 31, 2020, and January 1, 2026 non-taxable income, and (vii) funding to support state and local governments; K-12 schools and higher education; the Centers for Disease Control; public transit; rental assistance; child care; and airline industry workers.
Removed
Regulation of Deposit Operations Our deposit operations are subject to federal laws applicable to depository accounts, including, among others, the following: • Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; 13 • Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts; • Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and • Rules and regulations of the various agencies charged with the responsibility of implementing these laws.
Item 1A. Risk Factors
Risk Factors — what could go wrong, per management
33 edited+21 added−14 removed95 unchanged
Item 1A. Risk Factors
Risk Factors — what could go wrong, per management
33 edited+21 added−14 removed95 unchanged
2022 filing
2023 filing
Biggest changeIn addition, federal regulators have issued guidance outlining their expectations for third-party service provider oversight and monitoring by financial institutions. Any failure to adequately oversee the actions of our third-party service providers could result in regulatory actions against us, which could adversely affect our business, consolidated financial condition, results of operations and cash flows.
Biggest changeAny failure to adequately oversee the actions of our third-party service providers could result in regulatory actions against us, which could adversely affect our business, consolidated financial condition, results of operations and cash flows. 19 Risks Related to Legal, Reputational and Compliance Matters We are subject to extensive governmental regulation, and the costs of complying with such regulation could have an adverse impact on our operations.
Our acquisition activities could involve a number of additional risks, including the risks of: • incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating the terms of potential transactions, resulting in our attention being diverted from the operation of our existing business; • using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets; • being potentially exposed to unknown or contingent liabilities of banks and businesses we acquire; 20 • changes in asset quality and credit risk as a result of the transaction; • being required to expend time and expense to integrate the operations and personnel of the combined businesses; • experiencing higher operating expenses relative to operating income from the new operations; • creating an adverse short-term effect on our results of operations; • losing key team members and customers as a result of an acquisition that is poorly received; and • incurring significant problems relating to the conversion of the financial and customer data of the entity being acquired into our financial and customer product systems.
Our acquisition activities could involve a number of additional risks, including the risks of: • incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating the terms of potential transactions, resulting in our attention being diverted from the operation of our existing business; • using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets; • being potentially exposed to unknown or contingent liabilities of banks and businesses we acquire; • changes in asset quality and credit risk as a result of the transaction; • being required to expend time and expense to integrate the operations and personnel of the combined businesses; • experiencing higher operating expenses relative to operating income from the new operations; • creating an adverse short-term effect on our results of operations; • losing key team members and customers as a result of an acquisition that is poorly received; and • incurring significant problems relating to the conversion of the financial and customer data of the entity being acquired into our financial and customer product systems.
The market price of our common stock may be subject to significant fluctuations in response to a variety of factors, including, but not limited to: • general economic, business and political conditions; • changing market conditions in the broader stock market in general, or in the financial services industry in particular; • monetary and fiscal policies, laws and regulations and other activities of the government, agencies and similar organizations; • actual or anticipated variations in our operating results, financial condition or asset quality; • our failure to meet analyst predictions and projections; • collectability of loans; • cost and other effects of legal and administrative cases and proceedings, claims, settlements and judgments; • additions or departures of key personnel; • trades of large blocks of our stock; • announcements of innovations or new services by us or our competitors; • future sales of our common stock or other securities; and • other events or factors, many of which are beyond our control.
The market price of our common stock may be subject to significant fluctuations in response to a variety of factors, including, but not limited to: • general economic, business and political conditions; • changing market conditions in the broader stock market in general, or in the financial services industry in particular; • monetary and fiscal policies, laws and regulations and other activities of the government, agencies and similar organizations; • actual or anticipated variations in our operating results, financial condition or asset quality; • our failure to meet analyst predictions and projections; 23 • collectability of loans; • cost and other effects of legal and administrative cases and proceedings, claims, settlements and judgments; • additions or departures of key personnel; • trades of large blocks of our stock; • announcements of innovations or new services by us or our competitors; • future sales of our common stock or other securities; and • other events or factors, many of which are beyond our control.
Deterioration of economic conditions affecting borrowers, new information regarding existing loans, inaccurate management assumptions, identification of additional problem loans and other factors, both within and outside of our control, may result in higher levels of nonperforming assets and charge-offs and loan losses in excess of our current allowance for loan losses, requiring us to make material additions to our allowance for loan losses, which could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.
Deterioration of economic conditions affecting borrowers, new information regarding existing loans, inaccurate management assumptions, identification of additional problem loans and other factors, both within and outside of our control, may result in higher levels of nonperforming assets and charge-offs and loan losses in excess of our current allowance for credit losses, requiring us to make material additions to our allowance for credit losses, which could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.
We maintain a portfolio of securities that can be used as a source of liquidity. Other sources of liquidity are available should they be needed, such as through our 22 acquisition of additional non-core deposits. Bancshares may be able, depending on market conditions, to issue and sell debt securities and preferred or common equity securities in public or private transactions.
We maintain a portfolio of securities that can be used as a source of liquidity. Other sources of liquidity are available should they be needed, such as through our acquisition of additional non-core deposits. Bancshares may be able, depending on market conditions, to issue and sell debt securities and preferred or common equity securities in public or private transactions.
Additional risks and uncertainties also could adversely affect our business, consolidated financial condition, results of operations and cash flows. If any of the following risks actually occurs, our business, financial condition or results of operations could be negatively affected, the market 14 price of your common stock could decline, and you could lose all or a part of your investment.
Additional risks and uncertainties also could adversely affect our business, consolidated financial condition, results of operations and cash flows. If any of the following risks actually occurs, our business, financial condition or results of operations could be negatively affected, the market price of your common stock could decline, and you could lose all or a part of your investment.
Our success depends to a certain extent on the general economic conditions of the geographic markets that we serve in Alabama, 15 Tennessee and Virginia. Local economic conditions in these areas have a significant impact on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans.
Our success depends to a certain extent on the general economic conditions of the geographic markets that we serve in Alabama, Tennessee and Virginia. Local economic conditions in these areas have a significant impact on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans.
Our technologies, systems and networks, and our customers’ devices, may become the target of 17 cyber-attacks, electronic fraud or information security breaches that could result in the unauthorized release, gathering, monitoring, use, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations.
Our technologies, systems and networks, and our customers’ devices, may become the target of cyber-attacks, electronic fraud or information security breaches that could result in the unauthorized release, gathering, monitoring, use, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations.
The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact the Company’s financial condition and results of operations. Risks Related to Strategic Planning We intend to engage in acquisitions of other banking institutions from time to time.
The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact the Company’s financial condition and results of operations. 21 Risks Related to Strategic Planning We intend to engage in acquisitions of other banking institutions from time to time.
Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of delinquencies, defaults and charge-offs, additional provisions for loan losses, a decline in the value of our collateral, and an overall material adverse effect on the quality of our loan portfolio.
Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of delinquencies, defaults and charge-offs, additional provisions for loan losses, a decline in the value of our collateral, and an overall material adverse effect on 16 the quality of our loan portfolio.
Our inability to overcome these risks could have an adverse effect on levels of reported net income, return on equity and return on assets and the ability to achieve our business strategy and maintain market value. We may not be able to maintain consistent growth, earnings or profitability.
Our inability to overcome these risks could have an adverse effect on levels of reported net income, return on equity and return on assets and the ability to achieve our business strategy and maintain market value. 22 We may not be able to maintain consistent growth, earnings or profitability.
The FDIC has authority to increase insurance assessments, and any significant increase in insurance assessments would likely have an adverse effect on us. We face a risk of noncompliance and enforcement action under the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The FDIC has authority to increase insurance assessments, and any significant increase in insurance assessments would likely have an adverse effect on us. 20 We face a risk of noncompliance and enforcement action under the Bank Secrecy Act and other anti-money laundering statutes and regulations.
We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for potential loan losses based on a number of factors. We believe that our allowance for loan losses is adequate.
We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for potential credit losses based on a number of factors. We believe that our allowance for credit losses is adequate.
We are under continuous threat of loss due to hacking and cyber-attacks, especially as we continue to expand customer capabilities to utilize the internet and other remote channels to transact business.
We are under continuous threat 18 of loss due to hacking and cyber-attacks, especially as we continue to expand customer capabilities to utilize the internet and other remote channels to transact business.
However, if estimates, assumptions or judgments used in calculating this allowance are incorrect, the allowance for loan losses may not be sufficient to cover our actual loan losses.
However, if estimates, assumptions or judgments used in calculating this allowance are incorrect, the allowance for credit losses may not be sufficient to cover our actual loan losses.
Any defaults by, or failures of, the institutions with whom we transact could adversely affect our debt and equity holdings in such other institutions, our participation interests in loans originated by other institutions, and our business, including our liquidity, consolidated financial condition and earnings. Liquidity risks could affect our operations and jeopardize our financial condition.
Any defaults by, or failures of, the institutions with whom we transact could adversely affect our debt and equity holdings in such other institutions, our participation interests in loans originated by other institutions, and our business, including our liquidity, consolidated financial condition and earnings.
The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions.
The actual amount of future provisions for credit losses cannot be determined at this time and may vary from the amounts of past provisions.
Any restriction or disruption of the Company’s ability to obtain funding from these or other sources could have a negative effect on the Company’s ability to satisfy its current and future financial obligations, which could materially affect the Company’s condition or results of operations.
Any restriction or disruption of the Company’s ability to obtain funding from these or other sources could have a negative effect on the Company’s ability to satisfy its current and future financial obligations, which could materially affect the Company’s condition or results of operations. Liquidity risks could affect our operations and jeopardize our financial condition.
Additionally, national financial markets may be adversely affected by sustained high levels of inflation, and the current or anticipated impact of military conflict, including the current conflict between Russia and Ukraine, terrorism or other geopolitical events. The economic conditions in our local markets may be different from the economic conditions in the United States as a whole.
Additionally, national financial markets may be adversely affected by sustained high levels of inflation, the current or anticipated impact of military conflict, including the current conflicts in the Middle East and Ukraine, terrorism, and other geopolitical events. The economic conditions in our local markets may be different from the economic conditions in the United States as a whole.
In addition, banking regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further charge-offs if the regulators’ judgments are different than those of our management. Material additions to the allowance could materially decrease our net income.
In addition, banking regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further charge-offs if the regulators’ judgments are different than those of our management. Material additions to the allowance could materially decrease our net income. 15 CRE lending may expose us to increased lending risks.
The instruments of monetary policy employed by the Federal Reserve include open market operations in United States government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits.
Our consolidated results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in United States government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits.
In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. The potential effect of these factors is heightened due to the current conditions in the financial markets and economic conditions generally.
In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations.
In addition, Bancshares’ right to participate in any distribution of assets of any of its subsidiaries upon a subsidiary’s liquidation or otherwise will be subject to the prior claims of creditors of that subsidiary, except to the extent that any of Bancshares’ claims as a creditor of such subsidiary may be recognized. 19 The internal controls that we have implemented to mitigate risks inherent to the business of banking might fail or be circumvented.
