Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30March 31, 20172018

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to                        

 

Commission File Number: 0-14549


First US Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware

63-0843362

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

 

3291 U.S. Highway 280

Birmingham, AL

35243

(Address of Principal Executive Offices)

(Zip Code)

 

(205) 582-1200

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    ☒  No    ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes    ☒  No    ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company  

 

If an emerging growth company, indicate by check mark ofif the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    ☐  No    ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Outstanding at NovemberMay 4 8, 20172018

Common Stock, $0.01 par value

6,077,3546,087,264 shares




1

 

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

 

  

PAGE

   
 

PART I. FINANCIAL INFORMATION

 
   

ITEM 1.

FINANCIAL STATEMENTS

 
   

Interim Condensed Consolidated Balance Sheets at September 30, 2017March 31, 2018 (Unaudited) and December 31, 20162017

4
   

Interim Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited)  

5
   

Interim Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited)

6
   

Interim Condensed Consolidated Statements of Cash Flows for the NineThree Months Ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited)

7
   

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

8
   

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

3536
   

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

5046
   

ITEM 4.

CONTROLS AND PROCEDURES

5146
   
 

PART II. OTHER INFORMATION

5247
   

ITEM 1.

LEGAL PROCEEDINGS

5247
   

ITEM 1A.

RISK FACTORS

5247
   

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

5247
   

ITEM 6.

EXHIBITS

5247
   

Signature Page

5348

 


2

 

FORWARD-LOOKING STATEMENTS

 

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, First US Bancshares, Inc. (“Bancshares” and, together with its subsidiaries, the “Company”), through its senior management, from time to time makes forward-looking statements concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe,” continues“continues” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based on current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in Part I, Item 1A of the Company’sCompany's Annual Report on Form 10-K as of and for the year ended December 31, 2016.2017. Specifically, with respect to statements relating to loan demand, growth and earnings potential, geographic expansion and the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy generally and in the Company’s service areas, market conditions and investment returns, changes in interest rates, the availability of quality loans in the Company’s service areas, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets, collateral values and collateral values.cybersecurity threats. With respect to the proposed acquisition of The Peoples Bank, these factors include, but are not limited to, the possibility that regulatory and other approvals and conditions to the proposed transaction are not received or satisfied on a timely basis or at all, or contain unanticipated terms and conditions; the possibility that modifications to the terms of the transaction may be required in order to obtain or satisfy such approvals or conditions; delays in closing the transaction; difficulties, delays and unanticipated costs in integrating the organizations’ businesses or realized expected cost savings and other benefits; business disruptions as a result of the integration of the organizations, including possible loss of customers; diversion of management time to address transaction-related issues; and changes in asset quality and credit risk as a result of the transaction. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

 


3

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)Thousands, Except Share and Per Share Data)

 

 

September 30,

  

December 31,

   

March 31,

  

December 31,

 
 

2017

  

2016

   

2018

  

2017

 
 

(Unaudited)

       

(Unaudited)

     

ASSETS

ASSETS

  

ASSETS

 

Cash and due from banks

 $8,705  $7,018   $7,806  $7,577 

Interest-bearing deposits in banks

  23,849   16,512    26,667   19,547 

Total cash and cash equivalents

  32,554   23,530    34,473   27,124 
Federal funds sold     15,000 
Investment securities available-for-sale, at fair value 158,425  181,910    156,642   153,871 

Investment securities held-to-maturity, at amortized cost

  27,377   25,904    25,300   26,279 

Federal Home Loan Bank stock, at cost

  1,396   1,581    1,413   1,609 

Loans, net of allowance for loan losses of $4,808 and $4,856, respectively

  338,026   322,772  

Loans, net of allowance for loan losses of $4,829 and $4,774, respectively

  353,805   346,121 

Premises and equipment, net

  26,242   18,340    26,197   26,433 

Cash surrender value of bank-owned life insurance

  14,843   14,603    15,000   14,923 

Accrued interest receivable

  1,877   1,987    2,011   2,057 

Other real estate owned

  3,819   4,858    3,343   3,792 

Other assets

  10,040   11,407    9,135   8,372 

Total assets

 $614,599  $606,892   $627,319  $625,581 

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Deposits

 $508,385  $497,556   $525,273  $517,079 

Accrued interest expense

  281   241  

Accrued interest payable

  387   381 

Other liabilities

  6,444   7,735    5,836   6,319 

Short-term borrowings

  10,635   10,119    10,298   15,594 

Long-term debt

  10,000   15,000    10,000   10,000 

Total liabilities

  535,745   530,651    551,794   549,373 

Commitments and contingencies

                 

Shareholders’ equity:

                 

Common stock, par value $0.01 per share, 10,000,000 shares authorized; 7,341,556 and 7,329,060 shares issued, respectively; 6,077,354 and 6,043,102 shares outstanding, respectively

  73   73  

Common stock, par value $0.01 per share, 10,000,000 shares authorized; 7,351,466 and 7,345,946 shares issued, respectively; 6,087,264 and 6,081,744 shares outstanding, respectively

  73   73 

Surplus

  10,657   10,786    10,867   10,755 

Accumulated other comprehensive income (loss), net of tax

  25   (1,277) 

Accumulated other comprehensive loss, net of tax

  (1,955)  (868)

Retained earnings

  88,525   87,434    86,965   86,673 

Less treasury stock: 1,264,202 and 1,285,958 shares at cost, respectively

  (20,414

)

  (20,764)

 

Less treasury stock: 1,264,202 shares at cost

  (20,414

)

  (20,414

)

Noncontrolling interest

  (12

)

  (11)

 

  (11

)

  (11

)

Total shareholders’ equity

  78,854   76,241    75,525   76,208 

Total liabilities and shareholders’ equity

 $614,599  $606,892   $627,319  $625,581 

 

The accompanying notes are an integral part of these Interim Condensed Consolidated Statements.

 


4

Table of Contents

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

 

 

Three Months Ended

   Nine Months Ended       

Three Months Ended

 
 

September 30,

   September 30,       

March 31,

 
 

2017

  

2016

    2017    2016  

2018

  

2017

 
 

(Unaudited)

       (Unaudited)  

(Unaudited)

 

Interest income:

                        

Interest and fees on loans

 $6,802  $6,773  $19,928  $19,192  $7,089  $6,496 

Interest on investment securities

  1,018   987   3,085   3,242   1,030   1,014 

Total interest income

  7,820   7,760   23,013   22,434   8,119   7,510 
                        

Interest expense:

                        

Interest on deposits

  617   532   1,713   1,568   701   528 

Interest on borrowings

  68   55   189   115   104   63 

Total interest expense

  685   587   1,902   1,683   805   591 
                        

Net interest income

  7,135   7,173   21,111   20,751   7,314   6,919 
                        

Provision for loan losses

  373   680   1,464   1,383   658   515 
                        

Net interest income after provision for loan losses

  6,762   6,493   19,647   19,368   6,656   6,404 
                        

Non-interest income:

                        

Service and other charges on deposit accounts

  481   463   1,406   1,306   467   464 

Credit insurance income

  160   256   459   570   218   256 
Net gain on sales and prepayments of investment securities 178  259  228  657   3   49 
Mortgage fees from secondary market  117    

Other income, net

  417   589   1,240   1,503   335   398 

Total non-interest income

  1,236   1,567   3,333   4,036   1,140   1,167 
                        

Non-interest expense:

                        

Salaries and employee benefits

  4,370   4,334   13,048   12,734   4,567   4,398 

Net occupancy and equipment

  806   830   2,276   2,381   889   777 

Other real estate/foreclosure expense, net

  244   124   461   370 

Computer services

  292   387 
Fees for professional services  273   233 

Other expense

  1,770   2,060   5,305   6,184   1,280   1,242 

Total non-interest expense

  7,190   7,348   21,090   21,669   7,301   7,037 
                        

Income before income taxes

  808   712   1,890   1,735   495   534 

Provision for income taxes

  173   162   435   406   81   130 

Net income

 $635  $550  $1,455  $1,329  $414  $404 

Basic net income per share

 $0.10  $0.09  $0.24  $0.22  $0.07  $0.07 

Diluted net income per share

 $0.10  $0.09  $0.22  $0.21  $0.06  $0.06 

Dividends per share

 $0.02  $0.02  $0.06  $0.06  $0.02  $0.02 

 

The accompanying notes are an integral part of these Interim Condensed Consolidated Statements.

 


5

Table of Contents

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

 

  

Three Months Ended

       Nine Months Ended 
  

September 30,

       September 30, 
  

2017

  

2016

    2017    2016 
  

(Unaudited)

       (Unaudited) 

Net income

 $635  $550  $1,455  $1,329 

Other comprehensive income:

                

Unrealized holding gains (losses) on securities available-for-sale arising during period, net of tax expense (benefit) of $(7), $(39), $864 and $656, respectively

  (12)  (66)  1,481   1,125 

Reclassification adjustment for net gains on securities available-for-sale realized in net income, net of tax expense of $66, $93, $84 and $238, respectively

  (113)  (160

)

  (144)  (410
Unrealized holding gains (losses) arising during the period on effective cash flow hedge derivatives, net of tax expense (benefit) of $(1), $34, $(20) and $(48), respectively  (1)  

57

   (35)  

(82

)

Other comprehensive income (loss)

  (126)  (169

)

  1,302   633 

Total comprehensive income

 $509  $381  $2,757  $1,962 
  

Three Months Ended

 
  

March 31,

 
  

2018

  

2017

 
  

(Unaudited)

 

Net income

 $414  $404 

Other comprehensive income:

        

Unrealized holding gains on securities available-for-sale arising during period, net of tax expense (benefit) of $(472) and $424, respectively

  (1,419

)

  757 
Reclassification adjustment for net gains on securities available-for-sale realized in net income, net of tax expense of $1 and $18, respectively  (2)  (31)
Unrealized holding gains arising during the period on effective cash flow hedge derivatives, net of tax expense of $112 and $4, respectively  334   8 

Other comprehensive income (loss)

  (1,087

)

  734 

Total comprehensive income (loss)

 $(673) $1,138 

 

The accompanying notes are an integral part of these Interim Condensed Consolidated Statements.

 


6

Table of Contents

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

 

 

Nine Months Ended

  

Three Months Ended

 
 

September 30,

  

March 31,

 
 

2017

  

2016

  

2018

  

2017

 
 

(Unaudited)

  

(Unaudited)

 

Cash flows from operating activities:

                

Net income

 $1,455  $1,329  $414  $404 

Adjustments to reconcile net income to cash provided by operating activities:

                

Depreciation and amortization

  781   726   351   242 

Provision for loan losses

  1,464

 

  1,383

 

  658   515 

Deferred income tax provision

  231   368   79   128 

Net gain on sale and prepayment of investment securities

  

(228

)

  (657

)

  (3

)

  (49

)

Stock-based compensation expense

  262   218   112   79 

Net amortization of securities

  869   1,163   225   313 

Net loss on premises and equipment and other real estate

  453   573   12   80 

Changes in assets and liabilities:

                

Decrease (increase) in accrued interest receivable

  110   (14)

Decrease in other assets

  57   224 

Increase in accrued interest expense

  40

 

  51

 

Decrease in accrued interest receivable

  46   63 

Increase in other assets

  (67)  (28)

Increase (decrease) in accrued interest payable

  6   (12

)

Decrease in other liabilities

  (114

)

  (27

)

  (483

)

  (262

)

Net cash provided by operating activities

  5,380   5,337   1,350   1,473 

Cash flows from investing activities:

                
Net decrease in federal funds sold  15,000    

Purchases of investment securities, available-for-sale

  (15,254

)

  (49,236

)

  (15,224

)

  (15,254

)

Purchases of investment securities, held-to-maturity

  (4,696

)

  (13,850

)

     (4,696

)

Proceeds from sales of investment securities, available-for-sale

  

1,749

   30,439 

Proceeds from maturities and prepayments of investment securities, available-for-sale

  38,570   37,131   10,367   14,228 

Proceeds from maturities and prepayments of investment securities, held-to-maturity

  3,119   17,779   949   925 

Net decrease (increase) in Federal Home Loan Bank stock

  

185

   

(343

)  196   (28)

Proceeds from the sale of premises and equipment and other real estate

  1,215   1,208   711   424 

Net change in loan portfolio

  (17,326)  (64,081)

Net decrease (increase) in loans

  (8,661)  4,397 

Purchases of premises and equipment

  (9,858

)

  (4,554

)

  (115

)

  (4,087

)

Net cash used in investing activities

  (2,296)  (45,507)

Net cash provided by (used in) investing activities

  3,223   (4,091)

Cash flows from financing activities:

                

Net increase in customer deposits

  10,829

 

  14,570

 

Net increase (decrease) in other borrowings

  516   (2,017)
Net increase (decrease) in Federal Home Loan Bank advances (5,000)  10,000 

Net increase in deposits

  8,194   11,522 

Net increase (decrease) in short-term borrowings

  (5,296)  631 
Net share-based compensation transactions (41)        (39)

Dividends paid

  (364

)

  (362

)

  (122

)

  (121

)

Net cash provided by financing activities

  5,940

 

  22,191

 

  2,776   11,993 

Net increase (decrease) in cash and cash equivalents

  9,024

 

  (17,979

)

Net increase in cash and cash equivalents

  7,349   9,375 

Cash and cash equivalents, beginning of period

  23,530   44,072   27,124   23,530 

Cash and cash equivalents, end of period

 $32,554  $26,093  $34,473  $32,905 

Supplemental disclosures:

                

Cash paid for:

                

Interest

 $1,862  $1,632  $799  $603 

Income taxes

  

77

   85   136    

Non-cash transactions:

                
Assets acquired in settlement of loans 608  1,009  $213  $183 

Reissuance of treasury stock as compensation

 $350  $53 

 

The accompanying notes are an integral part of these Interim Condensed Consolidated Statements.

 


7

Table of Contents

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

GENERAL

 

The accompanying unaudited interim condensed consolidated financial statements include the accounts of First US Bancshares, Inc. (“Bancshares”) and its subsidiaries (collectively, the “Company”). Bancshares is the parent holding company of First US Bank (the “Bank”). The Bank operates a finance company subsidiary, Acceptance Loan Company, Inc. (“ALC”). Management has determined that the Bank and ALC comprise Bancshares’ Bancshares' two reportable operating segments. All significant intercompany transactions and accounts have been eliminated.

 

The unaudited interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’sCompany's consolidated financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 20172018. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K10-K as of and for the year ended December 31, 2016.2017.

 

2.

BASIS OF PRESENTATION

 

Summary of Significant Accounting Policies

 

Certain significant accounting policies followed by the Company are set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K10-K as of and for the year ended December 31, 2016.2017.

 

Net Income Per Share and Comprehensive Income

 

Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.(basic shares). Included in basic shares are certain shares that have been accrued as of the balance sheet date as deferred compensationcompensation for members of Bancshares’ Board of Directors. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding, during the period, adjusted for the effect of potentially dilutive stock awards outstanding during the period.period (dilutive shares). The dilutive shares consist of nonqualified stock option grants issued to employees and members of Bancshares’ Board of Directors pursuant to Bancshares’ 2013 Incentive Plan (the “2013“2013 Incentive Plan”) previously approved by Bancshares’ shareholders. The following table reflects weighted average shares used to calculate basic and diluted net income per share for the periods presented.

