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FIRST US BANCSHARES, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Edgar Glimpses
DESCRIPTION OF THE BUSINESS
First US Bancshares, Inc. , aDelaware corporation ("Bancshares" and, together with its subsidiaries, the "Company"), is a bank holding company with its principal offices inBirmingham, Alabama . Bancshares operates one commercial banking subsidiary,First US Bank (the "Bank"). As ofSeptember 30, 2021 , the Bank operated and served its customers through 15 banking offices located inBirmingham ,Butler ,Calera ,Centreville ,Gilbertown ,Grove Hill ,Harpersville ,Jackson ,Thomasville ,Tuscaloosa andWoodstock, Alabama ;Knoxville andPowell, Tennessee ; andRose Hill, Virginia . In addition, the Bank operates loan production offices inMobile, Alabama and theChattanooga, Tennessee area. The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals. The Bank also performs indirect lending through third-party retailers and currently conducts this lending in 12 states, includingAlabama ,Florida ,Georgia ,Kentucky ,Mississippi ,Missouri ,North Carolina ,Oklahoma ,South Carolina ,Tennessee ,Texas andVirginia . During the third quarter of 2021, the Company closed four banking offices located in Bucksville,Columbiana and southTuscaloosa, Alabama , as well asEwing, Virginia . The Bank owns all of the stock ofAcceptance Loan Company, Inc. , anAlabama corporation ("ALC"). ALC is a finance company headquartered inMobile, Alabama . During the third quarter of 2021, ALC ceased new business development and permanently closed its 20 branch lending locations inAlabama andMississippi to the public.FUSB Reinsurance, Inc. , anArizona corporation and a wholly-owned subsidiary of the Bank ("FUSB Reinsurance"), reinsures or "underwrites" credit life and credit accident and health insurance policies sold to the Bank's and ALC's consumer loan customers. FUSB Reinsurance is responsible for the first level of risk on these policies up to a specified maximum amount, and a primary third-party insurer retains the remaining risk. A third-party administrator is also responsible for performing most of the administrative functions of FUSB Reinsurance on a contract basis. Delivery of the best possible financial services to customers remains an overall operational focus of the Company. The Company recognizes that attention to detail and responsiveness to customers' desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 187 full-time equivalent employees (as ofSeptember 30, 2021 ), to ensure customer satisfaction and convenience. The preparation of the Company's consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with accounting principles generally accepted inthe United States of America ("U.S. GAAP") and general banking practices. These estimates include accounting for the allowance for loan and lease losses, the right-of-use asset and lease liability, the value of other real estate owned and certain collateral-dependent loans, consideration related to goodwill impairment testing and deferred tax asset valuation. A description of these estimates, which significantly affect the determination of the Company's consolidated financial position, results of operations and cash flows, is set forth in Note 2, "Summary of Significant Accounting Policies," of the Notes to Consolidated Financial Statements in Bancshares' Annual Report on Form 10-K as of and for the year endedDecember 31, 2020 .
The emphasis of this discussion is a comparison of assets, liabilities and
shareholders' equity as of
comparing income and expense for the nine-month periods ended
and 2020.
All yields and ratios presented and discussed herein are recorded and presented
on the accrual basis and not on the tax-equivalent basis, unless otherwise
indicated.
This information should be read in conjunction with the Company's unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in Bancshares' Annual Report on Form 10-K as of and for the year endedDecember 31, 2020 . As used in the following discussion, the words "we," "us," "our" and the "Company" refer to Bancshares and its consolidated subsidiaries, unless the context indicates otherwise.
RECENT MARKET CONDITIONS: COVID-19 PANDEMIC
The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity and other economic activities have had, are currently having, and may for some time continue to have a destabilizing effect on financial markets and economic activity. The extent of the impact of COVID-19 on the Company's operational and financial performance is currently uncertain, cannot be predicted and will depend on certain developments, including, among others, the spread of COVID-19 and its variants, vaccination efforts, the duration of the pandemic, its impact on our customers, employees and vendors, and the continued governmental, regulatory and private sector responses, which may be precautionary, to COVID-19. The Company's business, financial condition and results of operations generally rely upon the ability of the Company's borrowers to repay their loans, the value of collateral underlying those loans, and demand for loans and other products and services that the Company offers, which are highly dependent on the business environment in the Company's primary markets andthe United States economy as a whole. 40
-------------------------------------------------------------------------------- In light of the changing economic outlook as a result of COVID-19, inMarch 2020 , theFederal Reserve reduced the target federal funds rate by 150 basis points. These reductions in interest rates and other economic uncertainties that have arisen as a result primarily of the COVID-19 pandemic have and are likely to continue to negatively impact net interest income, provisions for loan losses and noninterest income. Additional negative financial impacts could occur; however, the ultimate potential impact is not known at this time.