In addition, Bancshares’ right to participate in any distribution of assets of any of its subsidiaries upon a subsidiary’s liquidation or otherwise will be subject to the prior claims of creditors of that subsidiary, except to the extent that any of Bancshares’ claims as a creditor of such subsidiary may be recognized.
We also maintain important internal data, such as personally identifiable information about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties).
We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties).
These conditions impact our ability to attract deposits and to generate attractive earnings through our loan and investment portfolios. All of these factors can individually or in the aggregate be detrimental to our business, and the interplay between these factors can be complex and unpredictable.
All of these factors can individually or in the aggregate be detrimental to our business, and the interplay between these factors can be complex and unpredictable.
These changes or interpretations could adversely affect us, either directly or as a result of the effects on our customers. In the course of our business, we are sometimes subject to challenges from taxing authorities, including the Internal Revenue Service, individual states and municipalities, regarding amounts due.
In the course of our business, we are sometimes subject to challenges from taxing authorities, including the Internal Revenue Service, individual states and municipalities, regarding amounts due.
Further, a hurricane, tornado or other extreme weather event in any of our market areas could adversely impact the ability of borrowers to timely repay their loans and may adversely impact the value of collateral that we hold. 21 Securities issued by us, including our common stock, are not insured.
Such weather events could disrupt our operations and have a material adverse effect on our overall results of operations. Further, a hurricane, tornado or other extreme weather event in any of our market areas could adversely impact the ability of borrowers to timely repay their loans and may adversely impact the value of collateral that we hold.
Business – Supervision and Regulation.” We are subject to laws regarding the privacy, information security and protection of personal information, and any violation of these laws or unauthorized disclosure of such information could damage our reputation and otherwise adversely affect our operations and financial condition. 18 Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services.
Business – Supervision and Regulation.” We are subject to laws regarding the privacy, information security and protection of personal information, and any violation of these laws or unauthorized disclosure of such information could damage our reputation and otherwise adversely affect our operations and financial condition.
We are subject to the supervision and regulation of the Federal Reserve, the FDIC and the ASBD. These regulations are intended primarily to protect depositors, the public and the FDIC’s Deposit Insurance Fund, rather than shareholders. Additionally, we are subject to supervision, regulation and examination by other regulatory authorities, such as the SEC and state securities and insurance regulators.
The financial services industry is extensively regulated and supervised under both federal and state law. We are subject to the supervision and regulation of the Federal Reserve, the FDIC and the ASBD. These regulations are intended primarily to protect depositors, the public and the FDIC’s Deposit Insurance Fund, rather than shareholders.
Management regularly reviews and updates our internal controls and procedures that are designed to manage the various risks in our business, including credit risk, operational risk, financial risk, compliance risk and interest rate risk. No system of controls, however well-designed and operated, can provide absolute assurance that the objectives of the system will be met.
The internal controls that we have implemented to mitigate risks inherent to the business of banking might fail or be circumvented. Management regularly reviews and updates our internal controls and procedures that are designed to manage the various risks in our business, including credit risk, operational risk, financial risk, compliance risk and interest rate risk.
The enactment of federal tax reform has had, and is expected to continue to have, far reaching and significant effects on us, our customers and the United States economy. Further, the income tax treatment of corporations may at any time be clarified and/or modified through legislation, administration or judicial changes or interpretations.
Changes in tax laws and interpretations and tax challenges may adversely affect our financial results. The enactment of federal tax reform has had, and is expected to continue to have, far reaching and significant effects on us, our customers and the United States economy.
If such a system fails or is circumvented, there could be a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Changes in tax laws and interpretations and tax challenges may adversely affect our financial results.
No system of controls, however well-designed and operated, can provide absolute assurance that the objectives of the system will be met. If such a system fails or is circumvented, there could be a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.
In February 2022, the New York State Department of Financial Services issued a warning that the Russian invasion of Ukraine significantly elevates the cyber risk for the U.S. financial sector. While we have not experienced any material losses relating to cyber-attacks or other information security breaches to date, we may suffer such losses in the future.
While we have not experienced any material losses relating to cyber-attacks or other information security breaches to date, we may suffer such losses in the future.
Removed
If economic conditions in the United States or any of our local markets weaken, our growth and profitability from our operations could be constrained. Economic activity generally improved during 2022 as COVID-19 cases declined across the United States and restrictions were lifted; however, economic concerns remain due to ongoing uncertainty regarding the long-term effectiveness of the COVID-19 vaccine.
Added
Our policy generally has been to originate CRE loans primarily in the states in which the Bank operates. At December 31, 2023, CRE loans, including owner occupied, investor, and real estate construction loans, totaled $301.7 million or 36.7%, of our total loan portfolio.
Removed
In addition, the impact of the COVID-19 pandemic continues to influence the economy through ongoing supply chain shortages, workforce displacement, heightened volatility in the financial markets, and increased economic risks in certain industries. The current economic environment is characterized by high inflation levels and interest rates that have increased rapidly since March 2022.
Added
As a result of our growth in this portfolio over the past several years and planned future growth, these loans require more ongoing evaluation and monitoring and we are implementing enhanced risk management policies, procedures and controls.
Removed
Changes in the policies of monetary authorities and other government action could adversely affect our profitability. Our consolidated results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve.
Added
CRE loans generally involve a greater degree of credit risk than residential mortgage loans because they typically have larger balances and are more affected by adverse conditions in the economy.
Removed
Uncertainty relating to the LIBOR calculation process and the phasing out of LIBOR may adversely affect our results of operations.
Added
Because payments on loans secured by CRE often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulation.
Removed
The United Kingdom’s Financial Conduct Authority and ICE Benchmark Administration (“IBA”), the administrators of LIBOR, have announced that the publication of the most commonly used U.S. dollar London Interbank Offered Rate (“LIBOR”) settings will cease to be published or cease to be representative after June 30, 2023.
Added
In recent years, CRE markets have been experiencing substantial growth, and increased competitive pressures have contributed significantly to historically low capitalization rates and rising property values. However, CRE markets have been facing downward pressure since 2022 due in large part to increasing interest rates and declining property values.
Removed
The publication of all other LIBOR settings ceased to be published as of December 31, 2021. Given consumer protection, litigation, and reputational risks, the bank regulatory agencies indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they would examine bank practices accordingly.
Added
Accordingly, the federal banking agencies have expressed concerns about weaknesses in the current CRE market and have applied increased regulatory scrutiny to institutions with CRE loan portfolios that are fast growing or large relative to the institutions' total capital.
Removed
The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace U.S. dollar LIBOR with a benchmark rate based on the Secured Overnight 16 Financing Rate (“SOFR”) for contracts governed by U.S. law that have no or ineffective fallbacks, and in December 2022, the Federal Reserve Board adopted related implementing rules.
Added
To address supervisory expectations with respect to financial institutions' handling of CRE borrowers who are experiencing financial difficulty, in June of 2023, the federal banking agencies, including the OCC, issued an interagency policy statement addressing prudent CRE loan accommodations and workouts.
Removed
As of December 31, 2021, we no longer originate new loans or their products using any LIBOR index. As of December 31, 2022, approximately $66.5 million of our outstanding loans, and, in addition, certain derivative contracts, borrowings and other financial instruments have attributes that are either directly or indirectly dependent on LIBOR.
Added
Our failure to adequately implement enhanced risk management policies, procedures and controls could adversely affect our ability to increase this portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio. At December 31, 2023, nonaccrual CRE loans totaled $1.3 million, or less than 1% of our total portfolio of CRE loans.
Removed
The transition from LIBOR has resulted in and could continue to result in added costs and employee efforts and could present additional risk. We are subject to litigation and reputational risks if we are unable to renegotiate and amend existing contracts with counterparties that are dependent on LIBOR, including contracts that do not have fallback language.
Added
If economic conditions in the United States or any of our local markets weaken, our growth and profitability from our operations could be constrained. The current economic environment is characterized by high inflation levels and interest rates. These conditions impact our ability to attract deposits and to generate attractive earnings through our loan and investment portfolios.
Removed
We may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with contract counterparties over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results of operations.
Added
The potential effect of these factors is heightened due to the current conditions in the financial markets and economic conditions generally. 17 Fiscal challenges facing the U.S. government could negatively impact financial markets which in turn could have an adverse effect on our financial position or results of operations.
Removed
At this time, it is impossible to predict the effect of alternative rates, including SOFR, on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally.
Added
Federal budget deficit concerns and the potential for political conflict over legislation to fund U.S. government operations and raise the U.S. government’s debt limit may increase the possibility of a default by the U.S. government on its debt obligations, related credit-rating downgrades, or an economic recession in the United States.
Removed
Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings.
Added
Many of our investment securities are issued by the U.S. government and government agencies and sponsored entities.
Removed
Risks Related to Legal, Reputational and Compliance Matters We are subject to extensive governmental regulation, and the costs of complying with such regulation could have an adverse impact on our operations. The financial services industry is extensively regulated and supervised under both federal and state law.
Added
As a result of uncertain domestic political conditions, including potential future federal government shutdowns, the possibility of the federal government defaulting on its obligations for a period of time due to debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose liquidity risks.
Removed
Such weather events could disrupt our operations and have a material adverse effect on our overall results of operations.
Added
In connection with prior political disputes over U.S. fiscal and budgetary issues leading to the U.S. government shutdown in 2011, S&P lowered its long-term sovereign credit rating on the U.S. from AAA to AA+. In 2023, Congress narrowly averted two separate government shutdowns by passing continuing resolutions.
Added
In part due to repeated debt-limit political standoffs and last-minute resolutions, in 2023 a rating agency downgraded the U.S. long-term foreign-currency issuer default rating to AA+ from AAA.
Added
A further downgrade, or a downgrade by other rating agencies, as well as sovereign debt issues facing the governments of other countries, could have a material adverse impact on financial markets and economic conditions in the U.S. and worldwide. Changes in the policies of monetary authorities and other government action could adversely affect our profitability.
Added
In addition, federal regulators have issued guidance outlining their expectations for third-party service provider oversight and monitoring by financial institutions.
Added
Additionally, we are subject to supervision, regulation and examination by other regulatory authorities, such as the SEC and state securities and insurance regulators.
Added
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal data, such as personally identifiable information about our employees and information relating to our operations.
Added
Further, the income tax treatment of corporations may at any time be clarified and/or modified through legislation, administration or judicial changes or interpretations. These changes or interpretations could adversely affect us, either directly or as a result of the effects on our customers.
Added
Securities issued by us, including our common stock, are not insured.
Item 2. Properties
Properties — owned and leased real estate
1 edited+0 added−0 removed1 unchanged
Item 2. Properties
Properties — owned and leased real estate
1 edited+0 added−0 removed1 unchanged
2022 filing
2023 filing
Biggest changeItem 2. Pr operties. With the exception of its offices located in Knoxville and Powell, Tennessee, which are leased, the Bank owns all of its offices, including its executive offices, without encumbrances. ALC owns a commercial building in Jackson, Alabama, and leases additional office space in its Mobile, Alabama headquarters location.
Biggest changeItem 2. Pr operties. With the exception of its offices located in Knoxville and Powell, Tennessee, and Mobile, Alabama, which are leased, the Bank owns all of its offices, including its executive offices, without encumbrances.