 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

 
 

September 30,

  

September 30,

  

March 31,

 
 

2017

  

2016

  

2017

  

2016

  

2018

  

2017

 

Basic shares

  6,176,381   6,151,701   6,170,892   6,147,325   6,188,861   6,158,399 

Dilutive shares

  320,501   272,550   320,501   272,550   379,701   320,500 

Diluted shares

  6,496,882   6,424,251   6,491,393   6,419,875   6,568,562   6,478,899 

 

 

Three Months Ended

 

      Nine Months Ended

 

 

Three Months Ended

 
 

September 30,

 

      September 30,

 

 

March 31,

 
 

2017

 

2016

 

  2017

 

 

 2016

 

 

2018

  

2017

 
 

(Dollars in Thousands, Except Per Share Data)

 

 

(Dollars in Thousands, Except Per Share Data)

 

Net income

 

$

635

 

$

550

 

$

1,455

  

$

1,329

  $414  $404 

Basic net income per share

 

$

0.10

 

$

0.09

 

$

0.24

  

$

0.22

  $0.07  $0.07 

Diluted net income per share

 

$

0.10

 

$

0.09

 

$

0.22

  

$

0.21

  $0.06  $0.06 

Comprehensive Income

 

Comprehensive income consists of net income, as well as unrealized holding gains and losses that arise during the period associated with the Company’s available-for-sale securities portfolio and the effective portion of cash flow hedge derivatives. In the calculation of comprehensive income, reclassification adjustments are made for gains or losses realized in the statement of operations associated with the sale of available-for-sale securities or changes in the fair value of cash flow derivatives.

 

8

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

 

Accounting Standards Update (“ASU”) 2016-132017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU simplifies and expands the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies the application of Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the ASU provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period. The ASU is effective for years beginning after December 15, 2018, and interim periods within those years. The Company does not expect the adoption of ASU 2017-12 to have a material impact on the Company's consolidated financial statements.

"FinancialASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.Instruments.” Issued in June 2016, ASU 2016-132016-13 removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current recognition thresholds and will require companies to recognize an allowance for lifetime expected credit losses. Credit losses will be immediately recognized through net income;income; the amount recognized will be based on the current estimate of contractual cash flows not expected to be collected over the financial asset’s contractual term. ASU 2016-132016-13 also amends the credit loss measurement guidance for available-for-sale debt securities. For public business entities, ASU 2016-132016-13 is effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. Institutions will be required to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting period in which the guidance is effective. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

 

ASU 2016-09,2016-02,Compensation-Stock CompensationLeases (Topic 718) - Improvements to Employee Share-Based Payment Accounting.842).Issued in MarchFebruary 2016, ASU 2016-09 seeks to reduce complexity in accounting standards2016-02 was issued by simplifying several aspects of the accounting for share-based payment transactions, including (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes; (6) the practical expedient for estimating the expected term; and (7) intrinsic value.  ASU 2016-09 became effective for the Company on January 1, 2017.  The adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.


ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.”Issued in March 2016, ASU 2016-05clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815 does not, in and of itself, require de-designation of that hedging relationship, provided that all other hedge accounting criteria continue to be met.  ASU 2016-05 became effective for the Company on January 1, 2017.  The adoption of ASU 2016-05 did not have a material impact on the Company’s consolidated financial statements.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-022016-02 will require organizations that lease assets (lessees) to recognize on the balance sheet the assets and liabilities for the rights and obligations created by the lease for all operating leases under current U.S. GAAP with a term of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease are not significantly changed under ASU 2016-02,2016-02, and there will continue to be differentiation between finance leases and operating leases. The accounting applied by the lessor in a lease transaction remains largely unchanged from previous U.S. GAAP. ASU 2016-022016-02 is effective for fiscal years beginning after December 15, 2018. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.statements; however, because the Company has several leases, assets and liabilities are expected to increase upon adoption for right-of-use assets and lease liabilities.

 

ASU 2016-01,2016-01,Financial Instruments-OverallInstruments - Overall (Subtopic 825-10)825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of FASB ASC 825)825).”Issued in January 2016, ASU 2016-01 is2016-01 was intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-012016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value, with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; and (iii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 became effective for the Company on January 1, 2018. The amendmentsadoption of ASU 2016-01 are effective for interim and annual periods beginning after December 15, 2017.  Management is currently evaluating the2016-01 did not have a material impact that this ASU will have on the Company’sCompany's consolidated financial statements.

 

ASU 2014-09, “Revenue2014-09,Revenue from Contracts with Customers (Topic 606)606).” Issued in May 2014, ASU 2014-09 will add2014-09 added FASB ASC Topic 606, Revenue from Contracts with Customers,and will supersedesuperseded revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition and certain cost guidance in FASB ASC Topic 605-35,605-35, Revenue Recognition – Construction-Type and Production-Type Contracts.ASU 2014-092014-09 requires an entity to recognize revenue when (or as) an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services is transferred to the customer. ASU 2015-14,“Revenue from Contracts with Customers (Topic 606) 2014- Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year.  ASU 2015-14 provides that the amendments of ASU 2014-09 become09 became effective for interim and annual periods beginning after December 15, 2017.  Management is currently evaluating the impact that this ASU will haveCompany on the Company’s consolidated financial statements, as well as the most appropriate method of application.  However, because this guidance does not apply to revenue associated with financial instruments, including loans and securities accounted for under other U.S. GAAP, theJanuary 1, 2018. The adoption of ASU 2014-09 is 2014-09 did not expected to have a material impact on the Company’sCompany's consolidated financial statements.  Further, management has determined that

Revenue

On January 1, 2018, the adoptionCompany implemented Accounting Standards Update2014-09,Revenue from Contracts with Customers, codified at ASC Topic 606. The Company adopted ASC 606 using the modified retrospective transition method. As of this ASUDecember 31, 2017, the Company had no uncompleted customer contracts and, as a result, no cumulative transition adjustment was made to the Company’s accumulated deficit during the first quarter of 2018. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts continue to be reported under legacy U.S. GAAP.

The majority of the Company’s revenue streams reported within non-interest income that are withinis generated through interest earned on financial instruments, including loans and investment securities, which falls outside the scope of ASC 606. The Company also generates revenue from insurance- and lease-related contracts that also fall outside the accounting standard will not materially impactscope of ASC 606.

All of the Company’s consolidated financial statements.  revenue that is subject to ASC 606 is included in non-interest income; however, not all non-interest income is subject to ASC 606. Revenue earned by the Company subject to ASC 606 primarily consisted of service and other charges on deposit accounts, mortgage fees from secondary market transactions at the Bank, ATM fee income and other non-interest income. Revenue generated from these sources for the three months ended March 31, 2018 and 2017 was $0.8 million and $0.7 million, respectively. All sources of the Company’s revenue subject to ASC 606 are transaction-based, and revenue is recognized at the time the transaction is executed, which is the same time the Company’s performance obligation is satisfied. The Company had no contract liabilities or unsatisfied performance obligations with customers as of March 31, 2018.

 

 


9

 

3.

INVESTMENT SECURITIES

 

Details of investment securities available-for-sale and held-to-maturity as of September 30, 2017 March 31, 2018 and December 31, 2016 2017 were as follows:

 

 

Available-for-Sale

  

Available-for-Sale

 
 

September 30, 2017

  

March 31, 2018

 
     

Gross

  

Gross

  

Estimated

      

Gross

  

Gross

  

Estimated

 
 

Amortized

  

Unrealized

  

Unrealized

  

Fair

  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
 

Cost

  

Gains

  

Losses

  

Value

  

Cost

  

Gains

  

Losses

  

Value

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Mortgage-backed securities:

                                

Residential

 $83,391  $477  $(318

)

 $83,550  $87,463  $202  $(1,983

)

 $85,682 

Commercial

  67,781   62   (705

)

  67,138   67,846   16   (1,868

)

  65,994 

Obligations of states and political subdivisions

  5,424   231   

 

  5,655   4,749   140   (3

)

  4,886 

Obligations of U.S. government-sponsored agencies

  2,000   2   

 

  2,002 

U.S. Treasury securities

  80   

   

   80   80         80 

Total

 $158,676  $772  $(1,023

)

 $158,425  $160,138  $358  $(3,854

)

 $156,642 

 

 

Held-to-Maturity

  

Held-to-Maturity

 
 

September 30, 2017

  

March 31, 2018

 
     

Gross

  

Gross

  

Estimated

      

Gross

  

Gross

  

Estimated

 
 

Amortized

  

Unrealized

  

Unrealized

  

Fair

  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
 

Cost

  

Gains

  

Losses

  

Value

  

Cost

  

Gains

  

Losses

  

Value

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Mortgage-backed securities:

                                

Commercial

 $15,976  $18  $

(61

)

 $15,933  $14,237  $  $(342

)

 $13,895 

Obligations of U.S. government-sponsored agencies

  9,458   25   (79

)

  9,404   9,209      (255

)

  8,954 

Obligations of states and political subdivisions

  1,943   26   (3

)

  1,966   1,854      (16

)

  1,838 

Total

 $27,377  $69  $(143

)

 $27,303  $25,300  $  $(613

)

 $24,687 

 

 

Available-for-Sale

  

Available-for-Sale

 
 

December 31, 2016

  

December 31, 2017

 
     

Gross

  

Gross

  

Estimated

      

Gross

  

Gross

  

Estimated

 
 

Amortized

  

Unrealized

  

Unrealized

  

Fair

  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
 

Cost

  

Gains

  

Losses

  

Value

  

Cost

  

Gains

  

Losses

  

Value

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Mortgage-backed securities:

                                

Residential

 $99,922  $490  $(2,003

)

 $98,409  $83,360  $286  $(860

)

 $82,786 

Commercial

  71,761   56   (1,287

)

  70,530   67,281   27   (1,234

)

  66,074 

Obligations of states and political subdivisions

  9,759   390   (7

)

  10,142   4,752   182   (3

)

  4,931 

Obligations of U.S. government-sponsored agencies

  2,000      (7

)

  1,993 

Corporate notes

  756         756 

U.S. Treasury securities

  80         80   80         80 

Total

 $184,278  $936  $(3,304

)

 $181,910  $155,473  $495  $(2,097

)

 $153,871 

 

 

Held-to-Maturity

  

Held-to-Maturity

 
 

December 31, 2016

  

December 31, 2017

 
 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Estimated

Fair

Value

  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Estimated

Fair

Value

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Mortgage-backed securities:

                                

Commercial

 $14,684  $5  $(148

)

 $14,541  $15,065  $1  $(186

)

 $14,880 

Obligations of U.S. government-sponsored agencies

  9,129   13   (222

)

  8,920   9,326   7   (144

)

  9,189 

Obligations of states and political subdivisions

  2,091   2   (46

)

  2,047   1,888   5   (13

)

  1,880 

Total

 $25,904  $20  $(416

)

 $25,508  $26,279  $13  $(343

)

 $25,949 

10

 

The scheduled maturities of investment securities available-for-sale and held-to-maturity as of September 30, 2017 March 31, 2018 are presented in the following table:

 

  

Available-for-Sale

  

Held-to-Maturity

 
  

Amortized

Cost

  

Estimated

Fair

Value

  

Amortized

Cost

  

Estimated

Fair

Value

 
  

(Dollars in Thousands)

 

Maturing within one year

 $490  $496  $

  $

 

Maturing after one to five years

  8,674   8,723   2,048 �� 2,079 

Maturing after five to ten years

  71,462   71,596   2,904   2,899 

Maturing after ten years

  78,050   77,610   22,425   22,325 

Total

 $158,676  $158,425  $27,377  $27,303 


  

Available-for-Sale

  

Held-to-Maturity

 
  

Amortized

Cost

  

Estimated

Fair

Value

  

Amortized

Cost

  

Estimated

Fair

Value

 
  

(Dollars in Thousands)

 

Maturing within one year

 $699  $707  $  $ 

Maturing after one to five years

  22,234   21,719   1,827   1,813 

Maturing after five to ten years

  80,332   78,419   4,293   4,217 

Maturing after ten years

  56,873   55,797   19,180   18,657 

Total

 $160,138  $156,642  $25,300  $24,687 

 

For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities generally mature earlier than their weighted-average contractual maturities because of principal prepayments.

 

The following table reflects gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2017 March 31, 2018 and December 31, 2016.2017.

 

 

Available-for-Sale

  

Available-for-Sale

 
 

September 30, 2017

  

March 31, 2018

 
 

Less than 12 Months

  

12 Months or More

  

Less than 12 Months

  

12 Months or More

 
 

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Mortgage-backed securities:

                                

Residential

 $38,784  $(115

)

 $14,350  $(203

)

 $56,885  $(1,209

)

 $21,126  $(774

)

Commercial

  19,576   (145

)

  37,291   (560

)

  20,155   (398

)

  44,735   (1,470

)

Obligations of states and political subdivisions  426   (3)      

U.S. Treasury securities

  

80

   

 

  

   

   80          

Total

 $58,440  $(260

)

 $51,641  $(763

)

 $77,546  $(1,610

)

 $65,861  $(2,244

)

 

 

Held-to-Maturity

  

Held-to-Maturity

 
 

September 30, 2017

  

March 31, 2018

 
 

Less than 12 Months

  

12 Months or More

  

Less than 12 Months

  

12 Months or More

 
 

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 
Mortgage-backed securities:                   

Commercial

 $9,643  $(58) $

423

  $

(3

) $7,642  $(150

)

 $6,253  $(192)
Obligations of U.S. government-sponsored agencies 3,217 (27) 4,345 (52)  1,656   (23

)

  7,298   (232

)

Obligations of states and political subdivisions

     

 

  

543

   

(3

)  1,311   (8

)

  527   (8)

Total

 $12,860  $(85

)

 $

5,311

  $

(58

)

 $10,609  $(181

)

 $14,078  $(432

)

 

 

Available-for-Sale

  

Available-for-Sale

 
 

December 31, 2016

  

December 31, 2017

 
 

Less than 12 Months

  

12 Months or More

  

Less than 12 Months

  

12 Months or More

 
 

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Mortgage-backed securities:

                                

Residential

 $85,741  $(1,976

)

 $1,904  $(27

)

 $47,007  $(467

)

 $21,122  $(393

)

Commercial

  54,475   (946

)

  10,721   (341

)

  18,554   (180

)

  46,312   (1,054

)

Obligations of U.S. government-sponsored agencies

  1,993   (7

)

      

Obligations of states and political subdivisions

  434   (7)        428   (3)      

U.S. Treasury securities

  80   

 

        80          

Total

 $142,723  $(2,936

)

 $12,625  $(368

)

 $66,069  $(650

)

 $67,434  $(1,447

)

 

 

Held-to-Maturity

  

Held-to-Maturity

 
 

December 31, 2016

  

December 31, 2017

 
 

Less than 12 Months

  

12 Months or More

  

Less than 12 Months

  

12 Months or More

 
 

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Mortgage-backed securities:

                                

Commercial

 $12,776  $(148

)

 $  $  $7,895  $(63

)

 $6,675  $(123)

Obligations of U.S. government-sponsored agencies

  7,957   (222

)

     

 

  865   (2

)

  7,388   (142

)

Obligations of states and political subdivisions

  1,628   (46

)

        571   (3

)

  531   (10)

Total

 $22,361  $(416

)

 $  $

 

 $9,331  $(68

)

 $14,594  $(275

)

 

Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation. Consideration is given to: (i) the length of time and the extent to which fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) whether the Company intends to sell the securities, and (iv) whether it is more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases.

 

 

As of September 30, 2017, 46March 31, 2018, 75 debt securities had been in a loss position for more than 12 months, and 7594 debt securities had been in a loss position for less than 12 months. As of December 31, 2016, 132017, 72 debt securities had been in a loss position for more than 12 months, and 13083 debt securities had been in a loss position for less than 12 months. As of both September 30, 2017 March 31, 2018 and December 31, 2016, 2017, the losses for all securities were considered to be a direct result of the effect that the prevailing interest rate environment had on the value of debt securities and were not related to the creditworthiness of the issuers. Further, the Company has the current intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of September 30, 2017 and March 31, 2018 or December 31, 2016.2017.