Response to the COVID-19 Pandemic and the CARES Act
Loan Deferments and Credit Risk Identification
In accordance with section 4013 of the Coronavirus Aid, Relief and Economic Security (CARES) Act and interpretive guidance from banking regulators, in 2020, the Company implemented initiatives to provide short-term payment relief to borrowers who were negatively impacted by COVID-19. As ofSeptember 30, 2021 , loans that continued to be in pandemic-related deferment totaled$0.8 million , compared to$8.1 million as ofDecember 31, 2020 and$95.2 million as ofJune 30, 2020 , at the height of deferment activity. Management believes that the decrease in deferred loans over the past year is indicative of the strength of the credit quality within the portfolio. In addition, at the onset of the pandemic, management identified certain categories of loans that it believed to be at "high-risk" of potential default or credit loss due to the COVID-19 pandemic. The "high-risk" category, which includes loans collateralized by hotels/motels and dine-in restaurants, decreased to$11.6 million , or 1.6% of the loan portfolio, as ofSeptember 30, 2021 , compared to$13.5 million , or 2.1% of the loan portfolio, as ofDecember 31, 2020 . The spread of COVID-19 has created a global public health crisis that has resulted in widespread volatility and deterioration in household, business, economic and market conditions. Although loans in deferment status and loans in the "high-risk" category have decreased, the Company will continue to closely monitor the impact of changing economic circumstances on the Company's loan portfolio. Paycheck Protection Program Sections 1102 and 1106 of the CARES Act added a new loan program administered by theSmall Business Administration ("SBA") entitled the Paycheck Protection Program ("PPP"). The PPP is intended to provide economic relief to small businesses throughoutthe United States that have been adversely impacted by COVID-19. PPP loans are 100% guaranteed by the SBA and are forgivable in whole, or in part, if the proceeds are used by the borrower for payroll and other permitted purposes in accordance with the requirements of the PPP (as discussed in greater detail below). If not forgiven in whole or in part, the loans carry a fixed interest rate of 1.00% per annum with payments deferred for 24 weeks from the date of the loan, plus another 10 months after the 24-week period. As compensation for originating a PPP loan, the Company receives lender processing fees from the SBA ranging from 1% to 5% of the original loan balance, depending on the size of the loan. Processing fees, net of origination costs, are deferred and amortized over the contractual life of the loan as interest income. Upon forgiveness of a loan by the SBA, any unrecognized net deferred fees will be recognized as interest income in that period. PPP loans were initially originated for a term of two years; however, aJune 5, 2020 amendment to the CARES Act (i) provided for a five-year minimum loan term for loans originated after that date and (ii) permitted lenders and borrowers to amend loans previously issued under two-year terms to provide for terms of five to ten years if mutually agreed upon by both the lender and the borrower. As ofSeptember 30, 2021 , 77 PPP loans with an aggregate principal balance of$3.9 million remained outstanding. Of this amount,$0.2 million of the loans were originated under two-year terms, and$3.7 million of the loans were originated under five-year terms. A borrower is eligible for forgiveness of principal and accrued interest on its PPP loan to the extent that the proceeds were used to cover eligible payroll costs, interest costs, rent and utility costs over a period of between eight and twenty-four weeks after the loan is made, as long as the borrower retains its employees and their compensation levels. The SBA began processing forgiveness payments during the fourth quarter of 2020. As ofSeptember 30, 2021 , 194 of the Company's borrowers had received PPP loan forgiveness. Amortized PPP loan fees, which are recognized in interest and fees on loans, totaled approximately$398 thousand for the nine months endedSeptember 30, 2021 and$161 thousand for the year endedDecember 31, 2020 . As ofSeptember 30, 2021 , the Company had approximately$188 thousand in remaining net deferred SBA PPP loan fees. 41 --------------------------------------------------------------------------------
EXECUTIVE OVERVIEW
Advancement of Strategic Initiatives
During the third quarter of 2021, ALC ceased new business development and permanently closed its 20 branch lending locations inAlabama andMississippi to the public. The cessation of new business and closure of ALC's branch locations are being undertaken by the Company as part of a long-term strategy to reduce expenses, fortify asset quality, and focus the Company's loan growth efforts in other areas, including the Bank's commercial lending and consumer indirect lending efforts. In connection with the ALC branch closures, the Company recorded pre-tax charges of approximately$550 thousand during the third quarter of 2021. These one-time expenses included severance and related personnel costs, lease termination costs, fixed asset valuation adjustments, termination of technology contracts, and other costs to administer the branch closures. The Company expects to incur approximately$500 thousand in additional expenses in the coming months primarily related to personnel expenses associated with one-time payments to ALC personnel that continue to manage the remaining loan portfolio, as well as expenses associated with the ultimate termination of ALC's remaining branch leases. It is expected that the majority of the remaining one-time expenses will be incurred during the fourth quarter of 2021 and the first quarter of 2022 and will be fully offset by ongoing cost savings that result from the closures. The ongoing cost savings include reduced personnel-related expenses, branch lease and property depreciation expenses, and other overhead expenses that will no longer be incurred. In addition to the ALC branch closures, four of the Bank's previously existing banking offices were closed during the third quarter of 2021. The decision to close these banking offices was based on analysis of banking center activity, profitability and Community Reinvestment Act assessment. The closures included banking centers located in Bucksville,Columbiana and southTuscaloosa, Alabama , as well asEwing, Virginia . Earnings Highlights The Company earned net income of$0.8 million , or$0.13 per diluted common share, during the three months endedSeptember 30, 2021 , compared to$0.4 million , or$0.06 per diluted common share, for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , net income totaled$2.7 million , or$0.41 per diluted common share, compared to$1.7 million , or$0.25 per diluted common share, for the corresponding nine-month period of 2020.
Summarized condensed consolidated statements of operations are included below
for the three- and nine-month periods ended
respectively.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2021 2020 2021 2020
(Dollars in Thousands)
Interest income $ 10,030 $ 9,996 $ 29,934 $ 30,173
Interest expense 695 1,031 2,223 3,699
Net interest income 9,335 8,965 27,711 26,474
Provision for loan and lease losses 618 1,046 1,517 2,476
Net interest income after provision for
loan and lease losses 8,717 7,919 26,194 23,998
Non-interest income 896 1,375 2,656 4,002
Non-interest expense 8,547 8,747 25,342 25,822
Income before income taxes 1,066 547 3,508 2,178
Provision for income taxes 229 136 768 516
Net income $ 837 $ 411 $ 2,740 $ 1,662
Basic net income per share $ 0.13 $ 0.07 $ 0.43 $ 0.27
Diluted net income per share $ 0.13 $ 0.06 $ 0.41 $ 0.25
Dividends per share $ 0.03 $ 0.03 $ 0.09 $ 0.09
The following discussion summarizes the most significant activity that drove
changes in the Company's net income during the nine months ended September 30,
2021 , as compared to the nine months ended September 30, 2020 .
Net Interest Income
Net interest income increased $1.2 million comparing the nine months ended
September 30, 2021 to the nine months ended September 30, 2020 . Although average
total loans increased $100.9 million comparing the nine months ended September
30, 2021 to the nine months ended September 30, 2020 , interest income decreased
$0.2 million comparing the two periods. The decrease in interest income is
primarily due to margin compression, which has remained a challenge for the
Company due in part to the interest rate environment that has persisted since
the
42
-------------------------------------------------------------------------------- onset of the COVID-19 pandemic. In response to the interest rate environment, management has continued to reprice deposit liabilities at lower rates upon maturity. Due to these repricing efforts, annualized average total funding costs decreased to 0.36% for the nine months endedSeptember 30, 2021 , compared to 0.68% for the nine months endedSeptember 30, 2020 , which resulted in a reduction in interest expense of$1.5 million comparing the two periods. In addition to the prevailing interest rate environment, loan portfolio reductions in the higher-yielding direct consumer portfolio, coupled with significant influxes of investable cash through deposit growth, have also contributed to margin compression. Management expects the current lower interest rate environment to continue to put pressure on net interest income and margin. Accordingly, the Company will remain focused on deploying investable cash balances into loans or investment securities that meet the Company's established credit standards, while at the same time seeking to reduce interest expense through continued liability repricing.