Item 5. Market for Registrant's Common Equity
Market for Common Equity — stock, dividends, buybacks
7 edited+0 added−0 removed2 unchanged
Item 5. Market for Registrant's Common Equity
Market for Common Equity — stock, dividends, buybacks
7 edited+0 added−0 removed2 unchanged
2022 filing
2023 filing
Biggest changeIssuer Purchases of Equity Securities Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Programs (2) Maximum Number of Shares that May Yet Be Purchased Under the Programs (2) October 1-31, 2022 — $ — — 596,813 November 1-30, 2022 909 $ 8.43 — 596,813 December 1-31, 2022 9 $ 8.97 — 596,813 Total 918 $ 8.44 — 596,813 (1) 918 shares were purchased in open-market transactions by an independent trustee for Bancshares' 401(k) Plan during the fourth quarter of 2022.
Biggest changeIssuer Purchases of Equity Securities Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Programs (2) Maximum Number of Shares that May Yet Be Purchased Under the Programs (2) October 1-31, 2023 1,043 $ 8.70 — 596,813 November 1-30, 2023 111 $ 9.03 — 596,813 December 1-31, 2023 137,575 $ 10.34 137,500 459,313 Total 138,729 $ 10.33 137,500 459,313 (1) 1,229 shares were purchased in open-market transactions by an independent trustee for Bancshares' 401(k) Plan during the fourth quarter of 2023.
See note 15, "Shareholders' Equity", in the consolidated financial statements for additional information on dividend restrictions. 23 Share Repurchases The following table sets forth purchases made by or on behalf of Bancshares or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of Bancshares’ common stock during the fourth quarter of 2022.
See Note 14, "Shareholders' Equity," in the consolidated financial statements for additional information on dividend restrictions. 26 Share Repurchases The following table sets forth purchases made by or on behalf of Bancshares or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of Bancshares’ common stock during the fourth quarter of 2023.
Bancshares’ common stock is listed on the Nasdaq Capital Market under the symbol “FUSB.” Prior to our name change on October 11, 2016, our common stock was listed on the Nasdaq Capital Market under the symbol “USBI.” As of March 8, 2023, there were approximately 652 record holders of Bancshares’ common stock (excluding any participants in any clearing agency and “street name” holders).
Bancshares’ common stock is listed on the Nasdaq Capital Market under the symbol “FUSB.” Prior to our name change on October 11, 2016, our common stock was listed on the Nasdaq Capital Market under the symbol “USBI.” As of March 6, 2024, there were approximately 634 record holders of Bancshares’ common stock (excluding any participants in any clearing agency and “street name” holders).
As of December 31, 2022, Bancshares was authorized to repurchase up to 596,813 shares of common stock under the share repurchase program. Securities Authorized for Issuance under Equity Compensation Plans Information regarding securities authorized for issuance under our equity compensation plans is incorporated by reference to Item 12 of this Annual Report on Form 10-K.
As of December 31, 2023, Bancshares was authorized to repurchase up to 459,313 shares of common stock under the share repurchase program. Securities Authorized for Issuance under Equity Compensation Plans Information regarding securities authorized for issuance under our equity compensation plans is incorporated by reference to Item 12 of this Annual Report on Form 10-K.
Bancshares declared total dividends of $0.14 per common share and $0.12 per common share during the years ended December 31, 2022 and 2021, respectively.
Bancshares declared total dividends of $0.20 per common share and $0.14 per common share during the years ended December 31, 2023 and 2022, respectively.
On each of December 18, 2019 and April 28, 2021, the Board approved the repurchase of additional shares of common stock under the share repurchase program, and the Board has periodically extended the expiration date of the program, most recently to December 31, 2023.
In December 2019 and April 2021, the Board approved the repurchase of additional shares of common stock under the share repurchase program, and the Board has periodically extended the expiration date of the program, most recently to December 31, 2024.
(2) All shares have been repurchased to date pursuant to Bancshares’ publicly announced share repurchase program, which was initially approved by the Board of Directors on January 19, 2006 and authorized the repurchase of up to 642,785 shares of common stock.
(2) 137,500 shares were repurchased during the fourth quarter pursuant to Bancshares’ publicly announced share repurchase program, which was initially approved by the Board of Directors on January 19, 2006 and authorized the repurchase of up to 642,785 shares of common stock.
Item 7. Management's Discussion & Analysis
Management's Discussion & Analysis (MD&A) — revenue / margin commentary
87 edited+104 added−108 removed37 unchanged
Item 7. Management's Discussion & Analysis
Management's Discussion & Analysis (MD&A) — revenue / margin commentary
87 edited+104 added−108 removed37 unchanged
2022 filing
2023 filing
Biggest changeDecember 31, 2022 2021 (Dollars in Thousands) Total loans accounted for on a non-accrual basis $ 1,651 $ 2,008 Interest income that would have been recorded under original terms 60 52 Interest income reported and recorded during the year 29 30 39 Allocation of Allowance for Loan and Lease Losses While no portion of the allowance 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 loan and lease losses as of the end of the five years indicated. 2022 2021 2020 2019 2018 Allocation Allowance % Loans in Each Category Allocation Allowance % Loans in Each Category Allocation Allowance % Loans in Each Category Allocation Allowance % Loans in Each Category Allocation Allowance % Loans in Each Category (Dollars in Thousands) Real estate loans: Construction, land development and other land loans $ 517 7.0 % $ 628 9.4 % $ 393 5.7 % $ 197 5.5 % $ 241 8.1 % Secured by 1-4 family residential properties 832 11.4 % 690 10.2 % 639 13.7 % 466 18.8 % 346 21.1 % Secured by multi-family residential properties 646 8.8 % 437 6.5 % 577 8.4 % 422 9.2 % 128 4.4 % Secured by non-farm, non-residential properties 1,970 25.8 % 1,958 27.8 % 1,566 28.4 % 964 29.3 % 831 29.7 % Commercial and industrial loans 919 9.5 % 860 10.4 % 1,008 12.5 % 1,377 16.4 % 1,138 16.3 % Consumer loans: Director consumer 866 1.3 % 1,004 3.1 % 1,202 4.6 % 1,625 6.8 % 1,799 7.3 % Branch retail 518 1.8 % 304 3.6 % 373 4.9 % 395 5.8 % 427 5.4 % Indirect 3,154 34.4 % 2,439 29.0 % 1,712 21.8 % 316 8.2 % 145 7.7 % Total $ 9,422 100.0 % $ 8,320 100.0 % $ 7,470 100.0 % $ 5,762 100.0 % $ 5,055 100.0 % 40 Summary of Loan Loss Experience The following table summarizes the Company’s loan loss experience for each of the two years indicated. 2022 2021 (Dollars in Thousands) Balance of allowance for loan and lease losses at beginning of period $ 8,320 $ 7,470 Charge-offs: Real estate loans: Construction, land development and other land loans — (23 ) Secured by 1-4 family residential properties (40 ) (12 ) Secured by multi-family residential properties — — Secured by non-farm, non-residential properties — — Commercial and industrial loans — (6 ) Consumer loans: Direct consumer (1,958 ) (1,230 ) Branch retail (633 ) (377 ) Indirect (382 ) (483 ) Total charge-offs (3,013 ) (2,131 ) Recoveries: Real estate loans: Construction, land development and other land loans 2 22 Secured by 1-4 family residential properties 39 14 Secured by multi-family residential properties — — Secured by non-farm, non-residential properties 5 5 Commercial and industrial loans — 21 Consumer loans: Direct consumer 565 626 Branch retail 151 215 Indirect 45 68 Total recoveries 807 971 Net charge-offs (2,206 ) (1,160 ) Provision for loan and lease losses 3,308 2,010 Balance of allowance for loan and lease losses at end of period $ 9,422 $ 8,320 Ratio of net charge-offs during period to average loans outstanding 0.30 % 0.16 % Deposits Total deposits increased by 3.8% to $870.0 million as of December 31, 2022, from $838.1 million as of December 31, 2021.
Biggest changeFor years ended December 31, 2022 and prior, information presented is as determined in accordance with ASC 310, Receivables , prior to the adoption of ASC 326: Year Ended December 31, 2023 2022 2021 2020 2019 (Dollars in Thousands) Balance at beginning of period $ 9,422 $ 8,320 $ 7,470 $ 5,762 $ 5,055 Impact of adopting CECL accounting guidance 2,123 — — — — Charge-offs: Real estate loans: Construction, land development and other loan loans — — (23 ) — — Secured by 1-4 family residential properties (97 ) (40 ) (12 ) (61 ) (101 ) Secured by multi-family residential properties — — — — — Secured by non-farm, non-residential properties — — — — — Commercial and industrial loans — — (6 ) — — Consumer loans: Direct consumer (571 ) (1,958 ) (1,230 ) (1,621 ) (2,000 ) Branch retail (445 ) (633 ) (377 ) (374 ) (425 ) Indirect (932 ) (382 ) (483 ) (152 ) (301 ) Total charge-offs (2,045 ) (3,013 ) (2,131 ) (2,208 ) (2,827 ) Recoveries 965 807 971 971 820 Net charge-offs (1,080 ) (2,206 ) (1,160 ) (1,237 ) (2,007 ) Provision for credit losses 42 3,308 2,010 2,945 2,714 Ending balance $ 10,507 $ 9,422 $ 8,320 $ 7,470 $ 5,762 Ending balance as a percentage of loans 1.28 % 1.22 % 1.17 % 1.16 % 1.05 % Net charge-offs as a percentage of average loans 0.14 % 0.30 % 0.16 % 0.21 % 0.38 % The adoption of CECL was most impactful on the Company’s consumer indirect loan portfolio due primarily to the extension of the loss estimate period to the estimated life of loans in this category.
Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations. 27 Other intangible assets consist of core deposit intangible assets arising from acquisitions.
Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations. Other intangible assets consist of core deposit intangible assets arising from acquisitions.
This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, and our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed under Item 1A “Risk Factors” and elsewhere in this Annual Report. 24 Selected Financial Data The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the consolidated financial statements and related notes, appearing elsewhere herein.
This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, and our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed under Item 1A “Risk Factors” and elsewhere in this Annual Report. 27 Selected Financial Data The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the consolidated financial statements and related notes, appearing elsewhere herein.
MANAGEMENT’S DISCUSSION AND ANALYSIS O F FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements You should read the following discussion of our financial condition and results of operations in conjunction with the “Selected Financial Data” and our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2022.
MANAGEMENT’S DISCUSSION AND ANALYSIS O F FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements You should read the following discussion of our financial condition and results of operations in conjunction with the “Selected Financial Data” and our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2023.
As of both December 31, 2022 and 2021, the Bank exceeded all applicable minimum capital standards, and met applicable regulatory guidelines to be considered well-capitalized. No significant conditions or events have occurred since December 31, 2022 that management believes would affect the Bank’s classification as well-capitalized for regulatory purposes.
As of both December 31, 2023 and 2022, the Bank exceeded all applicable minimum capital standards, and met applicable regulatory guidelines to be considered well-capitalized. No significant conditions or events have occurred since December 31, 2023 that management believes would affect the Bank’s classification as well-capitalized for regulatory purposes.