 

Investment securities available-for-sale with a carrying value of $87.1$78.0 million and $87.7$86.8 million as of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, respectively, were pledged to secure public deposits and for other purposes.

 

4.

LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Portfolio Segments

 

The Company has divided the loan portfolio into eight portfolio segments, each with different risk characteristics described as follows:

 

Construction, land development and other land loans – Commercial construction, land and land development loans include the development of residential housing projects, loans for the development of commercial and industrial use property and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrowing entity.

 

Secured by 1-41-4 family residential properties – These loans include conventional mortgage loans on one-to-fourone-to-four family residential properties. These properties may serve as the borrower’s primary residence, vacation home or investment property. Also included in this portfolio are home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their homes.home.

 

Secured by multi-family residential properties – This portfolio segment includes mortgage loans secured by apartment buildings.

 

Secured by non-farm, non-residential properties – This portfolio segment includes real estate loans secured by commercial and industrial properties, office or mixed-use facilities, strip shopping centers or other commercial property. These loans are generally guaranteed by the principals of the borrowing entity.

 

Other real estate loans – Other real estate loans are loans primarily for agricultural production, secured by mortgages on farmland.

 

Commercial and industrial loans – This portfolio segment includes loans to commercial customers for use in the normal course of business. These credits may be loans and lines of credit to financially strong borrowers, secured by inventories, equipment or receivables, and are generally guaranteed by the principals of the borrowing entity.

 

Consumer loans – This portfolio segment includes a variety of secured and unsecured personal loans, including automobile loans, loans for household and personal purposes and all other direct consumer installment loans.

 

Indirect sales – This portfolio segment includes loans secured by collateral that is purchased by consumers at retail stores with whom ALC has an established relationship to provide financing for the retail products sold if applicable underwriting standards are met.

 


13

 

As of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:

 

 

September 30, 2017

  

March 31, 2018

 
 

Bank

  

ALC

  

Total

  

Bank

  

ALC

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Real estate loans:

                        

Construction, land development and other land loans

 $20,213  $

  $20,213  $25,965  $  $25,965 

Secured by 1-4 family residential properties

  35,125   11,490   46,615   36,618   9,963   46,581 

Secured by multi-family residential properties

  16,498   

   16,498   16,396      16,396 

Secured by non-farm, non-residential properties

  107,679   

   107,679   111,546      111,546 

Other

  223   

   223   188      188 

Commercial and industrial loans

  66,320   

   66,320   65,996      65,996 

Consumer loans:

                        
Consumer 5,431  35,650  41,081   5,416   32,758   38,174 

Indirect sales

     

50,553

   50,553      60,157   60,157 

Total loans

  251,489   97,693   349,182   262,125   102,878   365,003 

Less: Unearned interest, fees and deferred cost

  367   5,981   6,348   349   6,020   6,369 

Allowance for loan losses

  2,422   2,386   4,808   2,500   2,329   4,829 

Net loans

 $248,700  $89,326  $338,026  $259,276  $94,529  $353,805 

 

 

December 31, 2016

  

December 31, 2017

 
 

Bank

  

ALC

  

Total

  

Bank

  

ALC

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Real estate loans:

                        

Construction, land development and other land loans

 $23,772  $  $23,772  $26,143  $  $26,143 

Secured by 1-4 family residential properties

  32,955   13,724   46,679   34,272   10,801   45,073 

Secured by multi-family residential properties

  16,627      16,627   16,579      16,579 

Secured by non-farm, non-residential properties

  102,112      102,112   105,133      105,133 

Other

  234      234   190      190 

Commercial and industrial loans

  57,963      57,963   69,969      69,969 

Consumer loans:

                        
Consumer 6,206  36,413  42,619   5,217   34,083   39,300 

Indirect sales

     44,775   44,775      55,071   55,071 

Total loans

  239,869   94,912   334,781   257,503   99,955   357,458 

Less: Unearned interest, fees and deferred cost

  218   6,935   7,153   374   6,189   6,563 

Allowance for loan losses

  2,409   2,447   4,856   2,447   2,327   4,774 

Net loans

 $237,242  $85,530  $322,772  $254,682  $91,439  $346,121 

 

The Company makes commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 5455.8%.0% and 56.6%54.0% of the portfolio was concentrated in loans secured by real estate located primarily within a single geographic region of the United States as of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, respectively.

 

Related Party Loans

 

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with non-relatedunrelated parties. Management believes that such loans do not represent more than a normal risk of collectability, nor do they present other unfavorable features. The aggregate balances of such related party loans and commitments as of September 30, 2017 March 31, 2018 and December 31, 20162017 were $0.5$0.4 million and $2.7$0.5 million, respectively. During the ninethree months ended September 30, 2017, March 31, 2018, there were no new loans to these parties, and repayments by active related parties were $7 thousand. In addition, during the nine months ended September 30, 2017, approximately $2.5 million in related party loans were reclassified as unrelated party loans due to the retirement of certain members of the Company’s Board of Directors.$0.1 million. During the year ended December 31, 2016, 2017, there was onewere no new loanloans to athese related party,parties, and repayments by active related parties totaled $0.1 million.were $11 thousand.

 


14

 

Allowance for Loan Losses

 

The following tables present changes in the allowance for loan losses during the three months ended March 31, 2018 and the year ended December 31, 2017 and the related loan balances by loan portfolio segment and loan type as of September 30, 2017 March 31, 2018 and December 31, 2016.2017:

 

 

Bank

  

Bank

 
 

Nine Months Ended September 30, 2017

  

Three Months Ended March 31, 2018

 
 

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

   

Non-Farm Non-Residential

   Other    Commercial   

Consumer

  

Indirect

Sales

  

Total

  

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  Other  Commercial  

Consumer

  

Indirect

Sales

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Allowance for loan losses:

                                                                        

Beginning balance

 $535  $304  $88  $903  $2  $527  $50  $  $2,409  $203  $238  $116  $777  $2  $1,049  $62  $  $2,447 

Charge-offs

                 (16)  (63)     (79)     (8)                    (8)

Recoveries

     85      69      16   52      222      10      3      5   4      22 

Provision

  (328)  (141)  27    (142)   —   440   14      (130)  (7)  14   (1)  18      36   (21)     39 

Ending balance

 $207  $248  $115  $830  $2  $967  $53  $  $2,422  $196  $254  $115  $798  $2  $1,090  $45  $  $2,500 
                                                                
Ending balance of allowance attributable to loans:                                                                

Individually evaluated for impairment

 $62  $5  $  $55  $ —  $72  $  $  $194  $  $5  $  $14  $  $69  $  $  $88 

Collectively evaluated for impairment

  145   243   115   775   2   895   53      2,228   196   249   115   784   2   1,021   45      2,412 
Total allowance for loan losses $207 $248 $115 $830 $2 $967 $53 $ $2,422  $196  $254  $115  $798  $2  $1,090  $45  $  $2,500 

Ending balance of loans receivable:

                                                                        
Individually evaluated for impairment $86  $189  $  $535  $  $70  $  $  $880  $  $186  $  $524  $  $69  $  $  $779 

Collectively evaluated for impairment

  20,127   34,936   16,498   107,144   223   66,250   5,431      250,609   25,965   36,432   16,396   111,022   188   65,927   5,416      261,346 

Total loans receivable

 $20,213  $35,125  $16,498  $107,679  $223  $66,320  $5,431  $  $251,489  $25,965  $36,618  $16,396  $111,546  $188  $65,996  $5,416  $  $262,125 

 

 

ALC

  

ALC

 
 

Nine Months Ended September 30, 2017

  

Three Months Ended March 31, 2018

 
 

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  

Other

  

Commercial

  

Consumer

  

Indirect

Sales

  

Total

  

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  

Other

  

Commercial

  

Consumer

  

Indirect

Sales

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Allowance for loan losses:

                                                                        

Beginning balance

 $  $107  $  $  $  $  $1,717  $623  $2,447  $  $52  $  $  $  $  $1,653  $622  $2,327 

Charge-offs

     (27)              (1,721)  (445)  (2,193)     (14)              (604)  (147)  (765)

Recoveries

     28               435   75   538      5               122   21   148 

Provision

     (5)              1,134   465   1,594      (7)              481   145   619 

Ending balance

 $  $103  $  $  $  $  $1,565  $718  $2,386  $  $36  $  $  $  $  $1,652  $641  $2,329 
                                                               
Ending balance of allowance attributable to loans:                                                               

Individually evaluated for impairment

 $  $  $  $  $  $  $  $  $  $  $  $  $  $  $  $  $  $ 

Collectively evaluated for impairment

     103               1,565   718   2,386      36               1,652   641   2,329 
Total allowance for loan losses $ $103 $ $ $ $ $1,565 $718 $2,386  $  $36  $  $  $  $  $1,652  $641  $2,329 

Ending balance of loans receivable:

                                                                        

Individually evaluated for impairment

 $  $  $  $  $  $  $  $  $  $  $  $  $  $  $  $  $  $ 
Collectively evaluated for impairment     11,490               35,650   50,553   97,693      9,963               32,758   60,157   102,878 

Total loans receivable

 $  $11,490  $  $  $  $  $35,650  $50,553  $97,693  $  $9,963  $  $  $  $  $32,758  $60,157  $102,878 

15

  

Bank and ALC

 
  

Three Months Ended March 31, 2018

 
  

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  

Other

  

Commercial

  

Consumer

  

Indirect

Sales

  

Total

 
  

(Dollars in Thousands)

 

Allowance for loan losses:

                                    

Beginning balance

 $203  $290  $116  $777  $2  $1,049  $1,715  $622  $4,774 

Charge-offs

     (22)              (604)  (147)  (773)

Recoveries

     15      3      5   126   21   170 

Provision

  (7)  7   (1)  18      36   460   145   658 

Ending balance

 $196  $290  $115  $798  $2  $1,090  $1,697  $641  $4,829 
                                     
Ending balance of allowance attributable to loans:                                    

Individually evaluated for impairment

 $  $5  $  $14  $  $69  $  $  $88 

Collectively evaluated for impairment

  196   285   115   784   2   1,021   1,697   641   4,741 
Total allowance for loan losses $196  $290  $115  $798  $2  $1,090  $1,697  $641  $4,829 

Ending balance of loans receivable:

                                    

Individually evaluated for impairment

 $  $186  $  $524  $  $69  $  $  $779 
Collectively evaluated for impairment  25,965   46,395   16,396   111,022   188   65,927   38,174   60,157   364,224 

Total loans receivable

 $25,965  $46,581  $16,396  $111,546  $188  $65,996  $38,174  $60,157  $365,003 

  

Bank

 
  

Year Ended December 31, 2017

 
  

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  

Other

  

Commercial

  

Consumer

  

Indirect

Sales

  

Total

 
  

(Dollars in Thousands)

 

Allowance for loan losses:

                                    

Beginning balance

 $535  $304  $88  $903  $2  $527  $50  $  $2,409 

Charge-offs

                 (16)  (63)     (79)

Recoveries

     103      69      19   56      247 

Provision

  (332)  (169)  28   (195)     519   19      (130)

Ending balance

 $203  $238  $116  $777  $2  $1,049  $62  $  $2,447 
                                     
Ending balance of allowance attributable to loans:                                    

Individually evaluated for impairment

 $  $5  $  $21  $  $72  $  $  $98 

Collectively evaluated for impairment

  203   233   116   756   2   977   62      2,349 
Total allowance for loan losses $203  $238  $116  $777  $2  $1,049  $62  $  $2,447 

Loan receivables:

                                    

Individually evaluated for impairment

 $  $187  $  $532  $  $72  $  $  $791 
Collectively evaluated for impairment  26,143   34,085   16,579   104,601   190   69,897   5,217      256,712 

Total loans receivable

 $26,143  $34,272  $16,579  $105,133  $190  $69,969  $5,217  $  $257,503 

 

 


16

 

  

Bank and ALC

 
  

Nine Months Ended September 30, 2017

 
  

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  

Other

  

Commercial

  

Consumer

  

Indirect

Sales

  

Total

 
  

(Dollars in Thousands)

 

Allowance for loan losses:

                                    

Beginning balance

 $535  $411  $88  $903  $2  $527  $1,767  $623  $4,856 

Charge-offs

     (27)           (16)  (1,784)  (445)  (2,272)

Recoveries

     113      69      16   487   75   760 

Provision

  (328)  (146)  27   (142)     440   1,148   465   1,464 

Ending balance

 $207  $351  $115  $830  $2  $967  $1,618  $718  $4,808 
                                     
Ending balance of allowance attributable to loans:                                    

Individually evaluated for impairment

 $62  $5  $  $55  $  $72  $  $  $194 

Collectively evaluated for impairment

  145   346   115   775   2   895   1,618   718   4,614 
Total allowance for loan losses $207  $351  $115  $830  $2  $967  $1,618  $718  $4,808 

Ending balance of loans receivable:

                                    

Individually evaluated for impairment

 $86  $189  $  $535  $  $70  $  $  $880 
Collectively evaluated for impairment  20,127   46,426   16,498   107,144   223   66,250   41,081   50,553   348,302 

Total loans receivable

 $20,213  $46,615  $16,498  $107,679  $223  $66,320  $41,081  $50,553  $349,182 

  

Bank

 
  

Year Ended December 31, 2016

 
  

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  

Other

  

Commercial

  

Consumer

  

Indirect

Sales

  

Total

 
  

(Dollars in Thousands)

 

Allowance for loan losses:

                                    

Beginning balance

 $110  $138  $29  $351  $1  $659  $41  $  $1,329 

Charge-offs

     (66     (40     (2  (43     (151

Recoveries

  200   23            73   50      346 

Provision

  225   209   59   592   1   (203  2      885 

Ending balance

 $535  $304  $88  $903  $2  $527  $50  $  $2,409 
                                     
Ending balance of allowance attributable to loans:                                    

Individually evaluated for impairment

 $423  $5  $  $107  $  $  $  $  $535 

Collectively evaluated for impairment

  112   299   88   796   2   527   50      1,874 
Total allowance for loan losses $535  $304  $88  $903  $2  $527  $50  $  $2,409 

Ending balance of loans receivable:

                                    

Individually evaluated for impairment

 $1,361  $193  $  $549  $  $  $  $  $2,103 
Collectively evaluated for impairment  22,411   32,762   16,627   101,563   234   57,963   6,206      237,766 

Total loans receivable

 $23,772  $32,955  $16,627  $102,112  $234  $57,963  $6,206  $  $239,869 

  

ALC

 
  

Year Ended December 31, 2017

 
  

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  

Other

  

Commercial

  

Consumer

  

Indirect

Sales

  

Total

 
  

(Dollars in Thousands)

 

Allowance for loan losses:

                                    

Beginning balance

 $  $107  $  $  $  $  $1,717  $623  $2,447 

Charge-offs

     (28

)

              (2,297

)

  (587)  (2,912

)

Recoveries

     32               545   98   675 

Provision

     (59)              1,688   488   2,117 

Ending balance

 $  $52  $  $  $  $  $1,653  $622  $2,327 
                                     
Ending balance of allowance attributable to loans:                                    

Individually evaluated for impairment

 $  $  $  $  $  $  $  $  $ 

Collectively evaluated for impairment

     52               1,653   622   2,327 
Total allowance for loan losses $  $52  $  $  $  $  $1,653  $622  $2,327 

Ending balance of loans receivable:

                                    

Individually evaluated for impairment

 $  $  $  $  $  $  $  $  $ 
Collectively evaluated for impairment     10,801               34,083   55,071   99,955 

Total loans receivable

 $  $10,801  $  $  $  $  $34,083  $55,071  $99,955 

 


  

Bank and ALC

 
  

Year Ended December 31, 2017

 
  

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  

Other

  

Commercial

  

Consumer

  

Indirect

Sales

  

Total

 
  

(Dollars in Thousands)

 

Allowance for loan losses:

                                    

Beginning balance

 $535  $411  $88  $903  $2  $527  $1,767  $623  $4,856 

Charge-offs

     (28

)

           (16

)

  (2,360

)

  (587)  (2,991

)

Recoveries

     135      69      19   601   98   922 

Provision

  (332)  (228)  28   (195)     519   1,707   488   1,987 

Ending balance

 $203  $290  $116  $777  $2  $1,049  $1,715  $622  $4,774 
                                     
Ending balance of allowance attributable to loans:                                    

Individually evaluated for impairment

 $  $5  $  $21  $  $72  $  $  $98 

Collectively evaluated for impairment

  203   285   116   756   2   977   1,715   622   4,676 
Total allowance for loan losses $203  $290  $116  $777  $2  $1,049  $1,715  $622  $4,774 

Loan receivables:

                                    

Individually evaluated for impairment

 $  $187  $  $532  $  $72  $  $  $791 
Collectively evaluated for impairment  26,143   44,886   16,579   104,601   190   69,897   39,300   55,071   356,667 

Total loans receivable

 $26,143  $45,073  $16,579  $105,133  $190  $69,969  $39,300  $55,071  $357,458 

  

ALC

 
  

Year Ended December 31, 2016

 
  

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  

Other

  

Commercial

  

Consumer

  

Indirect

Sales

  

Total

 
  

(Dollars in Thousands)

 

Allowance for loan losses:

                                    

Beginning balance

 $  $250  $  $  $  $  $1,584  $618  $2,452 

Charge-offs

     (56

)

     

 

     

 

  (2,218

)

  (752  (3,026

)

Recoveries

     39               451   220   710 

Provision

     (126           

 

  1,900   537   2,311 

Ending balance

 $  $107  $  $  $  $  $1,717  $623  $2,447 
                                     
Ending balance of allowance attributable to loans:                                    

Individually evaluated for impairment

 $  $  $  $  $  $  $  $  $ 

Collectively evaluated for impairment

     107               1,717   623   2,447 
Total allowance for loan losses $  $107  $  $  $  $  $1,717  $623  $2,447 

Ending balance of loans receivable:

                                    

Individually evaluated for impairment

 $  $  $  $  $  $  $  $  $ 
Collectively evaluated for impairment     13,724               36,413   44,775   94,912 

Total loans receivable

 $  $13,724  $  $  $  $  $36,413  $44,775  $94,912 

  

Bank and ALC

 
  

Year Ended December 31, 2016

 
  

Construction,

Land

  

1-4

Family

  

Real

Estate

Multi-

Family

  

Non-Farm Non-Residential

  

Other

  

Commercial

  

Consumer

  

Indirect

Sales

  

Total

 
  

(Dollars in Thousands)

 

Allowance for loan losses:

                                    

Beginning balance

 $110  $388  $29  $351  $1  $659  $1,625  $618  $3,781 

Charge-offs

     (122

)

     (40

)

     (2

)

  (2,261

)

  (752  (3,177

)

Recoveries

  200   62            73   501   220   1,056 

Provision

  225   83   59   592   1   (203

)

  1,902   537   3,196 

Ending balance

 $535  $411  $88  $903  $2  $527  $1,767  $623  $4,856 
                                     
Ending balance of allowance attributable to loans:                                    

Individually evaluated for impairment

 $423  $5  $  $107  $  $  $  $  $535 

Collectively evaluated for impairment

  112   406   88   796   2   527   1,767   623   4,321 
Total allowance for loan losses $535  $411  $88  $903  $2  $527  $1,767  $623  $4,856 

Ending balance of loans receivable:

                                    

Individually evaluated for impairment

 $1,361  $193  $  $549  $  $  $  $  $2,103 
Collectively evaluated for impairment  22,411   46,486   16,627   101,563   234   57,963   42,619   44,775   332,678 

Total loans receivable

 $23,772  $46,679  $16,627  $102,112  $234  $57,963  $42,619  $44,775  $334,781 

 

Credit Quality Indicators

 

The Bank utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, each loan is graded based on pre-determined risk metrics and categorized into one of nine risk grades. These risk grades can be summarized into categories described as pass, special mention, substandard, doubtful and loss, as described in further detail below.

 

 

Pass (Risk Grades 1-5)1-5): Loans in this category include obligations in which the probability of default is considered low.

 

 

Special Mention (Risk Grade 6)6): Loans in this category exhibit potential credit weaknesses or downward trends deserving Bank management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Although a special mention asset has a higher probability of default than pass-rated categories, its default is not imminent.

 

 

 

Substandard (Risk Grade 7)7): Loans in this category have defined weaknesses that jeopardize the orderly liquidation of debt. A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard.

 

 

Doubtful (Risk Grade 8)8): Loans classified as doubtful have all of the weaknesses found in substandard loans, with the added characteristic that the weaknesses make collection of debt in full, based on currently existing facts, conditions and values, highly questionable or improbable. Serious problems exist such that partial loss of principal is likely; however, because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Such pending factors may include proposed merger, acquisition or liquidation procedures, capital injection, perfection of liens on additional collateral and refinancing plans. Loans classified as doubtful may include loans to borrowers that have demonstrated a history of failing to live up to agreements.

 

 

Loss (Risk Grade 9)9): Loans are classified in this category when borrowers are deemed incapable of repayment of unsecured debt. Loans to such borrowers are considered uncollectable and of such little value that continuance as active assets of the Bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not prudent to defer writing off these worthless assets, even though partial recovery may occurbe affected in the future.

 

At ALC, because the loan portfolio is more uniform in nature, each loan is categorized into one of two risk grades, depending on whether the loan is considered to be performing or nonperforming. Performing loans are loans that are paying principal and interest in accordance with a contractual agreement. Nonperforming loans are loans that have demonstrated characteristics that indicate a probability of loss.

 

The tables below illustrate the carrying amount of loans by credit quality indicator as of September 30, 2017.March 31, 2018.

 

 

Bank

  

Bank

 
 

Pass

1-5

  

Special

Mention

6

  

Substandard

7

  

Doubtful

8

  

Total

  

Pass

1-5

  

Special

Mention

6

  

Substandard

7

  

Doubtful

8

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                                        

Construction, land development and other land loans

 $19,939  $

  $274  $

  $20,213  $25,697  $85  $183  $  $25,965 

Secured by 1-4 family residential properties

  34,069   201   855   

   35,125   35,569   335   714      36,618 

Secured by multi-family residential properties

  16,498   

   

   

   16,498   16,396            16,396 

Secured by non-farm, non-residential properties

  102,264   4,884   531   

   107,679   108,933   2,104   509      111,546 

Other

  223   

   

   

   223   188            188 

Commercial and industrial loans

  63,995   2,105   220   

   66,320   63,764   2,033   199      65,996 

Consumer loans

  5,366   

   

65

   

   5,431   5,358      58      5,416 

Other loans

               

Total

 $242,354  $7,190  $1,945  $

  $251,489  $255,905  $4,557  $1,663  $  $262,125 

 

 

ALC

  

ALC

 
 

Performing

  

Nonperforming

  

Total

  

Performing

  

Nonperforming

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                        

Secured by 1-4 family residential properties

 $11,292  $198  $11,490  $9,732  $231  $9,963 
Consumer loans:                        
Consumer  34,609   1,041   35,650   31,861   897   32,758 

Indirect sales

  50,168   385   50,553   59,617   540   60,157 

Total

 $96,069  $1,624  $97,693  $101,210  $1,668  $102,878 

 

 

The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31, 2016.2017.

 

 

Bank

  

Bank

 
 

Pass

1-5

  

Special

Mention

6

  

Substandard

7

  

Doubtful

8

  

Total

  

Pass

1-5

  

Special

Mention

6

  

Substandard

7

  

Doubtful

8

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                                        

Construction, land development and other land loans

 $22,240  $  $1,532  $  $23,772  $25,872  $84  $187  $  $26,143 

Secured by 1-4 family residential properties

  31,995   213   747      32,955   33,278   339   655      34,272 

Secured by multi-family residential properties

  16,627            16,627   16,579            16,579 

Secured by non-farm, non-residential properties

  99,082   2,315   715      102,112   99,847   4,766   520      105,133 

Other

  234            234   190            190 

Commercial and industrial loans

  55,481   2,227   255      57,963   67,689   2,066   214      69,969 

Consumer loans

  6,126      80      6,206   5,155      62      5,217 

Total

 $231,785  $4,755  $3,329  $  $239,869  $248,610  $7,255  $1,638  $  $257,503 

 

 

ALC

  

ALC

 
 

Performing

  

Nonperforming

  

Total

  

Performing

  

Nonperforming

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                        

Secured by 1-4 family residential properties

 $13,507  $217  $13,724  $10,495  $306  $10,801 
Consumer loans:                        
Consumer  35,278   1,135   36,413   32,933   1,150   34,083 

Indirect sales

  44,228   547   44,775   54,611   460   55,071 

Total

 $93,013  $1,899  $94,912  $98,039  $1,916  $99,955 

 

The following tables provide an aging analysis of past due loans by class as of September 30, 2017.March 31, 2018.

 

 

Bank

  

Bank

 
 

As of September 30, 2017

  

As of March 31, 2018

 
 

30-59

Days

Past

Due

  

60-89

Days

Past

Due

  

90

Days

Or

Greater

  

Total

Past

Due

  

Current

  

Total

Loans

  

Recorded

Investment

>

90 Days

And

Accruing

  

30-59

Days

Past

Due

  

60-89

Days

Past

Due

  

90

Days

Or

Greater

  

Total

Past

Due

  

Current

  

Total

Loans

  

Recorded

Investment

>

90 Days

And

Accruing

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                                                        

Construction, land development and other land loans

 $23  $

  $  $23  $20,190  $20,213  $

  $  $  $  $  $25,965  $25,965  $ 

Secured by 1-4 family residential properties

  149      91   240   34,885   35,125   

   154   19   82   255   36,363   36,618    

Secured by multi-family residential properties

  

   

   

   

   16,498   16,498   

               16,396   16,396    

Secured by non-farm, non-residential properties

  

15

   

117

   

   

132

   107,547   107,679   

   115         115   111,431   111,546    

Other

  

   

   

   

   223   223   

               188   188    

Commercial and industrial loans

  31      

   31   66,289   66,320   

   36   21      57   65,939   65,996    

Consumer loans

  

   

   

23

   

23

   5,408   5,431   

   21         21   5,395   5,416    

Total

 $218  $117  $114  $449  $251,040  $251,489  $

  $326  $40  $82  $448  $261,677  $262,125  $ 

 

 

 

ALC

  

ALC

 
 

As of September 30, 2017

  

As of March 31, 2018

 
 

30-59

Days

Past

Due

  

60-89

Days

Past

Due

  

90

Days

Or

Greater

  

Total

Past

Due

  

Current

  

Total

Loans

  

Recorded

Investment

>

90 Days

And

Accruing

  

30-59

Days

Past

Due

  

60-89

Days

Past

Due

  

90

Days

Or

Greater

  

Total

Past

Due

  

Current

  

Total

Loans

  

Recorded

Investment

>

90 Days

And

Accruing

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                                                        

Construction, land development and other land loans

 $

  $

  $

  $

  $

  $

  $

  $  $  $  $  $  $  $ 

Secured by 1-4 family residential properties

  73   70   71   214   11,276   11,490   

   104   28   231   363   9,600   9,963    

Secured by multi-family residential properties

  

   

   

   

   

   

   

                      

Secured by non-farm, non-residential properties

  

   

   

   

   

   

   

                      

Other

  

   

   

   

   

   

   

                      

Commercial and industrial loans

  

   

   

   

   

   

   

                      
Consumer loans:                                                 

Consumer

  506   433   1,016   1,955   33,695   35,650   

   526   323   897   1,746   31,012   32,758    

Indirect sales

  

214

   

221

   

383

   

818

   

49,735

   

50,553

   

   244   176   540   960   59,197   60,157    

Total

 $793  $724  $1,470  $2,987  $94,706  $97,693  $

  $874  $527  $1,668  $3,069  $99,809  $102,878  $ 

 

The following tables provide an aging analysis of past due loans by class as of December 31, 2016201.7.

 

 

Bank

  

Bank

 
 

As of December 31, 2016

  

As of December 31, 2017

 
 

30-59

Days

Past

Due

  

60-89

Days

Past

Due

  

90

Days

Or

Greater

  

Total

Past

Due

  

Current

  

Total

Loans

  

Recorded

Investment

>

90 Days

And

Accruing

  

30-59

Days

Past

Due

  

60-89

Days

Past

Due

  

90

Days

Or

Greater

  

Total

Past

Due

  

Current

  

Total

Loans

  

Recorded

Investment

>

90 Days

And

Accruing

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                                                        

Construction, land development and other land loans

 $

  $  $86  $86  $23,686  $23,772  $  $  $  $  $  $26,143  $26,143  $ 

Secured by 1-4 family residential properties

  164   69   145   378   32,577   32,955      227      52   279   33,993   34,272    

Secured by multi-family residential properties

  

            16,627   16,627                  16,579   16,579    

Secured by non-farm, non-residential properties

  762         762   101,350   102,112      13         13   105,120   105,133    

Other

  

            234   234                  190   190    

Commercial and industrial loans

        14   14   57,949   57,963      70         70   69,899   69,969    

Consumer loans

  

   28      28   6,178   6,206      42         42   5,175   5,217    

Total

 $926  $97  $245  $1,268  $238,601  $239,869  $  $352  $  $52  $404  $257,099  $257,503  $ 

 

 

 

ALC

  

ALC

 
 

As of December 31, 2016

  

As of December 31, 2017

 
 

30-59

Days

Past

Due

  

60-89

Days

Past

Due

  

90

Days

Or

Greater

  

Total

Past

Due

  

Current

  

Total

Loans

  

Recorded Investment

>

90 Days

And

Accruing

  

30-59

Days

Past

Due

  

60-89

Days

Past

Due

  

90

Days

Or

Greater

  

Total

Past

Due

  

Current

  

Total

Loans

  

Recorded Investment

>

90 Days

And

Accruing

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                                                        

Construction, land development and other land loans

 $  $  $  $  $  $  $  $  $  $  $  $  $  $ 

Secured by 1-4 family residential properties

  61   29   213   303   13,421   13,724      61   23   290   374   10,427   10,801    

Secured by multi-family residential properties

                                          

Secured by non-farm, non-residential properties

                                          

Other

                                          

Commercial and industrial loans

                                          
Consumer loans:                                                 

Consumer

  441   413   1,104   1,958   34,455   36,413      490   323   1,111   1,924   32,159   34,083    

Indirect sales

  191   139   489   819   43,956   44,775      281   230   433   944   54,127   55,071    

Total

 $693  $581  $1,806  $3,080  $91,832  $94,912  $  $832  $576  $1,834  $3,242  $96,713  $99,955  $ 

 

The following table provides an analysis of non-accruing loans by class as of September 30, 2017 March 31, 2018 and December 31, 2016.2017.