Provision for Loan and Lease Losses
The provision for loan and lease losses was$1.5 million during the nine months endedSeptember 30, 2021 , compared to$2.5 million during the nine months endedSeptember 30, 2020 . The decrease in provisioning comparing the periods was due in part to improvement in the credit quality of the loan portfolio resulting from reductions in ALC's consumer-related portfolio. As ofSeptember 30, 2021 , total loans at ALC, which contain the highest charge-off rates in the Company's loan portfolio, were reduced by$7.9 million compared toSeptember 30, 2020 . The loan volume reductions at ALC led to lower credit losses, but also contributed to margin compression as the mix of higher interest-earning loans decreased relative to prior periods. In addition to changes in the credit quality mix of the Company's loan portfolio, the overall economic outlook in the markets served by the Company continued to improve during the nine months endedSeptember 30, 2021 compared to the prior fiscal year, including reductions in COVID-19-related deferments. Although a measure of economic uncertainty continues to exist, management believes that the allowance, which was calculated under an incurred loss model, was sufficient to absorb losses in the Company's loan portfolio based on circumstances existing as ofSeptember 30, 2021 . The Company will continue to closely monitor the impact of changing economic circumstances on the Company's loan portfolio. In accordance with relevant accounting guidance for smaller reporting companies, the Company has not yet adopted the Current Expected Credit Loss (CECL) accounting model for the calculation of credit losses and is currently evaluating the impact that adopting CECL will have on the Company's financial statements. Due to its classification as a smaller reporting company by theSecurities and Exchange Commission , the Company is not required to implement the CECL model untilJanuary 1, 2023 .
Non-interest Income
Non-interest income decreased by$1.4 million comparing the nine months endedSeptember 30, 2021 to the nine months endedSeptember 30, 2020 . Approximately$0.8 million of the decrease resulted from reductions in service charges and related fees on the Bank's deposit accounts, credit insurance income and secondary market mortgage revenues, while the remaining$0.6 million of the decrease resulted from net gains on the sale of investment securities and gains on the sale of premises and equipment and other assets that occurred during the nine months endedSeptember 30, 2020 that were not repeated in the same period of 2021. The decrease in service charges is consistent with changes in deposit customer behaviors since the onset of the pandemic. The reduction in secondary market mortgage fees resulted from the discontinuance of the Bank's mortgage division that became effective in the fourth quarter of 2020. Although the discontinuance resulted in a reduction in non-interest income, non-interest expense, primarily salaries and benefits, was reduced commensurately.
Non-interest Expense
Non-interest expense decreased$0.5 million comparing the nine months endedSeptember 30, 2021 to the nine months endedSeptember 30, 2020 due primarily to reductions in salaries and employee benefits. A portion of the expense reduction was associated with the discontinuation of the secondary mortgage marketing division.
Provision for Income Taxes
The Company's effective tax rate was 21.9% for the nine months ended
30, 2021
Balance Sheet Management
The Company's asset base increased during the nine months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , assets totaled$956.7 million , compared to$890.5 million as ofDecember 31, 2020 . The discussion below presents significant balance sheet components comparingSeptember 30, 2021 toDecember 31, 2020 . Loans and Credit Quality Total loans increased by$58.8 million as ofSeptember 30, 2021 compared toDecember 31, 2020 . The increase was distributed between indirect lending, real estate lending, and commercial and industrial lending, which netted growth of$52.6 million ,$16.4 million and$4.0 million , respectively. Growth in real estate lending was split between construction and non-residential real estate, partially offset by a reduction in single family and multi-family residential lending. Growth in the indirect portfolio continued to be focused on consumer loans secured by 43
-------------------------------------------------------------------------------- collateral that includes recreational vehicles, campers, boats, horse trailers and cargo trailers. The Bank does not originate auto loans in its indirect portfolio. The Bank operates indirect lending in a 12-state footprint primarily in the southeasternUnited States . Aside from indirect lending, other consumer loan categories decreased during the nine months endedSeptember 30, 2021 . The direct consumer and branch retail categories, which consist primarily of loans at ALC, decreased by a total of$6.3 million during the nine months endedSeptember 30, 2021 . We expect that the ALC loan portfolio will continue to decrease over time as these loans mature and are paid off. Additionally, the Bank's PPP loan balance, which is included within commercial and industrial lending, declined by$7.9 million during the nine months endedSeptember 30, 2021 as PPP loans continue to be forgiven by the SBA.
Non-performing assets, including loans in non-accrual status and other real
estate owned (OREO), decreased to
compared to
assets, non-performing assets improved to 0.35% as of
compared to 0.45% as of
average loans totaled 0.16% for the nine months ended
compared to 0.25% for the nine months ended
During the third quarter of 2021, additional investment securities were purchased in an effort to more effectively deploy excess cash. The investment securities portfolio continues to provide the Company with additional liquidity and allows management to fund a portion of loan growth from the maturity and payoff of securities within the portfolio. As ofSeptember 30, 2021 , the investment securities portfolio increased to$121.5 million , compared to$91.4 million as ofDecember 31, 2020 . Management monitors its liquidity position, including forecasted expectations related to loan growth, when making determinations about whether to re-invest in the securities portfolio.
Deposits and Borrowings
Deposits totaled$846.8 million as ofSeptember 30, 2021 , compared to$782.2 million as ofDecember 31, 2020 . The deposit growth reflected the impact of the pandemic on both business and consumer deposit holders, including preferences for liquidity, loan payment deferments, tax payment deferments, government stimulus receipts and generally lower consumer spending. Of the total increase in deposits,$23.4 million represented non-interest-bearing deposits, while$41.2 million were interest-bearing.
Liquidity and Capital
The Company continues to maintain excess funding capacity to provide adequate liquidity for loan growth, capital expenditures and ongoing operations. The Company benefits from a strong deposit base, a liquid investment securities portfolio and access to funding from a variety of sources, including federal funds lines,Federal Home Loan Bank ("FHLB") advances and brokered deposits. During the third quarter of 2021, the Bank continued to maintain capital ratios at higher levels than required to be considered a "well-capitalized" institution under applicable banking regulations. As ofSeptember 30, 2021 , the Bank's common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 10.69%. Its total capital ratio was 11.78%, and its Tier 1 leverage ratio was 8.51%. Cash Dividend
The Company declared a cash dividend of
the third quarter of 2021, which is consistent with the Company's dividend
declaration for the first and second quarters of 2021 and each quarter of 2020.