The repurchased shares were allocated to treasury stock under the Company’s existing share repurchase program that was amended by the Board of Directors in each of December 2019 and April 2021 to allow the repurchase of additional shares. The Board has periodically extended the expiration date of the share repurchase program, most recently to December 31, 2023.
The repurchased shares were allocated to treasury stock under the Company’s existing share repurchase program that was amended by the Board of Directors in each of December 2019 and April 2021 to allow the repurchase of additional shares. The Board has periodically extended the expiration date of the share repurchase program, most recently to December 31, 2024.
The following discussion and financial information are presented to aid in an understanding of the Company’s consolidated financial position, changes in financial position, results of operations and cash flows and should be read in conjunction with the consolidated financial statements and notes thereto included herein. The emphasis of the discussion is on the years 2022 and 2021.
The following discussion and financial information are presented to aid in an understanding of the Company’s consolidated financial position, changes in financial position, results of operations and cash flows and should be read in conjunction with the consolidated financial statements and notes thereto included herein. The emphasis of the discussion is on the years 2023 and 2022.
See Note 17, “Derivative Financial Instruments,” in the consolidated financial statements for additional information related to these derivative instruments. Contractual Obligations The Company has contractual obligations to make future payments under debt and lease agreements. Long-term debt and operating lease obligations are reflected on the consolidated balance sheets.
See Note 16, “Derivative Financial Instruments,” in the consolidated financial statements for additional information related to these derivative instruments. Contractual Obligations The Company has contractual obligations to make future payments under debt and lease agreements. Long-term debt and operating lease obligations are reflected on the consolidated balance sheets.
Goodwill impairment was neither indicated nor recorded during the years ended December 31, 2022 or 2021. As of October 1, 2022, the date of our most recent impairment test, the Bank reporting unit had a fair value that was in excess of its carrying value.
Goodwill impairment was neither indicated nor recorded during the years ended December 31, 2023 or 2022. As of October 1, 2023, the date of our most recent impairment test, the Bank reporting unit had a fair value that was in excess of its carrying value.
The share repurchases were completed under the Company’s existing share repurchase program, which was amended in each of December 2019 and April 2021 to allow the repurchase of additional shares, and the Company's Board of Directors has periodically extended the expiration date of the program, most recently to December 31, 2023.
The share repurchases were completed under the Company’s existing share repurchase program, which was amended in each of December 2019 and April 2021 to allow the repurchase of additional shares, and the Company's Board of Directors has periodically extended the expiration date of the program, most recently to December 31, 2024.
Interest-bearing liabilities consist of interest-bearing demand deposits and savings and time deposits, as well as borrowings. The following table shows the average balances of each principal category of assets, liabilities and shareholders’ equity for the years ended December 31, 2022 and 2021.
Interest-bearing liabilities consist of interest-bearing demand deposits and savings and time deposits, as well as borrowings. The following table shows the average balances of each principal category of assets, liabilities and shareholders’ equity for the years ended December 31, 2023 and 2022.
Deposits, in particular 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 such deposits will continue to be the Company’s primary source of funding in the future.
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.
Policies related to the right of use asset and lease liability, revenue recognition, investment securities and long-lived assets require difficult judgments on complex matters that are often subject to multiple and recent changes in the authoritative guidance. Certain of these matters are among topics currently under 28 re-examination by accounting standard setters and regulators.
Policies related to the right of use asset and lease liability, revenue recognition, and long-lived assets require difficult judgments on complex matters that are often subject to multiple and recent changes in the authoritative guidance. Certain of these matters are among topics currently under re-examination by accounting standard setters and regulators.
Additionally, refer to the section captioned “Dividend Restrictions” included in Note 15 for a discussion regarding restrictions that could materially influence the Bank’s, and therefore Bancshares’, ability to pay dividends. Asset/Liability Management Market risk reflects the potential risk of loss arising from adverse changes in interest rates and market prices.
Additionally, refer to the section captioned “Dividend Restrictions” included in Note 14 for a discussion regarding restrictions that could materially influence the Bank’s, and therefore Bancshares’, ability to pay dividends. 48 Asset/Liability Management Market risk reflects the potential risk of loss arising from adverse changes in interest rates and market prices.
The Company has not entered into any unconditional purchase obligations or other long-term obligations, other than as included below. These types of obligations are further discussed in Note 10, “Borrowings,” and Note 16, “Leases,” in the Notes to consolidated financial statements. Many of the Bank’s lending relationships, including those with commercial and consumer customers, contain both funded and unfunded elements.
The Company has not entered into any unconditional purchase obligations or other long-term obligations, other than as included below. These types of obligations are further discussed in Note 9, “Borrowings,” and Note 15, “Leases,” in the Notes to consolidated financial statements. Many of the Bank’s lending relationships, including those with commercial and consumer customers, contain both funded and unfunded elements.
Liquidity As of December 31, 2022, the Company continued to maintain excess funding capacity sufficient to provide adequate liquidity for loan growth, capital expenditures and ongoing operations.
Liquidity As of December 31, 2023, the Company continued to maintain excess funding capacity sufficient to provide adequate liquidity for loan growth, capital expenditures and ongoing operations.
The Company’s effective tax rate was 23.8% and 22.3%, 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.
The Company’s effective tax rate was 24.7% and 23.8%, 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.
As of December 31, 2022, the Company had $0.4 million in other intangible assets, and there was no indication of impairment. Other Real Estate Owned Other real estate owned (“OREO”) consists of properties obtained through foreclosure or in satisfaction of loans, as well as closed Bank and ALC branches.
As of December 31, 2023, the Company had $0.2 million in other intangible assets, and there was no indication of impairment. Other Real Estate Owned Other real estate owned (“OREO”) consists of properties obtained through foreclosure or in satisfaction of loans, as well as closed Bank and ALC branches.
The expected average life of securities in the investment portfolio was 3.5 years and 3.7 years as of December 31, 2022 and 2021, respectively. Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income or loss, a separate component of shareholders’ equity.
The expected average life of securities in the investment portfolio was 3.9 years and 3.5 years as of December 31, 2023 and 2022, 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.
Refer to the section captioned “Regulatory Capital” included in Note 15, “Shareholders’ Equity,” in the Notes to the consolidated financial statements for an illustration of the Bank’s actual regulatory capital amounts and ratios under regulatory capital standards in effect as of December 31, 2022 and December 31, 2021.
Refer to the section captioned “Regulatory Capital” included in Note 14, “Shareholders’ Equity,” in the Notes to the consolidated financial statements for an illustration of the Bank’s actual regulatory capital amounts and ratios under regulatory capital standards in effect as of December 31, 2023 and December 31, 2022.
As part of interest rate risk management, the Company may use derivative instruments in accordance with policies established by the Board of Directors. Derivative instruments may include the use of interest rate swaps, caps and floors.
As part of interest rate risk management, the Company may use derivative instruments in accordance with policies established by the Board of Directors. Derivative instruments may include the use of interest rate swaps or option products such as caps and floors.
We will continue to monitor deposit levels closely to help ensure an adequate level of funding for the Company’s activities.
Management will continue to monitor core deposit levels closely to help ensure an adequate level of funding for the Company’s activities.
Loans maturing or repricing in one year or less amounted to $212.5 million as of December 31, 2022 and $102.4 million as of December 31, 2021. Investment securities forecasted to mature or reprice in one year or less were estimated to be $7.1 million and $9.5 million of the investment portfolio as of December 31, 2022 and 2021, respectively.
Loans maturing or repricing in one year or less amounted to $241.2 million as of December 31, 2023 and $212.5 million as of December 31, 2022. Investment securities forecasted to mature or reprice in one year or less were estimated to be $12.9 million and $7.1 million of the investment portfolio as of December 31, 2023 and 2022, respectively.
Management will continue to evaluate opportunities to add new non-interest revenue streams or to grow existing streams; however, significant growth in non-interest income is not expected in the near term. Non-Interest Expense Non-interest expense represents expenses incurred from sources other than interest-bearing liabilities.
Management continues to evaluate opportunities to add non-interest revenue streams and grow existing streams; however, significant growth in non-interest income is not expected in the near term. 38 Non-Interest Expense Non-interest expense represents expenses incurred from sources other than interest-bearing liabilities.
As of December 31, 2022, a total of 596,813 shares remained available for repurchase under the program. Regulatory Capital D uring 2022, 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 December 31, 2023, a total of 459,313 shares remained available for repurchase under the program. Regulatory Capital During 2023, the Bank continued to maintain capital ratios at higher levels than required to be considered a “well-capitalized” institution under applicable banking regulations.
The interest rate swap contracts, which were designated as either cash flow hedges or fair value hedges, were intended to mitigate risk associated with rising interest rates by converting floating interest rate payments to a fixed rate or by converting a pool of fixed rate loans to a variable rate.
As of December 31, 2022, the Company held four forward interest rate swap contracts, designated as either cash flow hedges or fair value hedges, that were intended to mitigate risk associated with rising interest rates by converting floating interest rate payments to a fixed rate or by converting a pool of fixed rate loans to a variable rate.
Year Ended December 31, 2022 2021 2020 2019 2018 (Dollars in Thousands, except Per Share Amounts) Results of Operations: Interest income $ 41,197 $ 39,921 $ 40,377 $ 43,588 $ 37,138 Interest expense 4,256 2,950 4,611 6,646 4,350 Net interest income 36,941 36,971 35,766 36,942 32,788 Provision for loan and lease losses 3,308 2,010 2,945 2,714 2,622 Non-interest income 3,451 3,521 5,010 5,366 5,610 Non-interest expense 28,072 32,756 34,299 33,782 32,385 Income before income taxes 9,012 5,726 3,532 5,812 3,391 Provision for income taxes 2,148 1,275 825 1,246 901 Net income $ 6,864 $ 4,451 $ 2,707 $ 4,566 $ 2,490 Per Share Data: Basic net income per share $ 1.13 $ 0.70 $ 0.43 $ 0.71 $ 0.40 Diluted net income per share $ 1.06 $ 0.66 $ 0.40 $ 0.67 $ 0.37 Dividends per share $ 0.14 $ 0.12 $ 0.12 $ 0.09 $ 0.08 Common stock price - High $ 12.00 $ 12.50 $ 12.00 $ 11.93 $ 13.62 Common stock price - Low $ 6.46 $ 7.54 $ 5.18 $ 7.60 $ 7.60 Period end price per share $ 8.68 $ 10.57 $ 9.02 $ 11.61 $ 7.95 Period end shares outstanding (in thousands) 5,812 6,172 6,177 6,158 6,298 Period-End Balance Sheet: Total assets $ 994,667 $ 958,302 $ 890,511 $ 788,738 $ 791,939 Loans, net of allowance for loan and lease losses 764,451 700,030 638,374 545,243 514,867 Allowance for loan and lease losses 9,422 8,320 7,470 5,762 5,055 Investment securities, net 132,657 134,319 91,422 108,356 153,949 Total deposits 870,025 838,126 782,212 683,662 704,725 Short-term borrowings 20,038 10,046 10,017 10,025 527 Long-term borrowings 10,726 10,653 — — — Total shareholders’ equity 85,135 90,064 86,678 84,748 79,437 Book value 14.65 14.59 14.03 13.76 12.61 Performance Ratios: Loans to deposits 87.9 % 83.5 % 81.6 % 79.8 % 73.1 % Net interest margin 4.07 % 4.23 % 4.69 % 5.18 % 5.27 % Return on average assets 0.70 % 0.47 % 0.32 % 0.58 % 0.36 % Return on average equity 7.99 % 5.01 % 3.17 % 5.51 % 3.26 % Asset Quality: Allowance for loan and lease losses as % of loans 1.22 % 1.17 % 1.16 % 1.05 % 0.97 % Nonperforming assets as % of loans and other real estate 0.30 % 0.59 % 0.62 % 0.87 % 0.82 % Nonperforming assets as % of total assets 0.24 % 0.43 % 0.45 % 0.61 % 0.54 % Net charge-offs as a % of average loans 0.30 % 0.16 % 0.21 % 0.38 % 0.57 % Capital Adequacy: Common equity tier 1 risk-based capital ratio 11.07 % 11.36 % 11.78 % 12.78 % 12.62 % Tier 1 risk-based capital ratio 11.07 % 11.36 % 11.78 % 12.78 % 12.62 % Total risk-based capital ratio 12.19 % 12.44 % 12.92 % 13.77 % 13.53 % Tier 1 leverage ratio 9.39 % 9.17 % 8.98 % 9.61 % 8.96 % 25 DESCRIPTION OF THE BUSINESS First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its subsidiaries, the “Company”), is a bank holding company formed in 1983 registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”).