 

 

Loans on Non-Accrual Status

  

Loans on Non-Accrual Status

 
 

September 30,

2017

  

December 31,

2016

  

March 31,

2018

  

December 31,

2017

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                

Construction, land development and other land loans

 $  $86  $  $ 

Secured by 1-4 family residential properties

  418   570   507   501 

Secured by multi-family residential properties

  

          

Secured by non-farm, non-residential properties

  33   53   24   29 

Commercial and industrial loans

  

14

   32   11   12 
Consumer loans:      
Consumer 1,106  1,676 
Consumer loans  955   1,173 

Indirect sales

  385      540   433 

Total loans

 $1,956  $2,417  $2,037  $2,148 

 

Impaired Loans

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the related loan agreement. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the liquidation of the collateral at the Bank. At management’s discretion, additional loans may be impaired based on homogeneous factors such as changes in the nature and volume of the portfolio, portfolio quality, adequacy of the underlying collateral value, loan concentrations, historical charge-off trends and economic conditions that may affect athe borrower’s ability to pay. At ALC, all real estate loans of $0.1$0.1 million or more are identified for impairment analysis. There are currently no loans at ALC that meet that criteria. All loans of $0.5$0.5 million or more that have a credit quality risk grade of seven or above are identified for impairment analysis. Impaired loans, or portions thereof, are charged off when deemed uncollectable.

 

 

As of September 30, 2017, March 31, 2018, the carrying amount of impaired loans at the Bank consisted of the following:

 

  

September 30, 2017

 

Impaired loans with no related allowance recorded

 

Carrying

Amount

  

Unpaid

Principal

Balance

  

Related

Allowances

 
  

(Dollars in Thousands)

 

Loans secured by real estate

            

Construction, land development and other land loans

 $  $  $ 

Secured by 1-4 family residential properties

         

Secured by multi-family residential properties

         

Secured by non-farm, non-residential properties

         

Commercial and industrial

         

Total loans with no related allowance recorded

 $  $  $ 
             

Impaired loans with an allowance recorded

            

Loans secured by real estate

            

Construction, land development and other land loans

 $86  $86  $62 

Secured by 1-4 family residential properties

  189   189   5 

Secured by multi-family residential properties

         

Secured by non-farm, non-residential properties

  535   535   55 

Commercial and industrial

  70   70   72 

Total loans with an allowance recorded

 $880  $880  $194 
             

Total impaired loans

            

Loans secured by real estate

            

Construction, land development and other land loans

 $86  $86  $62 

Secured by 1-4 family residential properties

  189   189   5 

Secured by multi-family residential properties

         

Secured by non-farm, non-residential properties

  535   535   55 

Commercial and industrial

  70   70   72 

Total impaired loans

 $880  $880  $194 

March 31, 2018

Impaired loans with no related allowance recorded

Carrying

Amount

Unpaid

Principal

Balance

Related

Allowances

(Dollars in Thousands)

Loans secured by real estate

Construction, land development and other land loans

$$$

Secured by 1-4 family residential properties

Secured by multi-family residential properties

Secured by non-farm, non-residential properties

Commercial and industrial

Total loans with no related allowance recorded

$$$

Impaired loans with an allowance recorded

Loans secured by real estate

Construction, land development and other land loans

$$$

Secured by 1-4 family residential properties

1861865

Secured by multi-family residential properties

Secured by non-farm, non-residential properties

52452414

Commercial and industrial

696969

Total loans with an allowance recorded

$779$779$88

Total impaired loans

Loans secured by real estate

Construction, land development and other land loans

$$$

Secured by 1-4 family residential properties

1861865

Secured by multi-family residential properties

Secured by non-farm, non-residential properties

52452414

Commercial and industrial

696969

Total impaired loans

$779$779$88

 

 

As of December 31, 2016,2017, the carrying amount of impaired loans at the Bank consisted of the following:  

 

 

December 31, 2016

  

December 31, 2017

 

Impaired loans with no related allowance recorded

 

Carrying

Amount

  

Unpaid

Principal

Balance

  

Related

Allowances

  

Carrying

Amount

  

Unpaid

Principal

Balance

  

Related

Allowances

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate

                        

Construction, land development and other land loans

 $  $  $  $  $  $ 

Secured by 1-4 family residential properties

                  

Secured by multi-family residential properties

                  

Secured by non-farm, non-residential properties

                  

Commercial and industrial

                  

Total loans with no related allowance recorded

 $  $  $  $  $  $ 
                        

Impaired loans with an allowance recorded

                        

Loans secured by real estate

                        

Construction, land development and other land loans

 $1,361  $1,361  $423  $  $  $ 

Secured by 1-4 family residential properties

  193   193   5   187   187   5 

Secured by multi-family residential properties

                  

Secured by non-farm, non-residential properties

  549   549   107   532   532   21 

Commercial and industrial

           72   72   72 

Total loans with an allowance recorded

 $2,103  $2,103  $535  $791  $791  $98 
                        

Total impaired loans

                        

Loans secured by real estate

                        

Construction, land development and other land loans

 $1,361  $1,361  $423  $  $  $ 

Secured by 1-4 family residential properties

  193   193   5   187   187   5 

Secured by multi-family residential properties

                  

Secured by non-farm, non-residential properties

  549   549   107   532   532   21 

Commercial and industrial

           72   72   72 

Total impaired loans

 $2,103  $2,103  $535  $791  $791  $98 

 

The average net investment in impaired loans and interest income recognized and received on impaired loans as ofduring the ninethree months ended September 30, 2017 March 31, 2018 and the year ended December 31, 2016 2017 were as follows:

 

 

September 30, 2017

  

March 31, 2018

 
 

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Interest

Income

Received

  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Interest

Income

Received

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate

                        

Construction, land development and other land

loans

 $1,183  $1  $1  $  $  $ 

Secured by 1-4 family residential properties

  191   10   11   187   3   3 

Secured by multi-family residential properties

                  

Secured by non-farm, non-residential properties

  539   27   25   526   9   9 

Commercial and industrial

  55   6   3   69   1   2 

Total

 $1,968  $44  $40  $782  $13  $14 

 

 

 

December 31, 2016

  

December 31, 2017

 
 

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Interest

Income

Received

  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Interest

Income

Received

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate

                        

Construction, land development and other land loans

 $1,381  $41  $39  $902  $  $ 

Secured by 1-4 family residential properties

  232   14   14   190   13   14 

Secured by multi-family residential properties

                  

Secured by non-farm, non-residential properties

  557   33   31   537   35   35 

Commercial and industrial

           59   7   5 

Total

 $2,170  $88  $84  $1,688  $55  $54 

 

Loans on which the accrual of interest has been discontinued amounted to $2.0$2.0 million and $2.4$2.1 million as of September 30, 2017 March 31, 2018 and December 31, 2016,2017, respectively. If interest on those loans had been accrued, there would have been $5$6 thousand and $35$19 thousand of interest accrued for the periods ended September 30, 2017 March 31, 2018 and December 31, 2016, 2017, respectively. Interest income related to these loans as of September 30, 2017 March 31, 2018 and December 31, 2016 2017 was $3$1 thousand and $4$3 thousand, respectively.

 

Troubled Debt Restructurings

 

Troubled debt restructurings include loans with respect to which concessions have been granted to borrowers that generally would not have otherwise been considered had the borrowers not been experiencing financial difficulty. The concessions granted may include payment schedule modifications, interest rate reductions, maturity date extensions, modifications of note structure, principal balance reductions or some combination of these concessions. There were no loans modified with concessions granted during the nine-monththree-month period ended September 30, 2017. March 31, 2018. Restructured loans may involve loans remaining on non-accrual, moving to non-accrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Non-accrual restructured loans are included with all other non-accrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, then the loan remains on non-accrual. As of both September 30, 2017 March 31, 2018 and December 31, 2016, 2017, the Company had $0.1$0.1 million of non-accruing loans that were previously restructured and that remained on non-accrual status. For both the ninethree months ended September 30,March 31, 2018 and the year ended December 31, 2017, the Company had no loans that were restored to accrual status based on a sustained period of repayment performance. For the year ended December 31, 2016, the Company had $0.3 million in restructured loans that were restored to accrual status based on a sustained period of repayment performance.

 

The following table provides the number of loans remaining in each loan category, as of September 30, 2017 March 31, 2018 and December 31, 2016 2017, that the Bank had previously modified in a troubled debt restructuring, as well as the pre- and post-modification principal balance as of each date.

 

 

September 30, 2017

  

December 31, 2016

  

March 31, 2018

  

December 31, 2017

 
 

Number

of

Loans

  

Pre-

Modification

Outstanding

Principal

Balance

  

Post-

Modification

Principal

Balance

  

Number

of

Loans

  

Pre-

Modification

Outstanding

Principal

Balance

  

Post-

Modification

Principal

Balance

  

Number

of

Loans

  

Pre-

Modification

Outstanding

Principal

Balance

  

Post-

Modification

Principal

Balance

  

Number

of

Loans

  

Pre-

Modification

Outstanding

Principal

Balance

  

Post-

Modification

Principal

Balance

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                                                

Construction, land development and other land loans

  1  $107  $84   2  $1,960  $1,286   1  $107  $80   1  $107  $82 

Secured by 1-4 family residential properties

  3   318   188   3   318   249   3   318   141   3   318   165 

Secured by non-farm, non-residential properties

  1   53   38   1   53   41   1   53   36   1   53   37 

Commercial loans

  2   116   83   2   116   88   2   116   80   2   116   81 

Total

  7  $594  $393   8  $2,447  $1,664   7  $594  $337   7  $594  $365 

 

 

As of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, no loans that previously had been modified in a troubled debt restructuring had defaulted subsequent to modification.

 

Restructured loan modifications primarily included maturity date extensions and payment schedule modifications. There were no modifications to principal balances of the loans that were restructured. Accordingly, there was no impact on the Company’s allowance for loan losses resulting from the modifications.

 

All loans with a principal balance of $0.5$0.5 million or more that have been modified in a troubled debt restructuring are considered impaired and evaluated individually for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, are considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses attributable to such restructured loans of $32 thousand as of September 30, 2017 both March 31, 2018 and $15 thousand as of December 31, 2016.2017.

 

5.

OTHER REAL ESTATE OWNED AND REPOSSESSIONS

Other Real Estate Owned

 

Other real estate and certain other assets acquired in foreclosure are reported at the lower of the investment in the loan or the fairnet realizable value of the property, less estimated costs to sell. The following table summarizestables summarize foreclosed property activity foras of the ninethree months ended September 30, 2017 March 31, 2018 and 2016.2017:

 

 

September 30, 2017

  

March 31, 2018

 
 

Bank

  

ALC

  

Total

  

Bank

  

ALC

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Beginning balance

 $4,353  $505  $4,858  $3,527  $265  $3,792 

Transfers from loans

     87   87 

Additions (1)

  106   25   131 

Sales proceeds

  (649

)

  (199

)

  (848

)

  (611

)

  (20

)

  (631

)

            

Gross gains

  

14

      14   121      121 

Gross losses

  (20

)

  (101

)

  (121

)

     (23

)

  (23

)

Net gains (losses)

  (6

)

  (101

)

  (107

)

  121   (23

)

  98 

Impairment

  

(171

)

  

 

  (171

)

  (43

)

  (4

)

  (47

)

Ending balance

 $3,527  $292  $3,819  $3,100  $243  $3,343 

 

 

September 30, 2016

  

March 31, 2017

 
 

Bank

  

ALC

  

Total

  

Bank

  

ALC

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Beginning balance

 $5,327  $711  $6,038  $4,353  $505  $4,858 

Transfers from loans

  255   149   404 
Additions (1)     20   20 

Sales proceeds

  (655

)

  (259

)

  (914

)

  (204

)

  (84

)

  (288

)

            

Gross gains

     27   27   13      13 

Gross losses

  (40

)

  (73

)

  (113

)

  (1

)

  (15

)

  (16

)

Net gains (losses)

  (40

)

  (46

)

  (86

)

  12   (15

)

  (3

)

Impairment

     (51

)

  (51

)

         

Ending balance

 $4,887  $504  $5,391  $4,161  $426  $4,587 

(1)Additions to other real estate owned (“OREO”) include transfers from loans and capitalized improvements to existing OREO properties.

 

Valuation adjustments are recorded in other non-interest expense and are primarily post-foreclosure write-downs that are a result of continued declining property values based on updated appraisals or other indications of value, such as offers to purchase. FairNet realizable value less estimated costcosts to sell of foreclosed residential real estate held by the Company was $0.6$0.6 million and $1.1$0.8 million as of September 30, 2017 March 31, 2018 and 2016,2017, respectively. In addition, the Company held $20 thousand and $0.1 million indid not hold any consumer mortgage loans collateralized by residential real estate that were in the process of foreclosure as of September 30,March 31, 2018 and held $0.1 million of these loans as of March 31, 2017.

Repossessions

In addition to the other real estate and other assets acquired in foreclosure, ALC also acquires assets through the repossession of the underlying collateral of loans in default. Total repossessed assets at ALC as of March 31, 2018 and December 31, 2017 were $0.3 million and 2016,$0.2 million, respectively.

 


25

 

6.

INVESTMENT IN LIMITED PARTNERSHIP

 

The CompanyBank holds an investment in an affordable housing project for which it provides funding as a limited partner and has received tax credits related to its investment in the project based on its partnership share. The net assets of the partnership consist primarily of apartment complexes, and the primary liabilities consist of those associated with the operation of the partnership. The Company has determined that this investment requires consolidation as a variable interest entity under ASCTopic 810, Consolidation. The Company holds a 99.9% interest in the limited partnership. Assets recorded by the Company as a result of the consolidation were less than $0.1$0.1 million as of both September 30, 2017 March 31, 2018 and December 31, 2016.2017.

 

7.

SHORT-TERM BORROWINGS

 

Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements and short-term Federal Home Loan Bank (“FHLB”) advances with original maturities of one year or less. Short-term borrowings totaled $10.6$10.3 million and $10.1$15.6 million as of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, respectively.

 

Federal funds purchased, which represent unsecured lines of credit that generally mature within one to four days, are available to the Bank through arrangements with correspondent banks and the Federal Reserve. As of both September 30, 2017 March 31, 2018 and December 31, 2016, 2017, there were no federal funds purchased outstanding, and the Bank had $18.8$18.8 million in available unused lines of credit with correspondent banks and the Federal Reserve.

 

Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The Bank monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements as of September 30, 2017 March 31, 2018 and December 31, 2016 2017 totaled $0.6$0.3 million and $0.1$0.6 million, respectively.

 

Short-term FHLB advances are secured borrowings available to the Bank as an alternative funding source. As of both September 30, 2017 March 31, 2018 and December 31, 2016, 2017, the Bank had $10.0$10.0 million and $15.0 million, respectively, in outstanding FHLB advances with original maturities of less than one year. 

 

8.

LONG-TERM DEBT

 

The Company uses FHLB advances as an alternative to funding sources with similar maturities, such as certificates of deposit or other deposit programs. These advances generally offer more attractive rates than other mid-term financing options. They are also flexible, allowing the Company to quickly obtain the necessary maturities and rates that best suit its overall asset/liability strategy. FHLB advances with an original maturity of more than one year are classified as long-term. The Company had long-term FHLB advances outstanding of $10.0 million and $15.0$10.0 million as of September 30, 2017 both March 31, 2018 and December 31, 2016, respectively. 2017.

 

Assets pledged associated with FHLB advances totaled $22.3$23.2 million and $28.0$26.0 million as of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, respectively. As of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, the CompanyBank had $164.8$167.6 million and $155.0$159.3 million, respectively, in remaining credit from the FHLB (subject to available collateral).

 

9.