Subordinated Debt Issuance
Subsequent toSeptember 30, 2021 , onOctober 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 onOctober 1, 2031 (the "Notes"). The Notes will bear interest at a rate of 3.50% per annum for the first five years, then the interest rate will be reset quarterly to a benchmark interest rate per annum which, subject to certain conditions provided in the Notes, will be equal to the then current three-month term Secured Overnight Financing Rate ("SOFR") plus 275 basis points. The Company expects to continue to use the net proceeds for general corporate purposes, which may include the repurchase of the Company's common stock, and to support organic growth plans, including the maintenance of capital ratios. Following receipt of the net proceeds of the Notes, the Company invested$5 million into capital surplus of the Bank. 44
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RESULTS OF OPERATIONS Net Interest Income Net interest income is calculated as the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company's earning assets consist of loans, taxable and tax-exempt investments,Federal Home Loan Bank stock, federal funds sold by the Bank and interest-bearing deposits in banks. Interest-bearing liabilities consist of interest-bearing demand deposits and savings and time deposits, as well as short-term borrowings. The following tables show the average balances of each principal category of assets, liabilities and shareholders' equity for the three- and nine-month periods endedSeptember 30, 2021 and 2020. Additionally, the tables provide an analysis of interest revenue or expense associated with each category, along with the accompanying yield or rate percentage. Net interest margin is calculated for each period presented as net interest income divided by average total interest-earning assets. Three Months Ended Three Months Ended September 30, 2021 September 30, 2020 Annualized Annualized Average Yield/ Average Yield/ Balance Interest Rate % Balance Interest Rate % (Dollars in Thousands) ASSETS Interest-earning assets: Total loans (Note A)$ 691,435 $ 9,568 5.49 %$ 609,609 $ 9,557 6.24 % Taxable investment securities 119,943 409 1.35 % 95,402 393 1.64 % Tax-exempt investment securities 3,367 15 1.77 % 3,530 16 1.80 % Federal Home Loan Bank stock 870 8 3.65 % 1,135 11 3.86 % Federal funds sold 86 - 0.00 % 80 - 0.00 % Interest-bearing deposits in banks 73,490 30 0.16 % 72,288 19 0.10 % Total interest-earning assets 889,191 10,030 4.48 % 782,044 9,996 5.08 % Non-interest-earning assets: Other assets 67,067
68,424
Total$ 956,258 $ 850,468 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Demand deposits$ 239,188 $ 141 0.23 %$ 203,842 $ 130 0.25 % Savings deposits 208,187 160 0.30 % 161,699 147 0.36 % Time deposits 223,988 351 0.62 % 226,269 717 1.26 % Total interest-bearing deposits (Note B) 671,363 652 0.39 % 591,810 994 0.67 % Borrowings 10,032 43 1.70 % 10,252 37 1.44 % Total interest-bearing liabilities 681,395 695 0.40 % 602,062 1,031 0.68 % Non-interest-bearing liabilities: Demand deposits 176,102 153,112 Other liabilities 9,158 9,638 Shareholders' equity 89,603 85,656 Total$ 956,258 $ 850,468 Net interest income (Note C)$ 9,335 $ 8,965 Net interest margin 4.17 % 4.56 %
Note A - For the purpose of these computations, non-accruing loans are included in
the average loan amounts outstanding. These loans averaged
and
respectively.
Note B - The annualized rate on total average funding costs, including total
average interest-bearing liabilities and average non-interest-bearing
demand deposits, was 0.32% and 0.54% for the three-month periods ended
Note C - Loan fees are included in the interest amounts presented. Loan fees
totaled
processing fees of
periods endedSeptember 30, 2021 and 2020, respectively. 45
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Nine Months Ended Nine Months Ended
September 30, 2021 September 30, 2020
Annualized Annualized
Average Yield/ Average Yield/
Balance Interest Rate % Balance Interest Rate %
(Dollars in Thousands)
ASSETS
Interest-earning assets:
Total loans (Note A) $ 672,807 $ 28,726 5.71 % $ 571,881 $ 28,433 6.64 %
Taxable investment securities 100,245 1,059 1.41 % 101,303 1,417 1.87 %
Tax-exempt investment securities 3,464 47 1.81 % 2,158 39 2.41 %
Federal Home Loan Bank stock 948 25 3.53 % 1,136 41 4.82 %
Federal funds sold 84 - 0.00 % 6,302 45 0.95 %
Interest-bearing deposits in
banks 86,632 77 0.12 % 66,325 198 0.40 %
Total interest-earning assets 864,180 29,934 4.63 % 749,105 30,173 5.38 %
Non-interest-earning assets:
Other assets 68,041 71,594
Total $ 932,221 $ 820,699
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Demand deposits $ 233,329 $ 425 0.24 % $ 185,667 $ 442 0.32 %
Savings deposits 190,296 453 0.32 % 161,026 605 0.50 %
Time deposits 230,986 1,222 0.71 % 232,824 2,553 1.46 %
Total interest-bearing deposits
(Note B) 654,611 2,100 0.43 % 579,517 3,600 0.83 %
Borrowings 10,022 123 1.64 % 10,201 99 1.30 %
Total interest-bearing
liabilities 664,633 2,223 0.45 % 589,718 3,699 0.84 %
Non-interest-bearing liabilities:
Demand deposits 169,780 136,052
Other liabilities 9,288 9,816
Shareholders' equity 88,520 85,113
Total $ 932,221 $ 820,699
Net interest income (Note C) $ 27,711 $ 26,474
Net interest margin 4.29 % 4.72 %
Note A - For the purpose of these computations, non-accruing loans are included in
the average loan amounts outstanding. These loans averaged
and
respectively.
Note B - The annualized rate on total average funding costs, including total
average interest-bearing liabilities and average non-interest-bearing
demand deposits, was 0.36% and 0.68% for the nine-month periods ended
Note C - Loan fees are included in the interest amounts presented. Loan fees
totaled
processing fees of
periods endedSeptember 30, 2021 and 2020, respectively. 46
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The following tables summarize the impact of variances in volume and rate of
interest-earning assets and interest-bearing liabilities on components of net
interest income. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in the average balance multiplied by
the previous year's average rate, and (2) changes in rate, which are changes in
the average rate multiplied by the average balance during the current year
period. The net changes attributable to the combined impact of both rate and
volume have been allocated proportionately.
Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021
Compared to Compared to
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Increase (Decrease) Increase (Decrease)
Due to Change In: Due to Change In:
Average Average
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
Interest earned on:
Total loans $ 1,283 $ (1,272 ) $ 11 $ 5,018 $ (4,725 ) $ 293
Taxable investment
securities 101 (85 ) 16 (15 ) (343 ) (358 )
Tax-exempt
investment
securities (1 ) - (1 ) 24 (16 ) 8
Federal Home Loan
Bank stock (3 ) - (3 ) (7 ) (9 ) (16 )
Federal funds sold - - - (44 ) (1 ) (45 )
Interest-bearing
deposits in banks - 11 11 61 (182 ) (121 )
Total
interest-earning
assets 1,380 (1,346 ) 34 5,037 (5,276 ) (239 )
Interest expense on:
Demand deposits 23 (12 ) 11 113 (130 ) (17 )
Savings deposits 42 (29 ) 13 110 (262 ) (152 )
Time deposits (7 ) (359 ) (366 ) (20 ) (1,311 ) (1,331 )
Borrowings (1 ) 7 6 (2 ) 26 24
Total
interest-bearing
liabilities 57 (393 ) (336 ) 201 (1,677 ) (1,476 )
Increase (decrease)
in net interest
income $ 1,323 $ (953 ) $ 370 $ 4,836 $ (3,599 ) $ 1,237
Net interest margin was reduced by 39 basis points to 4.17% during the third
quarter of 2021, compared to 4.56% during the third quarter of 2020. Net
interest margin decreased 43 basis points to 4.29% for the nine months ended
September 30, 2021 compared to 4.72% for the nine months ended September 30,
2020 . The reduction in net interest margin primarily resulted from the
prevailing low interest rate environment. Since August 2019 , the federal funds
rate has been reduced by 225 basis points, including decreases totaling 150
basis points in March 2020 in response to the COVID-19 pandemic. In addition to
the prevailing interest rate environment, loan portfolio reductions in the
higher-yielding direct consumer portfolio, coupled with significant influxes of
investable cash through deposit growth, have also contributed to margin
compression. Given this environment, management has continued to reprice deposit
liabilities at lower rates upon maturity. Due to these repricing efforts,
annualized average total funding costs decreased to 0.32% during the third
quarter of 2021, compared to 0.54% during the third quarter of 2020, and
decreased to 0.36% during the nine months ended September 30, 2021 , compared to
0.68% during the nine months ended September 30, 2020 .
The Company's average loan balance increased by $81.8 million comparing the
third quarter of 2021 to the third quarter of 2020 and increased by $100.9
million comparing the nine-month period ended September 30, 2021 to the same
period of 2020. Interest earned on loans increased by $11 thousand comparing the
three-month periods ended September 30, 2021 and 2020 and increased by $0.3
million comparing the nine months ended September 30, 2021 to the corresponding
period of 2020. The growth in average loans from September 30, 2020 to September
30, 2021 was funded through growth in deposits combined with maturities, sales
and pay-downs in the Company's investment portfolio.
The COVID-19 pandemic has reduced economic activity and increased liquidity for
deposit customers, consequently increasing the Company's cash balances during
2020 and the nine months ended September 30, 2021 . In the current environment,
the excess cash balances earn low yields, which has put downward pressure on net
interest margin. Management remains focused on deploying investable cash
balances into earning assets that meet the Company's established credit
standards, while maintaining appropriate levels of liquidity. In an effort to
more effectively deploy excess cash, additional investment securities were
purchased during the nine months ended September 30, 2021 .
In the current interest rate environment, management expects to further reduce
interest expense as interest-bearing liabilities continue to reprice; however,
economic uncertainty remains due to the COVID-19 pandemic. We expect that growth
in net loan volume with loans of sufficient credit quality will enhance net
income, particularly as resources are shifted from lower earning excess cash
balances and federal funds sold into loan assets. However, there continues to be
competitive pressure to generate loans of sufficient credit quality. Management
is maintaining vigilance in the deployment of strategies to effectively manage
risks associated with interest rate fluctuations. However, net interest income
could continue to experience downward pressure as a result of the interest rate
environment, as well as increased competition for quality loan and deposit
funding opportunities.
47
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Provision for Loan and Lease Losses
The provision for loan and lease losses was$0.6 million during the third quarter of 2021, compared to$1.0 million during the third quarter of 2020, and was$1.5 million for the nine months endedSeptember 30, 2021 , compared to$2.5 million for the nine months endedSeptember 30, 2020 . The decrease in provisioning comparing the periods was due in part to improvement in the credit quality of the loan portfolio resulting from reductions in ALC's consumer-related portfolio. As ofSeptember 30, 2021 , total loans at ALC, which contain the highest charge-off rates in the Company's loan portfolio, were reduced by$7.9 million compared toSeptember 30, 2020 , which led to lower credit losses. Management believes that the allowance for loan and lease losses as ofSeptember 30, 2021 , which was calculated under an incurred loss model, was sufficient to absorb losses in the Company's loan portfolio based on circumstances existing as of the balance sheet date. However, the economic environment as a result of the COVID-19 pandemic continues to contain a significant level of uncertainty. Management will continue to closely monitor circumstances associated with the Company's loan portfolio, and should economic circumstances deteriorate further, additional loan loss provisioning may be required. In accordance with relevant accounting guidance for smaller reporting companies, the Company has not yet adopted the Current Expected Credit Loss (CECL) accounting model for the calculation of credit losses and is currently evaluating the impact that adopting CECL will have on the Company's financial statements. Due to its classification as a smaller reporting company by theSecurities and Exchange Commission , the Company is not required to implement the CECL model untilJanuary 1, 2023 .