Year Ended December 31, 2023 2022 2021 2020 2019 (Dollars in Thousands, except Per Share Amounts) Results of Operations: Interest income $ 52,806 $ 41,197 $ 39,921 $ 40,377 $ 43,588 Interest expense 15,456 4,256 2,950 4,611 6,646 Net interest income 37,350 36,941 36,971 35,766 36,942 Provision for credit losses 319 3,308 2,010 2,945 2,714 Non-interest income 3,381 3,451 3,521 5,010 5,366 Non-interest expense 29,141 28,072 32,756 34,299 33,782 Income before income taxes 11,271 9,012 5,726 3,532 5,812 Provision for income taxes 2,786 2,148 1,275 825 1,246 Net income $ 8,485 $ 6,864 $ 4,451 $ 2,707 $ 4,566 Per Share Data: Basic net income per share $ 1.42 $ 1.13 $ 0.70 $ 0.43 $ 0.71 Diluted net income per share $ 1.33 $ 1.06 $ 0.66 $ 0.40 $ 0.67 Dividends per share $ 0.20 $ 0.14 $ 0.12 $ 0.12 $ 0.09 Common stock price - High $ 10.44 $ 12.00 $ 12.50 $ 12.00 $ 11.93 Common stock price - Low $ 6.54 $ 6.46 $ 7.54 $ 5.18 $ 7.60 Period end price per share $ 10.31 $ 8.68 $ 10.57 $ 9.02 $ 11.61 Period end shares outstanding (in thousands) 5,735 5,812 6,172 6,177 6,158 Period-End Balance Sheet: Total assets $ 1,072,940 $ 994,667 $ 958,302 $ 890,511 $ 788,738 Total loans 821,791 773,873 708,350 645,844 551,005 Allowance for credit losses on loans 10,507 9,422 8,320 7,470 5,762 Investment securities, net 136,669 132,657 134,319 91,422 108,356 Total deposits 950,191 870,025 838,126 782,212 683,662 Short-term borrowings 10,000 20,038 10,046 10,017 10,025 Long-term borrowings 10,799 10,726 10,653 — — Total shareholders’ equity 90,593 85,135 90,064 86,678 84,748 Book value 15.80 14.65 14.59 14.03 13.76 Performance Ratios: Total loans to deposits 86.5 % 88.9 % 84.5 % 82.6 % 80.6 % Net interest margin 3.87 % 4.07 % 4.23 % 4.69 % 5.18 % Return on average assets 0.82 % 0.70 % 0.47 % 0.32 % 0.58 % Return on average equity 9.88 % 7.99 % 5.01 % 3.17 % 5.51 % Asset Quality: Allowance for credit losses as % of loans 1.28 % 1.22 % 1.17 % 1.16 % 1.05 % Nonperforming assets as % of loans and other real estate 0.37 % 0.30 % 0.59 % 0.62 % 0.87 % Nonperforming assets as % of total assets 0.28 % 0.24 % 0.43 % 0.45 % 0.61 % Net charge-offs as a % of average loans 0.14 % 0.30 % 0.16 % 0.21 % 0.38 % Capital Adequacy: Common equity tier 1 risk-based capital ratio 10.88 % 11.07 % 11.36 % 11.78 % 12.78 % Tier 1 risk-based capital ratio 10.88 % 11.07 % 11.36 % 11.78 % 12.78 % Total risk-based capital ratio 12.11 % 12.19 % 12.44 % 12.92 % 13.77 % Tier 1 leverage ratio 9.36 % 9.39 % 9.17 % 8.98 % 9.61 % 28 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”).
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. As of December 31, 2022, the investment securities portfolio had an estimated average life of 3.5 years.
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.
As of December 31, 2022, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 11.07%, its total capital ratio was 12.19%, and its Tier 1 leverage ratio was 9.39%.
As of December 31, 2023, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 10.88%. Its total capital ratio was 12.11%, and its Tier 1 leverage ratio was 9.36%.
Held-to-maturity securities are stated at amortized cost. The calculations of the weighted average yields for each maturity category are based upon yield weighted by the respective costs of the securities.
The calculations of the weighted average yields for each maturity category are based upon yield weighted by the respective costs of the securities.
Non-accruing loans averaged $1.8 million for both years ended December 31, 2022 and 2021. Note B — Loan fees are included in the interest amounts presented.
Non-accruing loans averaged $1.7 million and $1.8 million for the years ended December 31, 2023 and 2022, respectively. (2) Loan fees are included in the interest amounts presented.
As used herein, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Bancshares, as well as the Bank, ALC, and FUSB Reinsurance, collectively. The Bank owns all of the stock of ALC. ALC is a finance company headquartered in Mobile, Alabama.
As used herein, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Bancshares and the Bank, as well as ALC and FUSB Reinsurance (for periods prior to their dissolution), collectively. ALC was a finance company headquartered in Mobile, Alabama.
During the year ended December 31, 2022 the Company completed repurchases of 412,400 shares of its common stock at a weighted average price of $10.87 per share, or $4.5 million in aggregate.
During the year ended December 31, 2023 the Company completed repurchases of 137,500 shares of its common stock at a weighted average price of $10.34 per share, or $1.4 million in aggregate.
Additionally, other real estate and certain other assets acquired in foreclosure are reported at the lower of the recorded investment or fair value of the property, less estimated cost to sell.
These assets and liabilities include securities available-for-sale, impaired loans and derivative instruments. Additionally, other real estate and certain other assets acquired in foreclosure are reported at the lower of the recorded investment or fair value of the property, less estimated cost to sell.
Off-Balance Sheet Obligations The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources other than as described in Note 16 “Leases,” Note 17 “Derivative Financial Instruments” and Note 20 “Guarantees, Commitments and Contingencies” in the consolidated financial statements.
Since interest payments under a variable rate cannot be forecasted with certainty, contractual interest during the variable period is not included in the table above. 49 Off-Balance Sheet Obligations The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources other than as described in Note 15 “Leases,” Note 16 “Derivative Financial Instruments” and Note 18 “Guarantees, Commitments and Contingencies” in the consolidated financial statements.
Provision for Loan and Lease Losses The provision for loan and lease losses was $3.3 million for the year ended December 31, 2022, compared to $2.0 million for the year ended December 31, 2021.
Provision for Credit Losses The provision for credit losses was $0.3 million for the year ended December 31, 2023, compared to $3.3 million for the year ended December 31, 2022.
As of December 31, 2022, available-for-sale securities totaled $130.8 million, or 98.6% of the total investment portfolio, compared to $130.9 million, or 97.4% of the total investment portfolio, as of December 31, 2021. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, corporate bonds and obligations of state and political subdivisions.
As of December 31, 2023, available-for-sale securities totaled $135.6 million, or 99.2% of the total investment portfolio, compared to $130.8 million, or 98.6% of the total investment portfolio, as of December 31, 2022. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S.
As of December 31, 2022 and 2021, the Company had $20.0 million and $10.0 million, respectively, in outstanding short-term borrowings under FHLB advances. 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.
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 and $10.7 million as of December 31, 2023 and 2022, respectively.
At this time, management considers it to be more likely than not that the Company will have sufficient taxable income in the future to allow all deferred tax assets to be realized. Accordingly, a valuation allowance was not established for deferred tax assets as of either December 31, 2022 or 2021.
At this time, management considers it to be more likely than not that the Company will have sufficient taxable income in the future to allow all deferred tax assets to be realized.
Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies and obligations of states and political subdivisions. Investment Securities Maturity Schedule The following tables summarize the carrying values and weighted average yield of the available-for-sale and held-to-maturity securities portfolios as of December 31, 2022, according to contractual maturity. Available-for-sale securities are stated at fair value.
Investment Securities Maturity Schedule The following tables summarize the carrying values and weighted average yield of the available-for-sale and held-to-maturity securities portfolios as of December 31, 2023, according to contractual maturity. Available-for-sale securities are stated at fair value. Held-to-maturity securities are stated at amortized cost.
Year Ended December 31, 2022 2021 (Dollars in Thousands) Interest income $ 41,197 $ 39,921 Interest expense 4,256 2,950 Net interest income 36,941 36,971 Provision for loan losses 3,308 2,010 Net interest income after provision for loan losses 33,633 34,961 Non-interest income 3,451 3,521 Non-interest expense 28,072 32,756 Income before income taxes 9,012 5,726 Provision for income taxes 2,148 1,275 Net income $ 6,864 $ 4,451 Basic net income per share $ 1.13 $ 0.70 Diluted net income per share $ 1.06 $ 0.66 Dividends per share $ 0.14 $ 0.12 The discussion that follows summarizes the most significant activity that impacted changes in the Company’s operations during 2022 as compared to 2021, as well as significant changes in the Company’s balance sheet comparing December 31, 2022 to December 31, 2021.
Year Ended December 31, 2023 2022 (Dollars in Thousands) Interest income $ 52,806 $ 41,197 Interest expense 15,456 4,256 Net interest income 37,350 36,941 Provision for credit losses 319 3,308 Net interest income after provision for credit losses 37,031 33,633 Non-interest income 3,381 3,451 Non-interest expense 29,141 28,072 Income before income taxes 11,271 9,012 Provision for income taxes 2,786 2,148 Net income $ 8,485 $ 6,864 Basic net income per share $ 1.42 $ 1.13 Diluted net income per share $ 1.33 $ 1.06 Dividends per share $ 0.20 $ 0.14 The discussion that follows summarizes the most significant activity that impacted changes in the Company’s operations during 2023 as compared to 2022, as well as significant changes in the Company’s balance sheet comparing December 31, 2023 to December 31, 2022.