INCOME TAXES

 

The Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was enacted in December 2017. This legislation made significant changes in federal tax law, including a reduction in the corporate income tax rates, changes to net operating loss carryforwards and carrybacks and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate income tax rate to 21% beginning in 2018.

The provision for income taxes was $0.40.1 million for both of the nine-monththree-month periods ended September 30, 2017 March 31, 2018 and 2016.2017. The Company’s effective tax rate was 23.0%16.4% and 23.4%24.3%, respectively, for the same periods. The effective tax rate is impacted by recurring permanent differences, such as those associated with bank-owned life insurance and tax-exempt investmentsinvestment and loan income. The reduced effective tax rate in the first quarter of 2018 compared to the first quarter of 2017 resulted from the reduction in the Company's statutory federal rate under Tax Reform.

 

The Company had a net deferred tax asset of $7.7$5.9 million and $8.7$5.6 million as of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, respectively. The reductionincrease in the net deferred tax asset resulted primarily from the impact of changes in the fair value of securities available-for-sale, as well as the reduction of federal net operating loss carry-forwards.available-for-sale.

 


26

 

10.

DEFERRED COMPENSATION PLANS

 

The Bank has entered into supplemental retirement compensation benefits agreements with certain directors and executive officers.  The measurement of the liability under these agreements includes estimates involving life expectancy, length of time before retirement and the expected returns on the bank-owned life insurance policies used to fund those agreements. Should these estimates prove to be materially wrong, the cost of these agreements could change accordingly. The related deferred compensation obligation to these directors and executive officers included in other liabilities was $3.4$3.4 million and $3.5$3.5 million as of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, respectively.

 

Non-employee directors may elect to defer payment of all or any portion of their Bancshares and Bank director fees under Bancshares’ Non-Employee Directors’ Deferred Compensation Plan (the “Deferral Plan”). The Deferral Plan which was ratified by Bancshares’ shareholders at the annual meeting held on May 11, 2004, permits non-employee directors to invest their directors’ fees and to receive the adjusted value of the deferred amounts in cash and/or shares of Bancshares’ common stock. Neither Bancshares nor the Bank makes any contribution to participants’ accounts under the Deferral Plan.  As of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, a total of 100,990106,566 and 114,547103,620 shares of Bancshares common stock, respectively, were deferred in connection with the Deferral Plan. 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'directors’ fees allocated to be paid in shares of stock as equity surplus. The Company uses shares of treasury stock to satisfy these obligations when due.  

 

11.

STOCK AWARDS

 

In accordance with the Company’s 2013 Incentive Plan, stock awards, including stock options and restricted stock, have been granted to certain employees and non-employee directors. Shares of common stock available for distribution to satisfy the grants may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares reacquired by the Company in any manner. Stock-based compensation expense related to stock awards totaled $0.2 million and $0.1$0.1 million for both of the nine-monththree-month periods ended September 30, 2017 March 31, 2018 and 2016, respectively.2017.

 

Stock Options

  

The stockStock option awards werehave been granted with an exercise price equal to the market price of Bancshares’the Company’s common stock on the date of the grant and have vesting periods ranging from one to three years, with 10-year10-year contractual terms.

 

The Company recognizes the cost of services received in exchange for stock option awards based on the grant date fair value of the award, with compensation expense recognized on a straight-line basis over the award’s vesting period. The fair value of outstanding awards was determined using the Black-Scholes option pricing model based on the assumptions noted in the table below. Expected volatilities are based on historical volatilities of Bancshares’the Company’s common stock.

 

 2017  2016  2018  2017 
Risk-free interest rate  2.23%  1.58%  2.77%  2.23%
Expected term 7.5 years  7.5 years 
Expected term (in years)  7.5   7.5 
Expected stock price volatility  25.36%  25.25%  28.3%  25.4%
Dividend yield  1.50%  1.50%  1.50%  1.50%

 

The following table summarizes the Company'sCompany’s stock option activity for the periods presented.

 

 

Nine Months Ended

  

Three Months Ended

 
 

September 30, 2017

  

September 30, 2016

  

March 31, 2018

  

March 31, 2017

 
 

Number of

Shares

  

Average

Exercise

Price

  

Number of

Shares

  

Average

Exercise

Price

  

Number of

Shares

  

Average

Exercise

Price

  

Number of

Shares

  

Average

Exercise

Price

 

Options:

                                

Outstanding, beginning of period

  272,550  $8.21   175,550  $8.17   318,000  $9.43   272,550  $8.21 

Granted

  70,600   13.84   97,000   8.30   62,150   11.71   64,600   14.11 

Exercised

  

19,316

   

8.15

               16,650   8.15 

Expired

  

   

      

             

Forfeited

  

3,334

   

11.79

      

   450   11.71       

Options outstanding, end of period

  320,500  $9.42   272,550  $8.21   379,700  $9.80   320,500  $9.41 

Options exercisable, end of period

  208,633  $8.20   175,550  $8.17   248,300  $8.71   210,633  $8.20 

 

The aggregate intrinsic value of stock options outstanding (calculated as the amount by which the market value of underlying stock exceeds the exercise price of the option) was approximately $0.8$0.8 million and $0.4$0.7 million as of September 30, 2017 March 31, 2018 and 2016,2017, respectively.

 

Restricted Stock

 

During the first ninethree months of 2018 and 2017, respectively, 5,520 shares and 7,533 shares of restricted stock were granted with vesting periods of either one or three years.  No shares of restricted stock were granted during the nine months ended September 30, 2016.granted. The Company recognizes the cost of services received in exchange for restricted stock awards based on the grant date closing price of the stock, with compensation expense recognized on a straight-line basis over the award’s vesting period.

 


27

12.

DERIVATIVE FINANCIAL INSTRUMENTS

 

On The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of certain balance sheet assets and liabilities. In the normal course of business, the Company also uses derivative financial instruments to add stability to interest income or expense and to manage its exposure to movements in interest rates. The Company does not use derivatives for trading or speculative purposes and only enters into transactions that have a qualifying hedging relationship. The Company's hedging strategies involving interest rate derivatives are classified as either Fair Value Hedges or Cash Flow Hedges, depending upon the rate characteristic of the hedged item.

Effective April 1,5, 2016, the Bank entered into a forward interest rate swap contract on a variable rate FHLB advance (indexed to three-monththree-month LIBOR) with a total notional amount of $10.0$10.0 million. The FHLB advance will be renewed at least every 18 months and will remain outstanding until April 5, 2023. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under ASC Topic 815, Derivatives and Hedging, with the objective of protecting the quarterly interest rate payments on the FHLB advance from the risk of variability of those payments resulting from changes in the three-monththree-month LIBOR interest rate throughout the seven-yearseven-year period beginning on April 5, 2016 and ending on April 5, 2023. Under the swap arrangement, which became effective on April 5, 2016, the Bank will pay a fixed interest rate of 1.46% and receive a variable interest rate based on three-monththree-month LIBOR on the notional amount of $10.0 million, with quarterly net settlements.

On October 18, 2017, the Bank entered into a forward interest rate swap contract on a variable rate FHLB advance (indexed to three-month LIBOR) with a total notional amount of $10.0$10.0 million. The FHLB advance will be renewed on at least a semi-annual basis and will remain outstanding until October 18, 2024. The interest rate swap was designated as a derivative instrument in a cash flow hedge with the objective of protecting the quarterly interest rate payments on the FHLB advance from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate throughout the seven-year period beginning on October 18, 2017 and ending on October 18, 2024. Under the swap arrangement, which became effective on October 18, 2017, the Bank will pay a fixed interest rate of 2.16% and receive a variable interest rate based on three-month LIBOR on the notional amount of $10.0 million, with quarterly net settlements.

 

No ineffectiveness related to the interest rate swapswaps designated as a cash flow hedgehedges was recognized in the consolidated statements of operations for the three- or nine-month periodsthree months ended September 30, 2017. March 31, 2018. The accumulated net after-tax gain related to the effective cash flow hedge included in accumulated other comprehensive income totaled $0.2$0.7 million and $0.3 million as of both September 30, 2017 March 31, 2018 and December 31, 2016.2017, respectively.

 

13.

SEGMENT REPORTING

 

Under ASC Topic 280, Segment Reporting, certain information is disclosed for the two reportable operating segments of Bancshares: the Bank and ALC. The reportable segments were determined using the internal management reporting system. These segments comprise Bancshares’ and the Bank’s significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K10-K as of and for the year ended December 31, 2016. 2017. The segment results include certain overhead allocations and intercompany transactions that were recorded at current market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results for the two reportable segments of the Company are included in the tables below.

 

          

All

         
  

Bank

  

ALC

  

Other

  

Eliminations

  

Consolidated

 
  

(Dollars in Thousands)

 

As of and for the three months ended September 30, 2017:

                    

Net interest income

 $4,192  $2,940  $3  $

  $7,135 

Provision (reduction in reserve) for loan losses

  (130)  503   

   

   373 

Total non-interest income

  1,005   219   954   (942)  1,236 

Total non-interest expense

  4,699   2,303   336   (148)  7,190 

Income before income taxes

  628   353   621   (794)  808 

Provision for income taxes

  48   202   (77)  

   173 

Net income

 $580  $151  $698  $(794) $635 

Other significant items:

                    

Total assets

 $616,820  $92,942  $84,170  $(179,333) $614,599 

Total investment securities

  185,722   

   80   

   185,802 

Total loans, net

  329,327   89,326   

   (80,627)  338,026 

Investment in subsidiaries

  5   

   78,469   (78,469)  5 

Fixed asset additions

  818   13   

   

   831 

Depreciation and amortization expense

  238   41   

   

   279 

Total interest income from external customers

  3,596   4,224   

   

   7,820 

Total interest income from affiliates

  1,284   

   3   (1,287)  

 
                     

For the nine months ended September 30, 2017:

                    

Net interest income

 $12,168  $8,933  $10  $

  $21,111 

Provision (reduction in reserve) for loan losses

  (130)  1,594   

   

   1,464 

Total non-interest income

  2,647   700   2,451   (2,465)  3,333 

Total non-interest expense

  13,522   6,966   1,074   (472)  21,090 

Income before income taxes

  1,423   1,073   1,387   (1,993)  1,890 

Provision for income taxes

  249   458   (272)  

   435 

Net income

 $1,174  $615  $1,659  $(1,993) $1,455 

Other significant items:

                    

Fixed asset additions

  8,578   103   

   

   8,681 

Depreciation and amortization expense

  657   124   

   

   781 

Total interest income from external customers

  10,493   12,520   

   

   23,013 

Total interest income from affiliates

  3,587   

   9   (3,596)  

 

          

All

         
  

Bank

  

ALC

  

Other

  

Eliminations

  

Consolidated

 
  

(Dollars in Thousands)

 

For the three months ended March 31, 2018:

                    

Net interest income

 $4,117  $3,193  $4  $  $7,314 

Provision for loan losses

  39   619         658 

Total non-interest income

  867   256   853   (836)  1,140 

Total non-interest expense

  4,531   2,524   447   (201)  7,301 

Income before income taxes

  414   306   410   (635)  495 

Provision for income taxes

  70   70   (59)     81 

Net income

 $344  $236  $469  $(635) $414 

Other significant items:

                    

Total assets

 $629,954  $97,685  $81,020  $(181,340) $627,319 

Total investment securities

  181,862      80      181,942 

Total loans, net

  344,319   94,529      (85,043)  353,805 

Investment in subsidiaries

  5      75,055   (75,055)  5 

Fixed asset additions

  113   2         115 

Depreciation and amortization expense

  318   33         351 

Total interest income from external customers

  3,837   4,282         8,119 

Total interest income from affiliates

  1,089      4   (1,093)   

 


28

                    
  

 

 

 

 

 

 

 

 

All

  

 

 

 

 

 

 

 

  

Bank

  

ALC

  

Other

  

Eliminations

  

Consolidated

 
  

(Dollars in Thousands)

 

As of and for the three months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

3,917

  

$

3,253  

$

3

  

$

  

$

7,173

 

Provision for loan losses

  

100

 

  580   

   

   

680

 

Total non-interest income

  

1,159

   316   973   

(881

)

  

1,567

 

Total non-interest expense

  

4,636

   2,403   474   

(165

)

  

7,348

 

Income (loss) before income taxes

  

340

   586   502   

(716

)

  

712

 

Provision for income taxes

  

52

   196   (86

)

  

   

162

 

Net income (loss)

 

$

288

  

$

390  

$

588  

$

(716

)

 

$

550

 

Other significant items:

                    

Total assets

 

$

602,123  

$

89,347  

$

84,291

  

$

(175,454

)

 

$

600,307

 

Total investment securities

  209,486   

   

80

   

   

209,566

 

Total loans, net

  308,423   85,720   

   

(77,022

)

  

317,121

 

Investment in subsidiaries

  5      

78,737

   

(78,737

)

  

5

 

Fixed asset additions

  960   16   

   

   

976

 

Depreciation and amortization expense

  193   54   

   

   

247

 

Total interest income from external customers

  3,415   4,345   

   

   

7,760

 

Total interest income from affiliates

  1,092   

   

3

   

(1,095

)

  

 
                     

For the nine months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

11,199

  

$

9,544  

$

8

  

$

  

$

20,751

 

Provision (reduction in reserve) for loan losses

  

(350

)

  1,733   

   

   

1,383

 

Total non-interest income

  3,002   909   

2,481

   

(2,356

)

  

4,036

 

Total non-interest expense

  13,435   7,306   

1,373

   

(445

)

  

21,669

 

Income (loss) before income taxes

  1,116   1,414   

1,116

   

(1,911

)

  

1,735

 

Provision for income taxes

  224   484   

(302

)

  

   

406

 

Net income (loss)

 

$

892  

$

930  

$

1,418

  

$

(1,911

)

 

$

1,329

 

Other significant items:

                    

Fixed asset additions

  4,521   33   

   

   

4,554

 

Depreciation and amortization expense

  564   162   

   

   

726

 

Total interest income from external customers

  9,750   12,684   

   

   

22,434

 

Total interest income from affiliates

  3,140   

   

8

   

(3,148

)

  

 

 

          

All

         
  

Bank

  

ALC

  

Other

  

Eliminations

  

Consolidated

 
  

(Dollars in Thousands)

 

For the three months ended March 31, 2017:

                    

Net interest income

 $3,911  $3,005  $3  $  $6,919 

Provision (reduction in reserve) for loan losses

     515         515 

Total non-interest income

  836   244   850   (763

)

  1,167 

Total non-interest expense

  4,401   2,377   429   (170

)

  7,037 

Income before income taxes

  346   357   424   (593

)

  534 

Provision for income taxes

  98   130   (98

)

     130 

Net income

 $248  $227  $522  $(593

)

 $404 

Other significant items:

                    

Total assets

 $622,528  $88,233  $82,667  $(173,601

)

 $619,827 

Total investment securities

  213,417      80      213,497 

Total loans, net

  309,425   84,761      (76,509

)

  317,677 

Investment in subsidiaries

  5      76,976   (76,976

)

  5 

Fixed asset addition

  4,025   62         4,087 

Depreciation and amortization expense

  201   41         242 

Total interest income from external customers

  3,392   4,118         7,510 

Total interest income from affiliates

  1,114      3   (1,117

)

   

 


29

 

14.

GUARANTEES, COMMITMENTS AND CONTINGENCIES

 

The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments. For interest rate swap transactions and commitments to purchase or sell securities for forward delivery, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of these derivative instruments through credit approvals, limits and monitoring procedures. Certain derivative contracts have credit risk for the carrying value plus the amount to replace such contracts in the event of counterparty default. All of the Bank’s financial instruments are held for risk management and not for trading purposes. During the nine-monththree-month periods ended September 30, 2017 March 31, 2018 and 2016,2017, there were no credit losses associated with derivative contracts.