Non-Interest Income
Non-interest income represents fees and income derived from sources other than
interest-earning assets. The following table presents the major components of
non-interest income for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(Dollars in Thousands) (Dollars in Thousands)
Service charges and other
fees on
deposit accounts $ 271 $ 298 $ (27 ) (9.1 )% $ 777 $ 995 $ (218 ) (21.9 )%
Credit insurance
commissions and fees 63 54 9
16.7 % 150 252 (102 ) (40.5 )%
Bank-owned life insurance 110
108 2 1.9 % 327 323 4 1.2 % Net gain on sale and prepayment of investment securities - - - NM 22 326 (304 ) (93.3 )% Mortgage fees from secondary market - 196 (196 ) (100.0 )% 23 499 (476 ) (95.4 )% Lease income 208 206 2 1.0 % 619 630 (11 ) (1.7 )% Gain on sales of premises and equipment and other assets 17 316 (299 ) (94.6 )% 17 324 (307 ) (94.8 )% Other income 227 197 30 15.2 % 721 653 68 10.4 %
Total non-interest income
NM: Not measurable Non-interest income at the Bank consists of service charges and other fees on deposit accounts; bank-owned life insurance; net gains on the sale and prepayment of investment securities; gains on the sale of premises and equipment and other assets; fees from the secondary market mortgage activities; lease income; and other non-interest income, which includes fee income generated by the Bank, such as ATM fees and real estate rental income. Non-interest income at ALC consists of credit insurance commissions and fees and other non-interest income generated for ancillary services, such as ALC's auto club membership program. Non-interest income decreased by$0.5 million and$1.3 million comparing the three- and nine-month periods endedSeptember 30, 2021 to the corresponding periods of 2020. The decrease resulted from reductions in service charges and related fees on the Bank's deposit accounts, credit insurance income, net gains on the sale of investment securities, secondary market mortgage revenues and gains on the sale of premises and equipment and other assets. The decrease in service charges is consistent with changes in deposit customer behaviors since the onset of the pandemic. The decreases in net gains on the sale of investment securities and gains on the sale of premises and equipment and other assets resulted from sales that occurred during the nine months endedSeptember 30, 2020 that were not repeated during 2021. The reduction in secondary market mortgage fees resulted from the discontinuance of the Bank's mortgage division that became effective in the fourth quarter of 2020. Although the discontinuance resulted in a reduction in non-interest income, non-interest expense, primarily salaries and benefits, was reduced commensurately. Certain categories of non-interest income are expected to provide a relatively stable source of revenues, while others may fluctuate significantly based on changes in economic conditions, regulation or other factors. Non-interest income is expected to remain below historic levels in the near-term due to the decline in economic activities resulting from the COVID-19 pandemic, as well as the discontinuance of the mortgage division. 48
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Non-Interest Expense
Non-interest expense represents expenses incurred from sources other than
interest-bearing liabilities. The following table presents the major components
of non-interest expense for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(Dollars in Thousands) (Dollars in Thousands)
Salaries and employee
benefits $ 5,045 $ 5,138 $ (93 ) (1.8 )% $ 14,951 $ 15,467 $ (516 ) (3.3 )%
Net occupancy and equipment
expense 1,259 1,078 $ 181 16.8 % 3,318 3,074 244 7.9 %
Computer services 461 470 $ (9 ) (1.9 )% 1,411 1,311 100 7.6 %
Insurance expense and
assessments 340 259 $ 81 31.3 % 985 758 227 29.9 %
Fees for professional
services 292 325 $ (33 ) (10.2 )% 1,003 1,004 (1 ) (0.1 )%
Postage, stationery and
supplies 206 207 $ (1 ) (0.5 )% 618 639 (21 ) (3.3 )%
Telephone/data communications 283 232
22.0 % 742 684 58 8.5 % Other real estate/foreclosure (income) expense, net (273 ) 21$ (294 ) (1400.0 )% (286 ) 62 (348 ) (561.3 )% Other expense 934 1,017$ (83 ) (8.2 )% 2,600 2,823 (223 ) (7.9 )%
Total non-interest expense
(2.3 )%$ 25,342 $ 25,822 $ (480 ) (1.9 )% Non-interest expense decreased$0.2 million and$0.5 million comparing the three- and nine-month periods endedSeptember 30, 2021 to the corresponding periods of 2020 due primarily to reductions in salaries and employee benefits. A portion of the expense reduction was associated with the discontinuation of the secondary mortgage marketing division beginning in the fourth quarter of 2020. The Company also recognized a gain of$0.3 million in other real estate during the third quarter of 2021 due to the sale of the closed Bucksville,Alabama branch, which caused a decline in non-interest expense for the three- and nine-month periods endedSeptember 30, 2021 . Reductions in non-interest expense were partially offset in the third quarter of 2021 by approximately$0.5 million in one-time expenses associated with the closure to the public of ALC's branches. These expenses included severance and related personnel costs, lease termination costs, fixed asset valuation adjustments, termination of technology contracts, and other costs to administer the branch closures. The Company expects to incur approximately$0.5 million in additional one-time expenses primarily related to personnel expenses associated with one-time payments to ALC personnel that continue to manage the remaining loan portfolio, as well as expenses associated with the ultimate termination of ALC's remaining branch leases. It is expected that the majority of the remaining one-time expenses will be incurred during the fourth quarter of 2021 and the first quarter of 2022 and will be fully offset by ongoing cost savings that result from the branch closures. The ongoing cost savings include reduced personnel-related expenses, branch lease and property depreciation expenses, and other overhead expenses that will no longer be incurred. As a result of the restructuring efforts at ALC, the total number of ALC's full-time equivalent employees was reduced to nine as ofSeptember 30, 2021 , compared to 77 as ofJune 30, 2021 , and 81 as ofDecember 31, 2020 . The ALC restructuring, combined with the closure of four Bank branches during the third quarter of 2021, resulted in a decrease in the Company's total full-time equivalent employees to 187 as ofSeptember 30, 2021 , compared to 259 as ofJune 30, 2021 , and 270 as ofDecember 31, 2020 . The ongoing reductions in salaries and employee benefits, combined with efficiencies gained in branch operations at both ALC and the Bank, are expected to drive continued reduction in the Company's non-interest expense in the near term.
Provision for Income Taxes
The provision for income taxes was$0.2 million and$0.1 million for the three-month periods endedSeptember 30, 2021 and 2020, respectively, and the Company's effective tax rate was 21.5% and 24.9%, respectively, for the same periods. The provision for income taxes was$0.8 million and$0.5 million for the nine-month periods endedSeptember 30, 2021 and 2020, respectively, and the Company's effective tax rate was 21.9% and 23.7%, respectively, for the same periods. The effective tax rate is impacted by recurring items, such as changes in tax-exempt interest income earned from bank-qualified municipal bonds and loans and the cash surrender value of bank-owned life insurance. Management makes decisions about whether to invest in tax-exempt instruments on a case-by-case basis after considering a number of factors, including investment return, credit quality and the consistency of such investments with the Company's overall strategy. The Company's effective tax rate is expected to fluctuate commensurate with the level of these investments as compared to total pre-tax income.