Deposits and Borrowings Deposits totaled $870.0 million as of December 31, 2022, compared to $838.1 million as of December 31, 2021. Core deposits, which exclude time deposits of $250 thousand or greater, totaled $778.1 million, or 89.4% of total deposits, as of December 31, 2022, compared to $775.1 million, or 92.5% of total deposits, as of December 31, 2021.
As of December 31, 2023, core deposits, which exclude time deposits of $250 thousand or more and all brokered deposits, totaled $819.5 million, or 86.2% of total deposits, compared to $778.1 million, or 89.4% of total deposits, as of December 31, 2022.
Total Assets As of December 31, 2022, the Company's assets totaled $994.7 million, compared to $958.3 million as of December 31, 2021, an increase of 3.8%. Loan Growth Total loans increased by $64.2 million, or 9.0%, as of December 31, 2022, compared to December 31, 2021.
Total Assets As of December 31, 2023, the Company's assets totaled $1,072.9 million, compared to $994.7 million as of December 31, 2022, an increase of 7.9%, primarily due to the loan and deposit growth described below. Loans Total loans increased by $47.9 million, or 6.2%, as of December 31, 2023, compared to December 31, 2022.
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.
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. 46 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.
For the year ended December 31, 2022, the Company declared total dividends of $0.14 per share, compared to $0.12 per share for the year ended December 31, 2021. Share Repurchases During 2022, the Company completed share repurchases totaling 412,400 shares of its common stock at a weighted average price of $10.87 per share.
Cash Dividends The Company declared cash dividends totaling $0.20 per share on its common stock during 2023, compared to cash dividends totaling $0.14 per share on its common stock during 2022. Share Repurchases During 2023, the Company completed share repurchases totaling 137,500 shares of its common stock at a weighted average price of $10.34 per share.
Financial Highlights For the year ended December 31, 2022, the Company earned net income of $6.9 million, or $1.06 per diluted common share, compared to net income of $4.5 million, or $0.66 per diluted common share, for the year ended December 31, 2021.
Financial Highlights For the year ended December 31, 2023, the Company earned net income of $8.5 million, or $1.33 per diluted common share, compared to net income of $6.9 million, or $1.06 per diluted common share, for the year ended December 31, 2022. 32 Summarized condensed consolidated statements of operations are included below for the years ended December 31, 2023 and 2022, respectively.
Under these requirements, the Bank is subject to minimum risk-based capital and leverage capital requirements, which are administered by the federal banking regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments.
These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments.
The following table presents the major components of non-interest income for the periods indicated: Year Ended December 31, 2022 2021 $ Change % Change (Dollars in Thousands) Service charges and other fees on deposit accounts $ 1,154 $ 1,069 $ 85 8.0 % Bank-owned life insurance 451 439 12 2.7 % Net (loss) gain on sale and prepayment of investment securities (83 ) 22 (105 ) NM Lease income 864 830 34 4.1 % Other income 1,065 1,161 (96 ) (8.3 )% Total non-interest income $ 3,451 $ 3,521 $ (70 ) (2.0 )% NM: Not Meaningful The Company’s non-interest income decreased in 2022 compared to 2021 primarily due to nonrecurring net losses on sales of investment securities totaling $83 thousand in 2022, compared to a gain of $22 thousand in 2021.
The following table presents the major components of non-interest income for the periods indicated: Year Ended December 31, 2023 2022 $ Change % Change (Dollars in Thousands) Service charges and other fees on deposit accounts $ 1,197 $ 1,154 $ 43 3.7 % Bank-owned life insurance 471 451 20 4.4 % Net loss on sale and prepayment of investment securities — (83 ) 83 NM Gain on sales of premises and equipment and other assets 17 301 (284 ) (94.4 )% Lease income 949 864 85 9.8 % ATM fee income 415 532 (117 ) (22.0 )% Other income 332 232 100 43.1 % Total non-interest income $ 3,381 $ 3,451 $ (70 ) (2.0 )% NM: Not Meaningful The Company’s non-interest income decreased by $0.1 million comparing 2023 to 2022, due primarily to gains on the sale of premises and equipment that occurred in 2022, but were not repeated in 2023, as well as reductions in ATM fee income.
Year Ended December 31, 2022 2021 Average Balance Interest Annualized Yield/ Rate % Average Balance Interest Annualized Yield/ Rate % (Dollars in Thousands) ASSETS Interest-earning assets: Total loans (Note A) $ 724,639 $ 38,015 5.25 % $ 685,010 $ 38,229 5.58 % Taxable investment securities 141,283 2,631 1.86 % 107,141 1,503 1.40 % Tax-exempt investment securities 2,342 36 1.54 % 3,370 60 1.78 % Federal Home Loan Bank stock 1,247 53 4.25 % 928 34 3.66 % Federal funds sold 584 22 3.77 % 83 — — Interest-bearing deposits in banks 38,379 440 1.15 % 76,972 95 0.12 % Total interest-earning assets 908,474 41,197 4.53 % 873,504 39,921 4.57 % Noninterest-earning assets 65,855 66,782 Total $ 974,329 $ 940,286 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Demand deposits $ 246,124 $ 638 0.26 % $ 236,084 $ 553 0.23 % Savings deposits 208,672 1,204 0.58 % 193,766 599 0.31 % Time deposits 212,591 1,540 0.72 % 226,425 1,517 0.67 % Total interest-bearing deposits 667,387 3,382 0.51 % 656,275 2,669 0.41 % Noninterest-bearing demand deposits 182,032 — — 172,187 — — Total deposits 849,419 3,382 0.40 % 828,462 2,669 0.32 % Borrowings 30,048 874 2.91 % 13,512 281 2.08 % Total funding costs 879,467 4,256 0.48 % 841,974 2,950 0.35 % Other noninterest-bearing liabilities 8,977 9,416 Shareholders’ equity 85,885 88,896 Total $ 974,329 $ 940,286 Net interest income (Note B) $ 36,941 $ 36,971 Net interest margin 4.07 % 4.23 % Note A — For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding.
Year Ended December 31, 2023 2022 Average Balance Interest Annualized Yield/ Rate % Average Balance Interest Annualized Yield/ Rate % (Dollars in Thousands) ASSETS Interest-earning assets: Total loans (1) $ 795,446 $ 47,749 6.00 % $ 724,639 $ 38,015 5.25 % Taxable investment securities 127,653 2,858 2.24 % 141,283 2,632 1.86 % Tax-exempt investment securities 1,042 13 1.25 % 2,342 36 1.54 % Federal Home Loan Bank stock 1,264 93 7.36 % 1,247 53 4.25 % Federal funds sold 1,841 95 5.16 % 584 22 3.77 % Interest-bearing deposits in banks 38,111 1,998 5.24 % 38,379 439 1.14 % Total interest-earning assets 965,357 52,806 5.47 % 908,474 41,197 4.53 % Noninterest-earning assets 63,765 65,855 Total $ 1,029,122 $ 974,329 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Demand deposits $ 212,010 $ 777 0.37 % $ 246,124 $ 638 0.26 % Savings deposits 229,238 5,007 2.18 % 208,672 1,204 0.58 % Time deposits 305,848 8,566 2.80 % 212,591 1,540 0.72 % Total interest-bearing deposits 747,096 14,350 1.92 % 667,387 3,382 0.51 % Noninterest-bearing demand deposits 160,598 — — 182,032 — — Total deposits 907,694 14,350 1.58 % 849,419 3,382 0.40 % Borrowings 26,252 1,106 4.21 % 30,048 874 2.91 % Total funding costs 933,946 15,456 1.65 % 879,467 4,256 0.48 % Other noninterest-bearing liabilities 9,302 8,977 Shareholders’ equity 85,874 85,885 Total $ 1,029,122 $ 974,329 Net interest income (2) $ 37,350 $ 36,941 Net interest margin 3.87 % 4.07 % (1) For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding.
Loan fees totaled $0.9 million and $1.7 million for 2022 and 2021, respectively. 33 The following table summarizes the impact of variances in volume and rate of interest-earning assets and interest-bearing liabilities on components of net interest income. 2022 Compared to 2021 Increase (Decrease) Due to Change In: 2021 Compared to 2020 Increase (Decrease) Due to Change In: Volume Average Rate Net Volume Average Rate Net (Dollars in Thousands) Interest earned on: Total loans $ 2,212 $ (2,426 ) $ (214 ) $ 6,145 $ (6,167 ) $ (22 ) Taxable investments 479 649 1,128 143 (401 ) (258 ) Tax-exempt investments (18 ) (6 ) (24 ) 19 (14 ) 5 Federal Home Loan Bank stock 12 7 19 (9 ) (8 ) (17 ) Federal funds 0 22 22 (44 ) (1 ) (45 ) Interest-bearing deposits in banks (48 ) 393 345 37 (156 ) (119 ) Total interest-earning assets 2,637 (1,361 ) 1,276 6,291 (6,747 ) (456 ) Interest expense on: Demand deposits 24 61 85 132 (156 ) (24 ) Savings deposits 46 559 605 145 (302 ) (157 ) Time deposits (93 ) 116 23 (99 ) (1,527 ) (1,626 ) Other borrowings 344 249 593 45 101 146 Total interest-bearing liabilities 321 985 1,306 223 (1,884 ) (1,661 ) Increase (decrease) in net interest income $ 2,316 $ (2,346 ) $ (30 ) $ 6,068 $ (4,863 ) $ 1,205 Note: Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates.
Loan fees totaled $0.6 million and $0.9 million for the years ended December 31, 2023 and December 31, 2022, respectively. 36 The following table summarizes the impact of variances in volume and rate of interest-earning assets and interest-bearing liabilities on components of net interest income. 2023 Compared to 2022 Increase (Decrease) Due to Change In: 2022 Compared to 2021 Increase (Decrease) Due to Change In: Volume Average Rate Net Volume Average Rate Net (Dollars in Thousands) Interest earned on: Total loans $ 3,715 $ 6,019 $ 9,734 $ 2,212 $ (2,426 ) $ (214 ) Taxable investment securities (254 ) 480 226 479 650 1,129 Tax-exempt investment securities (20 ) (3 ) (23 ) (18 ) (6 ) (24 ) Federal Home Loan Bank stock 1 39 40 12 7 19 Federal funds sold 47 26 73 0 22 22 Interest-bearing deposits in banks (3 ) 1,562 1,559 (48 ) 392 344 Total interest-earning assets 3,486 8,123 11,609 2,637 (1,361 ) 1,276 Interest expense on: Demand deposits (88 ) 227 139 24 61 85 Savings deposits 119 3,684 3,803 46 559 605 Time deposits 676 6,350 7,026 (93 ) 116 23 Borrowings (110 ) 342 232 344 249 593 Total interest-bearing liabilities 597 10,603 11,200 321 985 1,306 Increase (decrease) in net interest income $ 2,889 $ (2,480 ) $ 409 $ 2,316 $ (2,346 ) $ (30 ) Note: Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates.