 

In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit, letters of credit and others, that are not included in the consolidated financial statements. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. A summary of these commitments and contingent liabilities is presented below.below:

 

 

September 30,

2017

  

December 31,

2016

  

March 31,

2018

  

December 31,

2017

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Standby letters of credit

 $180  $183  $180  $180 

Commitments to extend credit

 $53,231  $41,267  $54,250  $55,801 

 

Standby letters of credit are contingent commitments issued by the Bank generally to guarantee the performance of a customer to a third-party.third party. The Bank has recourse against the customer for any amount that it is required to pay to a third-partythird party under a standby letter of credit. Revenues are recognized over the lives of the standby letters of credit. As of September 30, 2017 March 31, 2018 and December 31, 2016, 2017, the potential amount of future payments that the Bank could be required to make under its standby letters of credit, which represent the Bank’s total credit risk in this category, is included in the table above.

 

A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon the extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

 

Commitments to purchase securities for delayed delivery require the Bank to purchase a specified security at a specified price for delivery on a specified date. Similarly, commitments to sell securities for delayed delivery require the Bank to sell a specified security at a specified price for delivery on a specified date. Market risk arises from potential movements in security values and interest rates between the commitment and delivery dates. As of both September 30, 2017 March 31, 2018 and December 31, 2016, 2017, there were no outstanding commitments to purchase securities for delayed delivery and no outstanding commitments to sell securities for delayed delivery.

 

The Company is self-insured for a significant portion of employee health benefits. However, the Company maintains stop-loss coverage with third-partythird-party insurers to limit the Company’sCompanys individual claim and total exposure related to self-insurance. The Company estimates an accrued liability for the ultimate costs to close known claims, as well as claims incurred but not yet reported, as of the balance sheet date. The Company’s recorded estimated liability for self-insurance is based on the insurance companies’ incurred loss estimates and management’s judgment, including assumptions and factors related to the frequency and severity of claims, the Company’s claims development history and the Company’s claims settlement practices. The assessment of loss contingencies and self-insurance reserves is a highly subjective process that requires judgments about future events. Contingencies are reviewed at least quarterly to determine the adequacy of self-insurance accruals. Self-insurance accruals totaled $0.2 million as of both March 31, 2018 and December 31, 2017. The ultimate settlement of loss contingencies and self-insurance reserves may differ significantly from amounts that the Company has accrued in the Company’s consolidated financial statements.

 

In 2016, the Bank entered into an agreement with a general contractor to manage construction of an office complex on a parcel of land located in the Birmingham, Alabama area that was purchased by the Bank in 2016.  As of September 30, 2017, construction of the office complex was substantially complete, and remaining contractual commitments with the general contractor totaled $0.3 million.Litigation

Litigation

The Company is party to certain ordinary course litigation from time to time, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

 


30

 

15.

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company follows the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

 

Fair Value Hierarchy

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

 

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange or Nasdaq. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

 

Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-partythird-party pricing services for identical or similar assets or liabilities.

 

 

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

 

The Company rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. Trading account assets and securities available-for-sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occurred at the beginning of a reporting period. There were no such transfers during the ninethree months ended September 30, 2017 March 31, 2018 or the year ended December 31, 2016.2017.

 

Fair Value Measurements on a Recurring Basis

 

Securities Available-for-Sale

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include exchange-traded equities. Level 2 securities include U.S. Treasury and agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

 

Interest Rate Derivative Agreements

 

Interest rate derivative agreements are used by the Company to mitigate risk associated with changes in interest rates. The fair value of these agreements is based on information obtained from third-partythird-party financial institutions. This information is periodically evaluated by the Company and, as necessary, corroborated against other third-partythird-party valuations. The Company classifies these derivative assets within Level 2 of the valuation hierarchy.

 


31

 

The following table presents assets measured at fair value on a recurring basis as of September 30, 2017 March 31, 2018 and December 31, 2016.2017. There were no liabilities measured at fair value on a recurring basis for either period presented.

 

 

Fair Value Measurements as of September 30, 2017 Using

  

Fair Value Measurements as of March 31, 2018 Using

 
 

Totals

At

September 30,

2017

  

Quoted

Prices in

Active

Markets For

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

  

Totals

At

March 31,

2018

  

Quoted

Prices in

Active

Markets For

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Investment securities, available-for-sale

                                

Mortgage-backed securities:

                                

Residential

 $83,550  $

  $83,550  $

  $85,682  $  $85,682  $ 

Commercial

  67,138   

   67,138   

   65,994      65,994    

Obligations of states and political subdivisions

  5,655   

   5,655   

   4,886      4,886    

Obligations of U.S. government-sponsored agencies

  2,002   

   2,002   

 
U.S. Treasury securities 80  

  80  

   80      80    

Other assets - derivatives

  291   

   291   

   889      889    

 

  

Fair Value Measurements as of December 31, 2016 Using

 
  

Totals

At

December 31,

2016

  

Quoted

Prices in

Active

Markets For

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
  

(Dollars in Thousands)

 

Investment securities, available-for-sale

                

Mortgage-backed securities:

                

Residential

 $98,409  $  $98,409  $ 

Commercial

  70,530      70,530    

Obligations of states and political subdivisions

  10,142      10,142    

Obligations of U.S. government-sponsored agencies

  1,993      1,993    

Corporate notes

  756   

   756   

 

U.S. Treasury securities

  80      80    

Other assets - derivatives

  346      346    

  

Fair Value Measurements as of December 31, 2017 Using

 
  

Totals

At

December 31,

2017

  

Quoted

Prices in

Active

Markets For

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
  

(Dollars in Thousands)

 

Investment securities, available-for-sale

                

Mortgage-backed securities:

                

Residential

 $82,786  $  $82,786  $ 

Commercial

  66,074      66,074    

Obligations of states and political subdivisions

  4,931      4,931    

U.S. Treasury securities

  80      80    

Other assets - derivatives

  443      443    

 

Fair Value Measurements on a Non-recurring Basis

 

Impaired Loans

 

Loans that are considered impaired are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due under the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less estimated selling cost if the loan is collateral-dependent. For the Company, the fair value of impaired loans is primarily measured based on the value of the collateral securing the loans (typically real estate). The Company determines the fair value of the collateral based on independent appraisals performed by qualified licensed appraisers. The appraisals may include a single valuation approach or a combination of approaches, including comparable sales and income approaches. Appraised values are discounted for estimated costs to sell and may be discounted further based on management’s knowledge of the collateral, changes in market conditions since the most recent appraisal and/or management’s knowledge of the borrower and the borrower’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are evaluated by management for additional impairment at least quarterly and are adjusted accordingly.

 

 

Other Real Estate Owned (OREO)OREO

 

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is recorded at the lower of the loannet realizable value’s carrying amount or the fair value of the property,, less estimated cost to sell. Estimates of fair value are generally based on third-partythird-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically significant unobservable inputs for determining fair value.

 

Other Assets Held for Sale

 

Included within other assets are certain assets that were formerly included as premises and equipment but have been removed from service, and as of the balance sheet date, were designated as assets to be disposed of by sale. These include assets associated with branches of the Bank that have been closed. When an asset is designated as held for sale, the Company ceases depreciation of the asset, and the asset is recorded at the lower of its carrying amount or fair value less estimated cost to sell. Estimates of fair value are generally based on third-partythird-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically unobservable inputs for determining fair value.

 

The following table presents the balances of impaired loans, OREO and other assets held for sale measured at fair value on a non-recurring basis as of September 30, 2017 March 31, 2018 and December 31, 2016.2017.

 

 

Fair Value Measurements as of September 30, 2017 Using

  

Fair Value Measurements as of March 31, 2018 Using

 
 

Totals

At

September 30,

2017

  

Quoted

Prices in

Active

Markets For

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

  

Totals

At

March 31,

2018

  

Quoted

Prices in

Active

Markets For

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Impaired loans

 $686  $

  $

  $686  $691  $  $  $691 
OREO  3,819         3,819   3,343         3,343 

Other assets

  228   

   

   228 

Assets held for sale

  228         228 

 

 

 

Fair Value Measurements as of December 31, 2016 Using

  

Fair Value Measurements as of December 31, 2017 Using

 
 

Totals

At

December 31,

2016

  

Quoted

Prices in

Active

Markets For Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

  

Totals

At

December 31,

2017

  

Quoted

Prices in

Active

Markets For Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Impaired loans

 $1,568  $  $  $1,568  $694  $  $  $694 
OREO  4,858         4,858   3,792         3,792 

Other assets

  280         280 

Assets held for sale

  228         228 

 

 

Non-recurring Fair Value Measurements Using Significant Unobservable Inputs

 

The following table presents information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3)3) as of September 30, 2017. March 31, 2018. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input and the weighted average within the range utilized as of September 30, 2017 March 31, 2018 are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.

 

 

Level 3 Significant Unobservable Input Assumptions

 

Level 3 Significant Unobservable Input Assumptions

 

 

Fair Value

September 30,

2017

 

 

Valuation Technique

 

Unobservable Input

 

Quantitative Range

of Unobservable

Inputs

(Weighted

Average)

 

Fair Value

March 31,

2018

  

Valuation Technique

 

Unobservable Input

 

Quantitative Range

of Unobservable

Inputs

(Weighted

Average)

 

 

(Dollars in Thousands)

 

(Dollars in Thousands)

 

Non-recurring fair value measurements:

 

 

 

 

 

 

 

 

 

 

              

 

 

 

 

 

 

 

 

 

 

              

Impaired loans

 

$

686

 

 

Multiple data points, including discount to appraised value of collateral based on recent market activity

 

Appraisal comparability adjustment (discount)

 

9% - 10%

(9.5%)

 $691  

Multiple data points, including discount to appraised value of collateral based on recent market activity

 

Appraisal comparability adjustment (discount)

 9%-10%(9.5%)

 

 

 

 

 

 

 

 

 

 

OREO $3,819  Discount to appraised value of property based on recent market activity for sales of similar properties Appraisal comparability adjustment (discount) 

9% - 10%

(9.5%)
 $3,343  Discount to appraised value of property based on recent market activity for sales of similar properties Appraisal comparability adjustment (discount) 9%-10%(9.5%)
          

Other assets

 

$

228

 

 

Discount to appraised value of property based on recent market activity for sales of similar properties

 

Appraisal comparability adjustment (discount)

 

9% - 10%

(9.5%)

Assets held for sale

 $228  

Discount to appraised value of property based on recent market activity for sales of similar properties

 

Appraisal comparability adjustment (discount)

 9%-10%(9.5%)

 

Impaired Loans

 

Impaired loans are valued based on multiple data points indicating the fair value for each loan. The primary data point is the appraisal value of the underlying collateral, to which a discount is applied. Management establishes this discount or comparability adjustment based on recent sales of similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted.

 

OREO

 

OREO under a binding contract for sale is valued based on contract price. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity, considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

 

Other Assets Held for Sale

 

Assets designated as held for sale that are under a binding contract are valued based on the contract price. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity, considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

 

Fair Value of Financial Instruments

 

ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value.estimate. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

 

Cash, due from banks and federal funds sold: The carrying amount of cash, due from banks and federal funds sold approximates fair value.

 

Federal Home Loan Bank stock: Based on the redemption provision of the FHLB, the stock has no quoted market value and is carried at cost.

 

Investment securities: Fair values of investment securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments.

 

Derivative instruments: The fair value of derivative instruments is based on information obtained from a third-partythird-party financial institution. This information is periodically evaluated by the Company and, as necessary, corroborated against other third-partythird-party information.

 

Accrued interest receivable and payable: The carrying amount of accrued interest approximates fair value.

 

 

Loans, net: For variable-rate loans, fair values are based on carrying values. Fixed-rate commercial loans, other installment loans and certain real estate mortgage loans are valued using discounted cash flows. The discount rate used to determine the present value of these loans is based on interest rates charged by the Company on comparable loans as to credit risk and term at the determination date.

 

Demand and savings deposits: The fair values of demand deposits are equal to the carrying value of such deposits. Demand deposits include non-interest-bearing demand deposits, savings accounts, NOW accounts and money market demand accounts.

 

Time deposits: The fair values of relatively short-term time deposits are equal to their carrying values. Discounted cash flows are used to value long-term time deposits. The discount rate used is based on interest rates currently being offered by the Company on comparable deposits as to amount and term.

 

Short-term borrowings: These borrowings may consist of federal funds purchased, securities sold under agreements to repurchase and the floating rate borrowings from the FHLB account. Due to the short-term nature of these borrowings, fair values approximate carrying values.

 

Long-term debt: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of the determination date.March 31, 2018 and December 31,2017.

 

Off-balance sheet instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements.

 

The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of September 30, 2017 March 31, 2018 and December 31, 2016 2017, were as follows:

 

 

September 30, 2017

  

March 31, 2018

 
 

Carrying

Amount

  

Estimated

Fair Value

  

Level 1

  

Level 2

  

Level 3

  

Carrying

Amount

  

Estimated

Fair Value

  

Level 1

  

Level 2

  

Level 3

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Assets:

                                        

Cash and cash equivalents

 $32,554  $32,554  $32,554  $

  $

  $34,473  $34,473  $34,473  $  $ 

Investment securities available-for-sale

  158,425   158,425   

   158,425   

   156,642   156,642      156,642    

Investment securities held-to-maturity

  27,377   27,303   

   27,303   

   25,300   24,687      24,687    

Federal Home Loan Bank stock

  1,396   1,396   

   

   1,396   1,413   1,413         1,413 

Loans, net of allowance for loan losses

  338,026   327,251   

   

   327,251   353,805   346,658         346,648 
Other assets - derivatives 291  291    291   

Other assets – derivatives

  889   889      889    

Liabilities:

                                        

Deposits

  508,385   507,298   

   507,298   

   525,273   522,767      522,767    

Short-term borrowings

  10,635   10,634   

   10,634   

   10,298   10,298      10,298    
Long-term debt 10,000  10,000  

  10,000  

   10,000   9,998      9,998    

 

 

 

December 31, 2016

  

December 31, 2017

 
 

Carrying

Amount

  

Estimated

Fair Value

  

Level 1

  

Level 2

  

Level 3

  

Carrying

Amount

  

Estimated

Fair Value

  

Level 1

  

Level 2

  

Level 3

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Assets:

                                        

Cash and cash equivalents

 $23,530  $23,530  $23,530  $  $  $27,124  $27,124  $27,124  $  $ 

Investment securities available-for-sale

  181,910   181,910      181,910      153,871   153,871      153,871    

Investment securities held-to-maturity

  25,904   25,508      25,508      26,279   25,949      25,949    
Federal funds sold  15,000   15,000      15,000    

Federal Home Loan Bank stock

  1,581   1,581   

      1,581   1,609   1,609         1,609 

Loans, net of allowance for loan losses

  322,772   319,881         319,881   346,121   342,248         342,248 

Other assets - derivatives

  346   346      346    

Other assets – derivatives

  443   443      443    

Liabilities:

                                        

Deposits

  497,556   497,037      497,037      517,079   515,645      515,645    

Short-term borrowings

  10,119   10,119      10,119      15,594   15,594      15,594    

Long-term debt

  15,000   14,998      14,998      10,000   9,998      9,998    

16.