BALANCE SHEET ANALYSIS
The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering the duration, composition and/or balance of the portfolio. The expected average life of securities in the investment portfolio was 3.8 years and 2.2 years as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. 49 -------------------------------------------------------------------------------- Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income, a separate component of shareholders' equity. As ofSeptember 30, 2021 , available-for-sale securities totaled$117.6 million , or 96.8% of the total investment portfolio, compared to$85.0 million , or 93.0% of the total investment portfolio, as ofDecember 31, 2020 . 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. 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 ofSeptember 30, 2021 , held-to-maturity securities totaled$3.9 million , or 3.2% of the total investment portfolio, compared to$6.4 million , or 7.0% of the total investment portfolio, as ofDecember 31, 2020 . Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations ofU.S. government-sponsored agencies and obligations of states and political subdivisions.
Loans and Allowance for Loan and Lease Losses
The tables below summarize loan balances by portfolio category at the end of
each of the most recent five quarters as of
Quarter Ended
2021 2020
September June March December September
30, 30, 31, 31, 30,
(Dollars in Thousands)
Real estate loans:
Construction, land development and
other land loans $ 58,175 $ 53,425 $ 48,491 $ 37,282 $ 35,472
Secured by 1-4 family residential
properties 73,112 78,815 82,349 88,856 95,147
Secured by multi-family residential
properties 51,420 53,811 54,180 54,326 49,197
Secured by non-farm,
non-residential properties 198,745 191,398 193,626 184,528 183,754
Commercial and industrial loans,
including PPP loans 77,679 77,359 79,838 81,735 86,898
Consumer loans:
Direct consumer 25,845 26,937 26,998 29,788 30,048
Branch retail 29,764 31,688 31,075 32,094 33,145
Indirect sales 194,154 176,116 153,940 141,514 125,369
Total loans $ 708,894 $ 689,549 $ 670,497 $ 650,123 $ 639,030
Less unearned interest, fees and
deferred cost 3,729 4,067 3,792 4,279 4,240
Allowance for loan and lease losses 8,193 7,726 7,475 7,470 7,185
Net loans $ 696,972 $ 677,756 $ 659,230 $ 638,374 $ 627,605
50
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The tables below summarize changes in the allowance for loan and lease losses
for each of the most recent five quarters as of
Quarter Ended
2021 2020
September June March December September
30, 30, 31, 31, 30,
(Dollars in Thousands)
Balance at beginning of period
$ 7,185 $ 6,423 Charge-offs: Real estate loans: Construction, land development and other land loans - (1 ) (21 ) - - Secured by 1-4 family residential properties (1 ) 4 (9 ) (9 ) (10 ) Secured by multi-family residential properties - - - - - Secured by non-farm, non-residential properties - - - - - Commercial and industrial loans, including PPP loans (6 ) - - - - Consumer loans: Direct consumer (222 ) (278 ) (348 ) (274 ) (385 ) Branch retail (77 ) (92 ) (130 ) (95 ) (58 ) Indirect sales (55 ) (193 ) (117 ) (49 ) (65 ) Total charge-offs (361 ) (560 ) (625 ) (427 ) (518 ) Recoveries 210 313 229 243 234 Net charge-offs (151 ) (247 ) (396 ) (184 ) (284 ) Provision for loan and lease losses 618 498 401 469 1,046 Ending balance$ 8,193 $ 7,726 $ 7,475 $ 7,470 $ 7,185 Ending balance as a percentage of loans (1) 1.16 % 1.13 % 1.12 % 1.16 % 1.13 % Net charge-offs as a percentage of average loans 0.09 % 0.15 % 0.25 % 0.11 % 0.19 % (1) The allowance for loan and lease losses as a percentage of loans excluding PPP loans, which are guaranteed by the SBA, for each of the five most recent quarters was 1.17%, 1.15%, 1.15%, 1.18% and 1.16%, respectively.
Nonperforming Assets
Nonperforming assets at the end of the five most recent quarters as ofSeptember 30, 2021 were as follows: Quarter Ended 2021 2020 September June March December September 30, 30, 31, 31, 30, (Dollars in Thousands) Non-accrual loans$ 969 $ 1,279 $ 2,509 $ 3,086 $ 3,053 Other real estate owned 2,373 846 942 949 985 Total$ 3,342 $ 2,125 $ 3,451 $ 4,035 $ 4,038 Nonperforming assets as a percentage of total assets 0.35 % 0.22 % 0.37 % 0.45 % 0.47 %
The increase in nonperforming assets during the third quarter of 2021 resulted
from the transfer of closed branch assets at the Bank and ALC into OREO.
51
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Allocation of Allowance for Loan and Lease Losses
While no portion of the allowance for loan and lease losses is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, the following table shows an allocation of the allowance for loan and lease losses as ofSeptember 30, 2021 andDecember 31, 2020 : September 30, 2021 December 31, 2020 Percent of Percent of Percent of Percent of Allowance Loans Allowance Loans in Each in Each in Each in Each Category Category Category Category Allocation to Total to Total Allocation to Total to Total Allowance Allowance Loans Allowance Allowance Loans (Dollars in Thousands) Real estate loans: Construction, land development and other land loans$ 520 6.4 % 8.2 %$ 393 5.3 % 5.7 % Secured by 1-4 family residential properties 692 8.4 % 10.3 % 639 8.5 % 13.7 % Secured by multi-family residential properties 488 6.0 % 7.3 % 577 7.7 % 8.4 % Secured by non-farm, non-residential properties 1,985 24.2 % 28.0 % 1,566 21.0 % 28.4 % Commercial and industrial loans, including PPP loans 877 10.7 % 11.0 % 1,008 13.5 % 12.5 % Consumer loans: Direct consumer 986 12.0 % 3.6 % 1,202 16.1 % 4.6 % Branch retail 349 4.3 % 4.2 % 373 5.0 % 4.9 % Indirect sales 2,296 28.0 % 27.4 % 1,712 22.9 % 21.8 % Total loans$ 8,193 100.0 % 100.0 %$ 7,470 100.0 % 100.0 % Deposits Total deposits increased by 8.3% to$846.8 million as ofSeptember 30, 2021 , from$782.2 million as ofDecember 31, 2020 . Core deposits, which exclude time deposits of$250 thousand or more, provide a relatively stable funding source that supports earning assets. Core deposits increased to$795.5 million , or 93.9% of total deposits, as ofSeptember 30, 2021 , compared to$726.9 million , or 92.9% of total deposits, as ofDecember 31, 2020 . The deposit growth reflects the impact of the pandemic on both business and consumer deposit holders, including preferences for liquidity, loan payment deferments, tax payment deferments, government stimulus receipts and generally lower consumer spending. Deposits, in particular core deposits, have historically been the Company's primary source of funding and have enabled the Company to successfully meet both short-term and long-term liquidity needs. Management anticipates that such deposits will continue to be the Company's primary source of funding in the future. The closure of four of the Bank's banking offices during the third quarter of 2021 may cause a slowing in deposit growth later this year. We will continue to monitor deposit levels closely to help ensure an adequate level of funding for the Company's activities. However, various economic and competitive factors could affect this funding source in the future, including increased competition from other financial institutions in deposit gathering, national and local economic conditions and interest rate policies adopted by theFederal Reserve and other central banks.