Core deposits, which exclude time deposits of $250 thousand or more, provide a relatively stable funding source that supports earning assets. Core deposits totaled $778.1 million, or 89.4% of total deposits, as of December 31, 2022, compared to $775.1 million, or 92.5% of total deposits, as of December 31, 2021.
As of December 31, 2023, core deposits, which exclude time deposits of $250 thousand or more and all brokered deposits, totaled $819.5 million, or 86.2% of total deposits, compared to $778.1 million, or 89.4% of total deposits, as of December 31, 2022.
The unfunded component of these commitments is not recorded in the consolidated balance sheets.
The unfunded component of these commitments is not recorded in the consolidated balance sheets. These commitments are further discussed in Note 18, “Guarantees, Commitments and Contingencies,” in the consolidated financial statements.
Fair Value Measurements Portions of the Company’s assets and liabilities are carried at fair value, with changes in fair value recorded either in earnings or accumulated other comprehensive income (loss). These assets and liabilities include securities available-for-sale, impaired loans and derivative instruments.
Accordingly, a valuation allowance was not established for deferred tax assets as of either December 31, 2023 or 2022. 31 Fair Value Measurements Portions of the Company’s assets and liabilities are carried at fair value, with changes in fair value recorded either in earnings or accumulated other comprehensive income (loss).
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.
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.
Subsequent to December 31, 2022, the Company terminated all four interest rate swap contracts that were in place as of December 31, 2022 and recorded deferred gains totaling $2.2 million. The deferred gains will be accreted to net interest income over the remaining life of the original term of each swap.
In both 2023 and 2022, the Company terminated certain interest rate swap contracts that had previously been in place, recording deferred gains of $2.1 million and $0.3 million in 2023 and 2022, respectively. The deferred gains are being accreted to net interest income over the remaining life of the original term of each swap.
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 12 states, including Alabama, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.
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.
For the year ended December 31, 2022, the Company’s funding costs (including interest and non-interest bearing deposits and borrowings) totaled 0.48%, compared to 0.35% for the year ended December 31, 2021. Shareholders’ Equity As of December 31, 2022, shareholders’ equity totaled $85.1 million, compared to $90.1 million as of December 31, 2021.
Net interest margin was 3.87% for the year ended December 31, 2023, compared to 4.07% for the year ended December 31, 2022. The Company’s total funding costs, including the cost of interest and non-interest bearing deposits, as well as borrowings, increased to 1.65% during the year ended December 31, 2023, compared to 0.48% during the year ended December 31, 2022.
The note is callable by the Company after the first five years. If not called, the interest rate becomes variable. Since interest payments under a variable rate cannot be forecasted with certainty, contractual interest during the variable period is not included in the table above.
The note is callable by the Company after the first five years. If not called, the interest rate becomes variable.
The estimates include accounting for the allowance for loan losses, goodwill and other intangible assets, other real estate owned, valuation of deferred tax assets and fair value measurements.
These estimates are necessary to comply with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general banking practices. The estimates include accounting for the allowance for credit losses, goodwill and other intangible assets, other real estate owned, valuation of deferred tax assets and fair value measurements.
One of management’s primary focuses continues to be business simplification and process improvements in an effort to continue improving the Company’s overall efficiency levels. 36 Provision for Income Taxes The provision for income taxes was $2.1 million and $1.3 million for the years ended December 31, 2022 and 2021, respectively.
Accordingly, management will remain focused on efforts to streamline business processes in an effort to continue to improve the Company’s overall efficiency levels. Provision for Income Taxes The provision for income taxes was $2.8 million and $2.1 million for the years ended December 31, 2023 and 2022, respectively.
These commitments are further discussed in Note 20, “Guarantees, Commitments and Contingencies,” in the consolidated financial statements. 45 The following table summarizes the Company’s contractual obligations as of December 31, 2022: Payment Due by Period Contractual Obligations Total Less than One Year One to Three Years Three to Five Years More than Five Years (Dollars in Thousands) Time deposits $ 252,712 $ 115,494 $ 119,680 $ 17,439 $ 99 Commitments to extend credit 186,169 186,169 — — — Subordinated notes (1) 12,540 385 770 385 11,000 FHLB advances 20,000 20,000 — — — Operating leases 2,146 432 777 699 238 Standby letters of credit 556 556 — — — Total $ 474,123 $ 323,036 $ 121,227 $ 18,523 $ 11,337 (1) Contractual obligations for the subordinated notes include the contractual fixed interest payments during the first five years of the note, as well as the final principal payment at the end of the 10-year term of the note.
The following table summarizes the Company’s contractual obligations as of December 31, 2023: Payment Due by Period Contractual Obligations Total Less than One Year One to Three Years Three to Five Years More than Five Years (Dollars in Thousands) Time deposits $ 328,512 $ 173,648 $ 148,359 $ 6,477 $ 28 Commitments to extend credit 141,121 141,121 — — — Subordinated notes (1) 12,155 385 770 — 11,000 FHLB advances 10,000 10,000 — — — Operating leases 2,499 395 597 577 930 Standby letters of credit 669 669 — — — Total $ 494,956 $ 326,218 $ 149,726 $ 7,054 $ 11,958 (1) Contractual obligations for the subordinated notes include the contractual fixed interest payments during the first five years of the note, as well as the final principal payment at the end of the 10-year term of the note.
Short-Term Borrowings (Maturity Less Than One Year) Long-Term Borrowings (Maturity One Year or Greater) (Dollars in Thousands) Other interest-bearing liabilities outstanding at year-end: 2022 $ 20,038 $ 10,726 2021 $ 10,046 $ — Weighted average interest rate at year-end: 2022 4.40 % 4.20 % 2021 0.18 % 4.20 % Maximum amount outstanding at any month end: 2022 $ 48,095 $ 10,726 2021 $ 10,046 $ 10,653 Average amount outstanding during the year: 2022 $ 19,293 $ 10,689 2021 $ 10,028 $ 2,682 Weighted average interest rate during the year: 2022 2.44 % 4.20 % 2021 0.17 % 4.20 % Shareholders’ Equity The Company has historically placed significant emphasis on maintaining its strong capital base and continues to do so.
Short-Term Borrowings (Maturity Less Than One Year) Long-Term Borrowings (Maturity One Year or Greater) (Dollars in Thousands) Other interest-bearing liabilities outstanding at year-end: 2023 $ 10,000 $ 10,799 2022 $ 20,038 $ 10,726 Weighted average interest rate at year-end: 2023 5.46 % 4.20 % 2022 4.40 % 4.20 % Maximum amount outstanding at any month end: 2023 $ 35,048 $ 10,799 2022 $ 48,095 $ 10,726 Average amount outstanding during the year: 2023 $ 15,438 $ 10,766 2022 $ 19,293 $ 10,689 Weighted average interest rate during the year: 2023 5.12 % 4.20 % 2022 2.44 % 4.20 % Shareholders’ Equity As of December 31, 2023, shareholders’ equity totaled $90.6 million, or 8.4% of total assets, compared to $85.1 million, or 8.6% of total assets, as of December 31, 2022.
As of December 31, 2022, the investment securities portfolio, including both the available-for-sale and held-to-maturity portfolios, totaled $132.7 million, compared to $134.3 million as of December 31, 2021. Management monitors its liquidity position, including forecasted expectations related to loan growth, when making determinations about whether to re-invest in the securities portfolio.
Investment securities, including both the available-for-sale and held-to-maturity portfolios, totaled $136.7 million as of December 31, 2023, compared to $132.7 million as of December 31, 2022. The expected average life of securities in the investment portfolio was 3.9 years as of December 31, 2023, compared to 3.5 years as of December 31, 2022.
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.
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, the Company had $45.0 million and $46.0 million in unused established federal funds lines as of December 31, 2022 and 2021, respectively. The Company believes that these potential funding sources will continue to be available.
The Company had up to $279.4 million and $246.8 million in remaining unused credit from the FHLB (subject to available collateral) as of December 31, 2023 and 2022, respectively. In addition, the Company had $48.0 million and $45.0 million in unused established federal funds lines as of December 31, 2023 and 2022, respectively.
As a percentage of total assets, non-performing assets were reduced to 0.24% as of December 31, 2022, compared to 0.43% as of December 31, 2021. As a percentage of average loans, net charge-offs increased to 0.30% for the year ended December 31, 2022, compared to 0.16% for the year ended December 31, 2021.
The Company’s net charge-offs as a percentage of average loans totaled 0.14% during the year ended December 31, 2023, compared to 0.30% during the year ended December 31, 2022. As of December 31, 2023, the Company’s allowance for credit losses on loans as a percentage of total loans was 1.28%, compared to 1.22% as of December 31, 2022.
The following table presents the major components of non-interest expense for the periods indicated: Year Ended December 31, 2022 2021 $ Change % Change (Dollars in Thousands) Salaries and employee benefits $ 16,418 $ 19,157 $ (2,739 ) (14.3 )% Net occupancy and equipment expense 3,281 4,388 (1,107 ) (25.2 )% Computer services 1,639 1,832 (193 ) (10.5 )% Insurance expense and assessments 1,250 1,361 (111 ) (8.2 )% Fees for professional services 1,060 1,275 (215 ) (16.9 )% Postage, stationery and supplies 614 802 (188 ) (23.4 )% Telephone/data communication 682 903 (221 ) (24.5 )% Other real estate/foreclosure expense, net (331 ) (371 ) 40 (10.8 )% Other 3,459 3,409 50 1.5 % Total non-interest expense $ 28,072 $ 32,756 $ (4,684 ) (14.3 )% Non-interest expense was reduced in 2022, compared to 2021, due primarily to the strategic initiatives executed by the Company beginning in the third quarter of 2021.
The following table presents the major components of non-interest expense for the periods indicated: Year Ended December 31, 2023 2022 $ Change % Change (Dollars in Thousands) Salaries and employee benefits $ 16,076 $ 16,418 $ (342 ) (2.1 )% Net occupancy and equipment 3,479 3,281 198 6.0 % Computer services 1,756 1,639 117 7.1 % Insurance expense and assessments 1,583 1,250 333 26.6 % Fees for professional services 1,105 1,060 45 4.2 % Postage, stationery and supplies 620 614 6 1.0 % Telephone/data communication 722 682 40 5.9 % Collection and recoveries 292 261 31 11.9 % Directors fees 471 479 (8 ) (1.7 )% Software amortization 412 460 (48 ) (10.4 )% Other real estate/foreclosure expense, net 68 (331 ) 399 (120.5 )% Other expense 2,557 2,259 298 13.2 % Total non-interest expense $ 29,141 $ 28,072 $ 1,069 3.8 % The Company’s non-interest expense increased by 3.8% comparing 2023 to 2022.
Available-for-Sale Stated Maturity as of December 31, 2022 Within One Year After One But Within Five Years After Five But Within Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in Thousands) Investment securities available-for-sale: Mortgage-backed securities: Residential $ 6 3.42 % $ 5,639 2.35 % $ 37,356 1.81 % $ 5,227 1.85 % Commercial 6 7.17 % 2,510 1.81 % 3,211 1.92 % 5,967 4.81 % Obligations of states and political subdivisions 500 3.25 % 512 1.09 % — — 1,060 1.09 % Corporate notes — — — — 15,920 3.48 % — — U.S.