Average Daily Amount of Deposits and Rates
The average daily amount of deposits and rates paid on such deposits are
summarized for the periods indicated in the following table:
Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in Thousands) (Dollars in Thousands)
Non-interest-bearing demand deposit accounts$ 176,102 -$ 153,112 -$ 169,780 -$ 136,052 - Interest-bearing demand deposit accounts 239,188 0.23 % 203,842 0.25 % 233,329 0.24 % 185,667 0.32 % Savings deposits 208,187 0.30 % 161,699 0.36 % 190,296 0.32 % 161,026 0.50 % Time deposits 223,988 0.62 % 226,269 1.26 % 230,986 0.71 % 232,824 1.46 % Total deposits$ 847,465 0.31 %$ 744,922 0.53 %$ 824,391 0.34 %$ 715,569 0.67 % Total interest-bearing deposits$ 671,363 0.39 %$ 591,810 0.67 %$ 654,611 0.43 %$ 579,517 0.83 % 52
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Other Interest-Bearing Liabilities
Other interest-bearing liabilities consist of federal funds purchased, securities sold under agreements to repurchase and FHLB advances. This category continues to be utilized as an alternative source of funds. During the three- and nine-month periods endedSeptember 30, 2021 , these borrowings represented 1.5% of average interest-bearing liabilities, compared to 1.7% in the same periods of 2020. Shareholders' Equity The Company has historically placed significant emphasis on maintaining its strong capital base and continues to do so. As ofSeptember 30, 2021 , shareholders' equity totaled$89.6 million , or 9.4% of total assets, compared to$86.7 million , or 9.7% of total assets, as ofDecember 31, 2020 . Management believes that this level of equity is an indicator of the financial soundness of the Company and the Company's ability to sustain future growth and profitability. Growth in retained earnings during the nine months endedSeptember 30, 2021 was supplemented by an increase in additional paid-in capital, as well as an increase in accumulated other comprehensive income associated with increases in the fair value of cash flow hedges during the nine months endedSeptember 30, 2021 . The fair value of the cash flow hedges fluctuates based on changes in interest rates. Accordingly, the increase in the fair value of the hedges during the nine months endedSeptember 30, 2021 is not necessarily indicative of future performance of the 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. During both of the nine-month periods endedSeptember 30, 2021 and 2020, Bancshares declared a dividend of$0.09 per common share, or approximately$0.6 million in aggregate amount. As ofSeptember 30, 2021 andDecember 31, 2020 , the Company retained approximately$21.8 million and$21.9 million in treasury stock, respectively. The Company initiated a share repurchase program inJanuary 2006 , under which the Company was authorized to repurchase up to 642,785 shares of Bancshares' common stock beforeDecember 31, 2007 . InDecember 2007 , and in each year since, the Board of Directors extended the expiration date of the share repurchase program for an additional year. OnApril 28, 2021 , the Board of Directors approved the repurchase of an additional 1,000,000 shares of common stock under the share repurchase program and extended the expiration of the repurchase program toDecember 31, 2022 . As ofSeptember 30, 2021 , there were 1,054,961 shares available for repurchase under this program. During the nine months endedSeptember 30, 2021 , there were no shares repurchased under this program. During the year endedDecember 31, 2020 , 38,604 shares were repurchased under the program at a weighted average price of$11.70 per share, or$0.5 million in total. Share repurchases under the program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate, subject to applicable regulatory requirements. The repurchase program does not obligate the Company to acquire any particular number of shares and may be suspended at any time at the Company's discretion. As ofSeptember 30, 2021 andDecember 31, 2020 , a total of 115,308 and 111,419 shares of stock, respectively, were deferred in connection with Bancshares' Non-Employee Directors' Deferred Compensation Plan. The plan permits non-employee directors to invest their directors' fees and to receive the adjusted value of the deferred amounts in cash or shares of Bancshares common stock. All deferred fees, whether in the form of cash or shares of Bancshares common stock, are reflected as compensation expense in the period earned. The Company classifies all deferred directors' fees allocated to be paid in shares of stock as equity additional paid-in capital. The Company may use issued shares or shares of treasury stock to satisfy these obligations when due. 53
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LIQUIDITY AND CAPITAL RESOURCES
The asset portion of the balance sheet provides liquidity primarily from the following sources: (1) excess cash and interest-bearing deposits in banks, (2) federal funds sold, (3) principal payments and maturities of loans and (4) principal payments and maturities from the investment portfolio. Loans maturing or repricing in one year or less amounted to$107.2 million as ofSeptember 30, 2021 and$105.3 million as ofDecember 31, 2020 . Investment securities forecasted to mature or reprice in one year or less were estimated to be$7.1 million and$11.3 million of the investment portfolio as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Although some securities in the investment portfolio have legal final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. The investment securities portfolio had an estimated average life of 3.8 years and 2.2 years as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings. The liability portion of the balance sheet provides liquidity through interest-bearing and non-interest-bearing deposit accounts, which represent the Company's primary sources of funds. In addition, federal funds purchased, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of available liquidity. Liquidity management involves the continual monitoring of the sources and uses of funds to maintain an acceptable cash position. Long-term liquidity management focuses on considerations related to the total balance sheet structure. The Bank manages the pricing of its deposits to maintain a desired overall deposit balance. In addition, the Bank invests in short-term interest-earning assets, which provide liquidity to meet lending requirements. As of bothSeptember 30, 2021 andDecember 31, 2020 , the Company had$10.0 million of outstanding borrowings under FHLB advances. The Company had up to$234.0 million and$225.8 million in remaining unused credit from the FHLB (subject to available collateral) as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. In addition, the Company had$45.9 million and$46.4 million in unused established federal funds lines as ofSeptember 30, 2021 andDecember 31, 2020 , respectively.
Management believes that the Company has adequate sources of liquidity to cover
its contractual obligations and commitments over the next twelve months.
54
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