Available-for-Sale Stated Maturity as of December 31, 2023 Within One Year After One But Within Five Years After Five But Within Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in Thousands) Investment securities available-for-sale: Mortgage-backed securities: Residential $ — $ — $ 4,948 2.57 % $ 26,638 1.94 % $ 13,142 2.77 % Commercial — — 3,190 2.46 % 2,769 3.01 % 3,081 2.07 % Obligations of U.S. government-sponsored agencies — — — — 7,107 1.58 % 4,174 2.82 % Obligations of states and political subdivisions — — 523 6.49 % 1,035 3.00 % — — Corporate notes — — — — 14,957 2.18 % — — U.S.
Management believes that the Company has adequate sources of liquidity to cover its contractual obligations and commitments over the next twelve months. 44 Regulatory Capital The Bank is subject to the revised capital requirements as described in the section captioned “Supervision and Regulation – Capital Adequacy” included in Part I, Item I of this report.
Regulatory Capital The Bank is subject to the revised capital requirements as described in the section captioned “Supervision and Regulation – Capital Adequacy” included in Part I, Item I of this report. Under these requirements, the Bank is subject to minimum risk-based capital and leverage capital requirements, which are administered by the federal banking regulatory agencies.
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 investment securities portfolio had an estimated average life of 3.9 years and 3.5 years as of December 31, 2023 and 2022, 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.
In March 2022, the Federal Reserve Board (FRB) raised the target federal funds rate for the first time in over three years, and between March 16, 2022 and February 1, 2023 increased the federal funds rate by a total of 450 basis points. Further increases are expected in 2023 as the FRB continues its efforts to reduce inflation.
In its effort to reduce inflation, the FRB raised the target federal funds rate by 525 basis points between March 2022 and July 2023. As of December 31, 2023, the target federal funds rate was in a range of 5.25% to 5.50%.
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 Federal Reserve and other central banks. 41 Average Daily Amount of Deposits and Rates The average daily amount of deposits and rates paid on such deposits are summarized for the periods indicated in the following table: 2022 2021 Average Amount Rate Average Amount Rate (Dollars in Thousands) Non-interest-bearing demand deposit accounts $ 182,032 — $ 172,187 — Interest-bearing demand deposit accounts 246,124 0.26 % 236,084 0.23 % Savings deposits 208,672 0.58 % 193,766 0.31 % Time deposits 212,591 0.72 % 226,425 0.67 % Total deposits $ 849,419 0.40 % $ 828,462 0.32 % Total interest-bearing deposits $ 667,387 0.51 % $ 656,275 0.41 % As of December 31, 2022 and 2021, uninsured demand and savings deposits (deposits in excess of $250 thousand, which is the maximum amount for federal deposit insurance) totaled $148.3 million and $156.9 million, respectively.
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. 44 Average Daily Amount of Deposits and Rates The average daily amount of deposits and rates paid on such deposits are summarized for the periods indicated in the following table: 2023 2022 Average Amount Rate Average Amount Rate (Dollars in Thousands) Non-interest-bearing demand deposit accounts $ 160,598 — $ 182,032 — Interest-bearing demand deposit accounts 212,010 0.37 % 246,124 0.26 % Savings deposits 229,238 2.18 % 208,672 0.58 % Time deposits 305,848 2.80 % 212,591 0.72 % Total deposits $ 907,694 1.58 % $ 849,419 0.40 % Total interest-bearing deposits $ 747,096 1.92 % $ 667,387 0.51 % Maturities of time deposits of greater than $250 thousand, as well as brokered deposits, outstanding as of December 31, 2023 and 2022 are summarized in the following table: Maturities December 31, 2023 2022 (Dollars in Thousands) Three months or less $ 12,167 $ 22,024 Over three through six months 26,032 1,976 Over six through twelve months 24,258 16,553 Over twelve months 68,213 52,244 Total $ 130,670 $ 92,797 Maturities of time certificates of deposit of greater than $100 thousand and less than $250 thousand outstanding as of December 31, 2023 and 2022 are summarized as follows: Maturities December 31, 2023 2022 (Dollars in Thousands) Three months or less $ 7,521 $ 7,971 Over three through six months 9,257 5,968 Over six through twelve months 32,323 8,834 Over twelve months 46,788 45,156 Total $ 95,889 $ 67,929 45 Other Interest-Bearing Liabilities Other interest-bearing liabilities consist of federal funds purchased, securities sold under agreements to repurchase, FHLB advances and subordinated debt that are used by the Company as alternative sources of funds.
EXECUTIVE OVERVIEW Update on Strategic Initiatives Beginning in 2021, the Company initiated certain strategic initiatives designed to improve the Company’s operating efficiency, focus the Company’s loan growth activities, and fortify asset quality. The discussion below provides an update as of December 31, 2022 regarding these ongoing strategic initiatives.
EXECUTIVE OVERVIEW During the third quarter of 2021, the Company executed strategic initiatives that were designed to improve operating efficiency, focus the Company’s loan growth activities, and fortify asset quality. The most significant component of these initiatives was the cessation of new business at ALC.
The Company’s net charge-offs totaled $2.2 million, or 0.30% of average loans, in 2022, compared to $1.2 million, or 0.16% of average loans, in 2021. Of the $2.2 million in net charge-offs in 2022, $1.9 million was associated ALC’s loans, while the remaining $0.3 million was associated with the Bank’s portfolio.
The Company’s net charge-offs totaled $1.1 million in 2023, compared to $2.2 million in 2022. The reduction included a decrease of $1.7 million in net charge-offs associated with ALC’s portfolio, partially offset by an increase of $0.6 million in net charge-offs associated with the indirect consumer portfolio.
Additionally, the Company’s borrowers could be negatively impacted by rising expense levels, leading to deterioration of credit quality and/or reductions in the Company’s lending activities. The higher interest rate environment has also led to unrealized losses in the Company’s investment portfolio which consists primarily of fixed rate instruments.
Additionally, the Company’s borrowers could be negatively impacted by rising expense levels, leading to deterioration of credit quality and/or reductions in the Company’s lending activity. 29 CRITICAL ACCOUNTING ESTIMATES The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates.
During the third quarter of 2021, the Company closed four banking offices located in Bucksville, Columbiana and south Tuscaloosa, Alabama, as well as Ewing, Virginia. The Bank has two wholly owned subsidiaries: Acceptance Loan Company, Inc., an Alabama corporation (“ALC”), and FUSB Reinsurance, Inc., an Arizona corporation (“FUSB Reinsurance”).
Previously, the Bank had two wholly owned subsidiaries: Acceptance Loan Company, Inc., an Alabama corporation (“ALC”), and FUSB Reinsurance, Inc., an Arizona corporation (“FUSB Reinsurance”). Both ALC and FUSB Reinsurance were dissolved in 2023, after all remaining assets and liabilities of these entities were transferred to the Bank.
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 December 31, 2022, held-to-maturity securities totaled $1.9 million, or 1.4% of the total investment portfolio, compared to $3.4 million, or 2.6% of the total investment portfolio, as of December 31, 2021.
Treasury securities, corporate notes, obligations of U.S. government-sponsored agencies, and obligations of state and political subdivisions. 39 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.
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, Federal Home Loan Bank advances and brokered deposits. 32 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.
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, FHLB advances, brokered deposits, and funding capacity with the FRB. In response to heightened liquidity concerns in the banking industry, during 2023 management undertook measures designed to enhance the Company’s liquidity position.
The growth in these categories was partially offset by reductions in ALC’s loans, construction loans and Paycheck Protection Plan (PPP) loans during the year ended December 31, 2022. Asset Quality The Company’s non-performing assets, including loans in non-accrual status and OREO, totaled $2.3 million as of December 31, 2022, compared to $4.2 million as of December 31, 2021.
Asset Quality Nonperforming assets, including loans in non-accrual status and OREO, totaled $3.0 million as of December 31, 2023 compared to $2.3 million as of December 31, 2022. The increase in nonperforming assets resulted primarily from one commercial real estate loan that moved into nonaccrual status during the third quarter of 2023.
The decrease in shareholders’ equity resulted from increases in accumulated other comprehensive loss due to declines in the market value of the Company’s available-for-sale investment portfolio, as well as repurchases of shares of the Company’s common stock during the year ended December 31, 2022.
The increase in shareholders’ equity resulted from increased earnings, net of dividends paid, combined with valuation increases in the Company’s available-for-sale investment portfolio that reduced accumulated other comprehensive loss.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk — interest-rate, FX, commodity exposure
1 edited+1 added−1 removed7 unchanged
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk — interest-rate, FX, commodity exposure
1 edited+1 added−1 removed7 unchanged
2022 filing
2023 filing
Biggest changeThe tables below depict how, as of December 31, 2022, pre-tax net interest margin and net interest income are forecasted to change over timeframes of six months, one year, two years and five years under the 8 listed interest rate scenarios.
Biggest changeThe tables below depict how, as of December 31, 2023, pre-tax net interest margin and net interest income are forecasted to change over timeframes of one year and two years under the 6 listed interest rate scenarios. The interest rate scenarios contemplate immediate and parallel shifts in short- and long-term interest rates.
Removed
The interest rate scenarios contemplate immediate and parallel shifts in short- and long-term interest rates. 46 Average Change in Net Interest Margin from Level Interest Rate Forecast (basis points, pre-tax): 6 Months 1 Year 2 Years 5 Years +1% 5 6 8 15 +2% 1 3 7 23 +3% (12 ) (10 ) (4 ) 21 +4% (23 ) (21 ) (13 ) 21 -1% (10 ) (11 ) (13 ) (20 ) -2% (24 ) (27 ) (33 ) (48 ) -3% (42 ) (47 ) (55 ) (75 ) -4% (58 ) (65 ) (76 ) (101 ) Cumulative Change in Net Interest Income from Level Interest Rate Forecast (dollars in thousands, pre-tax): 6 Months 1 Year 2 Years 5 Years +1% $ 265 $ 603 $ 1,634 $ 7,731 +2% 68 268 1,434 11,718 +3% (598 ) (1,030 ) (758 ) 10,445 +4% (1,160 ) (2,114 ) (2,525 ) 10,497 -1% (512 ) (1,125 ) (2,691 ) (10,266 ) -2% (1,220 ) (2,747 ) (6,633 ) (24,171 ) -3% (2,094 ) (4,670 ) (11,008 ) (37,846 ) -4% (2,920 ) (6,530 ) (15,319 ) (50,614 )
Added
Average Change in Net Interest Margin from Level Interest Rate Forecast (basis points, pre-tax): 1 Year 2 Years +1% 12 10 +2% 23 17 +3% 30 20 -1% (15 ) (11 ) -2% (32 ) (26 ) -3% (52 ) (45 ) Cumulative Change in Net Interest Income from Level Interest Rate Forecast (dollars in thousands, pre-tax): 1 Year 2 Years +1% $ 1,349 $ 2,069 +2% 2,475 3,645 +3% 3,214 4,382 -1% (1,574 ) (2,336 ) -2% (3,466 ) (5,660 ) -3% (5,617 ) (9,680 ) 50