SUBSEQUENT EVENTS

Subsequent to March 31, 2018, the Company entered into a definitive agreement to acquire The Peoples Bank, headquartered in Rose Hill, Virginia. The Peoples Bank serves communities in the Knoxville, Tennessee and southwest Virginia areas. Under the terms of the agreement, the Company will acquire all of the outstanding capital stock of The Peoples Bank and then merge The Peoples Bank with and into the Bank. The transaction is expected to close in the third quarter of 2018, subject to the satisfaction of customary closing conditions, including receipt of regulatory approvals. The transaction is expected to result in a combined institution approaching $800 million in assets.

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

DESCRIPTION OF THE BUSINESS

 

First US Bancshares, Inc., (“Bancshares”) a Delaware corporation, (“Bancshares”), is a bank holding company with its principal offices in Birmingham, Alabama. Bancshares operates one commercial banking subsidiary, First US Bank (the “Bank”). As of September 30, 2017,March 31, 2018, the Bank operated and served its customers through sixteen16 banking offices located in Birmingham, Bucksville, Butler, Calera, Centreville, Columbiana, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama, in addition to aAlabama. At the end of the first quarter of 2018, the Bank closed its loan production office in Mountain Brook, Alabama.Alabama and merged all of its Birmingham operations into its main office in Birmingham.

 

The Bank owns all of the stock of Acceptance Loan Company, Inc., an Alabama corporation (“ALC”). ALC is a finance company organized for the purpose of making and purchasing consumer loans. ALC’s principal office is located in Mobile, Alabama. The Bank is the funding source for ALC. As of September 30, 2017,March 31, 2018, in addition to its principal office, ALC operated twenty-one offices located in Alabama and southeast Mississippi. In addition, ALC conducted indirect lending operations through retailers in nine states. 

 

The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals, while ALC’s business is focused on consumer lending.

 

FUSB Reinsurance, Inc., an Arizona 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 third-party insurer retains the remaining risk. The third-party insurer 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 Bancshares and its subsidiaries (collectively, the “Company”). We recognizeThe 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 258253 full-time equivalent employees (as of March 31, 2018), 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 in the United States of America (“U.S. GAAP”) and general banking practices. These estimates include accounting for the allowance for loan losses, other real estate owned, valuation of deferred tax assets and fair value measurements. 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 ended December 31, 2016.2017.

 

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of September 30, 2017March 31, 2018 to December 31, 2016,2017, while comparing income and expense for the three- and nine-monththree-month periods ended September 30, 2017March 31, 2018 and 2016.2017.

 

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 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 ended December 31, 2016.2017. As used in the following discussion, the words “ we,“we,“ us,“us,“ our”“our” and the “ Company”“Company” refer to Bancshares and its consolidated subsidiaries, unless the context indicates otherwise.

 

EXECUTIVE OVERVIEW

 

The Company earned net income of $0.10$0.06 per diluted common share during each of the three monthsthree-month periods ended September 30, 2017, compared to $0.09 per diluted common share duringMarch 31, 2018 and March 31, 2017. However, the corresponding three-month period of 2016.  For the nine months ended September 30, 2017, net income totaled $0.22 per diluted common share, compared to $0.21 per diluted common share for the corresponding nine-month period of 2016. 

The composition of earnings changedwas significantly during bothdifferent comparing the three- and nine-month periods ended September 30, 2017,two periods. As compared to the corresponding periodsfirst quarter of 2017, the previous year.  The 20172018 results were positively impacted by increased net interest income, as a result ofwhich resulted primarily from growth in net loans, as well as decreasesloans. The growth in net interest income was offset by increased provision for loan losses and non-interest expenses, including regulatory assessments, insurance expense and occupancy and equipment expense.  By contrast,compared to the 2016 results were bolstered by higher gains on the sale of securities than were experiencedsame period in 2017. In addition, the Company’s effective tax rate decreased to 16.4% for the quarter ended March 31, 2018, compared to 24.3% for the first quarter of 2017. The reduced effective tax rate resulted from the reduction in the Company’s statutory federal income tax rate under the Tax Cuts and Jobs Act of 2017 (“Tax Reform”).

 

As of September 30, 2017,March 31, 2018, the Company’sCompany’s net loans totaled $338.0$353.8 million, an increase of $15.3$7.7 million, and $20.9 millionor 8.9% on an annualized basis, compared to December 31, 20162017. Growth in net loans for the first quarter of 2018 totaled $4.6 million at the Bank and September 30, 2016, respectively.  The$3.1 million at ALC. Consistent with previous periods, the majority of the Bank’s loan growth occurred in the Bank’swas focused on commercial loan portfolio and was concentratedlending in the Bank’s larger metropolitan service territories of Birmingham and Tuscaloosa, Alabama. The Bank’s commercialALC’s loan growth strategywas attributable to continued expansion of indirect lending through point-of-sale retail opportunities.     

Loan growth has been focused on these larger metropolitan growth marketsthe primary driver of the increase in the Company’s net interest income over the past 24 months.  Consistent withfive quarters. Pre-provision net interest income totaled $7.3 million for the first quarter of 2018, compared to $6.9 million for the first quarter of 2017. Average loans totaled $353.3 million and $325.1 million during the three months ended March 31, 2018 and 2017, respectively.   

Deposits also increased during the first quarter of 2018, totaling $525.3 million as of March 31, 2018, compared to $517.1 million as of December 31, 2017. Average deposits totaled $516.3 million during the first quarter of 2018, compared to $498.9 million during the first quarter of 2017. The growth in deposits compared to the first quarter of 2017 was largely attributable to deposits generated at the Bank’s new office in the Birmingham area that strategy,opened during the third quarter of 2017.

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Table of Contents

The rising interest rate environment has generally led to higher yields on earning assets at the Bank; however, these increases have been partially offset by reduced yields on ALC’s loan portfolio. The yield on ALC’s portfolio has generally declined in recent quarters due to the shift in loan mix from ALC’s traditional consumer portfolio to indirect lending products that have enhanced the credit quality of the loan portfolio, with a corresponding decrease in yield commensurate with reduced risk. The Company’s net yield on interest-earning assets totaled 5.24% for the three months ended March 31, 2018, compared to 5.05% for the corresponding period of 2017. The Bank’s average yield on loans totaled 4.39% during the first quarter of 2018, compared to 4.06% during the first quarter of 2017. At ALC, average yield on loans was 18.47% and 19.11% during the first quarter of 2018 and 2017, respectively. Average cost of funds on interest-bearing liabilities was 0.72% during the first quarter of 2018, compared to 0.54% for the corresponding period of 2017.  

The provision for loan losses totaled $0.7 million for the first quarter of 2018, compared to $0.5 million for the first quarter of 2017. The increase in provision expense was due to substantial loan growth in the first quarter of 2018. Net loans grew $7.7 million in the first quarter of 2018, compared to a decrease of $5.1 million during the first quarter of 2017. The Company’s allowance for loan losses as a percentage of loans was 1.35% as of March 31, 2018, compared to 1.36% as of December 31, 2017 and 1.51% as of March 31, 2017. The reduction in the allowance for loan losses as a percentage of net loans resulted from continued favorable charge-off experience at the Bank, completed initial constructioncoupled with the mix-shift in lending at ALC that has led to reduced losses in ALC’s portfolio.

Non-interest income totaled $1.1 million for the first quarter of an office complex along U.S. Highway 2802018, compared to $1.2 million for the first quarter of 2017. The decrease in Birmingham.  The office complex houses a retail branchnon-interest income for the three months ended March 31, 2018 compared to the same period in 2017 resulted primarily from reductions in gains on the sale and prepayment of investment securities at the Bank, as well as reductions in other ancillary revenues at ALC, and was partially offset by an increase in mortgage fees from secondary market transactions at the Birmingham commercial lending teamBank. The Bank’s mortgage division became operational during the second quarter of 2017 and certain membersis expected to enhance the Company’s non-interest income over time through fees earned on the closing of the Bank’s executive management team.  At the end of the third quarter, the headquarters of both Bancshares and the Bank were relocated to the newly completed office complex.mortgage loans with third-party secondary market financial institutions.

 

Additional financial resultsNon-interest expense totaled $7.3 million for the first ninequarter of 2018, compared to $7.0 million for the first quarter of 2017. The increase in non-interest expense for the three months ended March 31, 2018 compared to the same period in 2017 resulted primarily from increases in salaries and benefits expense and occupancy and equipment expense, partially offset by a decrease in computer services expense. Management expects to incur increased expenses in upcoming quarters in connection with the proposed acquisition of 2017 are summarizedThe Peoples Bank, as discussed below.

 


For the nine months ended September 30,

Asset quality metrics continued to improve during the first quarter of 2018. Non-performing assets, including loans in non-accrual status and OREO, decreased to 0.86% of total assets as of March 31, 2018, compared to 0.95% and 1.10% as of December 31, 2017 and March 31, 2017, pre-provision net interest income totaled $21.1 million, compared to $20.8 million during the same period of the previous year.  The increase in net interest income resulted from growth in the loan portfolio. Average loans totaled $327.3 million and $283.0 million during the nine months ended September 30, 2017 and 2016, respectively.   

Due to growth of the loan portfolio, certain investment security assets were redeployed into the loan portfolio upon maturity or prepayment.  As a result of this shift in earning assets to the loan portfolio (which generally earns higher yields than the investment portfolio), the average balance of the investment securities portfolio (including both available-for-sale and held-to-maturity securities) decreased to $205.2 million for the nine months ended September 30, 2017, compared to $227.9 million for the nine months ended September 30, 2016.  

Net yield on interest-earning assets was 5.08% for the nine months ended September 30, 2017, compared to 5.16% for the nine months ended September 30, 2016.   Yields declined at the Bank and ALC as a result of continued efforts by management at both entities to adhere to practices designed to improve the credit quality of the Company’s loan portfolio.  The Bank’s yield on loans totaled 4.15% for the nine months ended September 30, 2017, compared to 4.39% for the first nine months of 2016.  ALC’s yield totaled 18.83% and 19.78% during the nine months ended September 30, 2017 and 2016, respectively.   The yield reduction at ALC was underscored by a continued mix-shift away from traditional consumer loans to point-of-sale retail lending, which provides higher credit quality, but at reduced yields.   Average cost of funds on deposits and other borrowings was 0.57% and 0.53% during the nine months ended September 30, 2017 and 2016, respectively.

For the nine months ended September 30, 2017, the provision for loan losses totaled $1.5 million, compared to $1.4 million for the nine months ended September 30, 2016. 

Non-interest income decreased to $3.3 million for the nine months ended September 30, 2017, compared to $4.0 million during the corresponding period of 2016.  The decrease was primarily due to reductions in gains on sale and prepayments of investment securities totaling $0.4 million, as well as a reduction of $0.1 million in credit insurance revenues.  In addition, other income was reduced by $0.2 million due primarily to the collection of settlement amounts associated with a nonaccrual asset in 2016 that was not repeated in 2017.  

Non-interest expense decreased to $21.1 million for the nine months ended September 30, 2017, compared to $21.7 million for the corresponding period of 2016.  The decrease resulted primarily from reductions in routine regulatory assessments, insurance expense, occupancy and equipment expense, professional services fees and impairment charges associated with closed branches.  These reductions were partially offset by increases in salaries and benefits expense, telephone and data communications expense and write-downs of OREO.

●

The Company continued to experience improvement in asset quality metrics during the first nine months of 2017.  Non-performing assets, including loans in non-accrual status and OREO, decreased to 0.94% of total assets as of September 30, 2017, compared to 1.20% as of December 31, 2016, and 1.28% as of September 30, 2016.  




Premises and equipment increased by $7.9 million during the first nine months of 2017 due to capital expenditures associated with the Bank’s new office complex in Birmingham, Alabama. 



Deposits increased to $508.4 million as of September 30, 2017, compared to $497.6 million as of December 31, 2016.  Short and long-term borrowings totaled $20.6 million as of September 30, 2017, compared to $25.1 million as of December 31, 2016.

 

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. Management believes that continued success in loan growth efforts at both the Bank and ALC, combined with continued adherence to established credit underwriting standards, will strengthen both the diversity and credit quality of the Company’s loan portfolio, while improving interest and fee income on loans.

Acquisition

Subsequent to March 31, 2018, the Company entered into a definitive agreement to acquire The Peoples Bank, headquartered in Rose Hill, Virginia. The Peoples Bank serves communities in the Knoxville, Tennessee and southwest Virginia areas. Under the terms of the agreement, the Company will acquire all of the outstanding capital stock of The Peoples Bank and then merge The Peoples Bank with and into the Bank. The transaction is expected to close in the third quarter of 2018, subject to the satisfaction of customary closing conditions, including receipt of regulatory approvals. The transaction is expected to result in a combined institution approaching $800 million in assets.

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Table of Contents

 

RESULTS OF OPERATIONS

 

 

Three Months Ended

       Nine Months Ended  

Three Months Ended

 
 

September 30,

  

September 30,

   September 30,    September 30,  

March 31,

  

March 31,

 
 

2017

  

2016

    2017    2016  

2018

  

2017

 
 

(Dollars in Thousands)     

  

(Dollars in Thousands)

 

Interest income

 $7,820  $7,760  $23,013  $22,434  $8,119  $7,510 

Interest expense

  685   587   1,902   1,683   805   591 

Net interest income

  7,135   7,173   21,111   20,751   7,314   6,919 

Provision for loan losses

  373   680

 

  1,464   1,383   658   515

 

Net interest income after provision for loan losses

  6,762   6,493   19,647   19,368   6,656   6,404 

Non-interest income

  1,236   1,567   3,333   4,036   1,140   1,167 

Non-interest expense

  7,190   7,348   21,090   21,669   7,301   7,037 

Income before income taxes

  808   712   1,890   1,735   495   534 

Provision for income taxes

  173   162   435   406   81   130 

Net income

 $635  $550  $1,455  $1,329  $414  $404 

 

Net Interest Income

 

Net interest income is calculatedcalculated 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 are comprisedconsist of loans at both the Bank and ALC, as well as taxable and nontaxable investments and federal funds sold by the Bank. Interest-bearing liabilities are comprisedconsist of interest-bearing demand deposits and savings and time deposits, as well as short-term borrowings and long-term debt.

 


38

Table of Contents

 

The following tables showtable shows the average balances of each principal category of assets, liabilities and shareholders’ equity for the three-three months ended March 31, 2018 and nine-month periods ended September 30, 2017 and 2016.2017. Additionally, the tables providetable provides an analysis of interest revenue or expense associated with each category, along with the accompanying yield or rate percentage. Net yield is calculated for each period presented as net interest income divided by average total interest-earning assets.

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Three Months Ended

 

 

September 30, 2017

 

 

September 30, 2016

 

 

March 31, 2018

 

 

March 31, 2017

 

 

Average

Balance

 

 

Interest

 

 

Annualized

Yield/

Rate %

 

 

Average

Balance

 

 

Interest

 

 

Annualized

Yield/

Rate %

 

 

Average

Balance

 

 

Interest

 

 

Annualized

Yield/

Rate %

 

 

Average

Balance

 

 

Interest

 

 

Annualized

Yield/

Rate %

 

 

(Dollars in Thousands)

 

 

(Dollars in Thousands)

 

ASSETS

ASSETS

 

ASSETS

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans – Bank (Note A)

 

$

240,006

 

$

2,578

 

4.26

%

 

$

223,739

 

$

2,428

 

4.34

%

 

$

259,243

 

$

2,808

 

4.39

%

 

$

237,706

 

$

2,377

 

4.06

%

Loans – ALC (Note A)

 

 

91,193

 

 

4,224

 

18.38

%

 

 

88,783

 

 

4,345

 

19.57

%

 

 

94,025

 

 

4,281

 

18.47

%

 

 

87,408

 

 

4,119

 

19.11

%

Taxable investment securities

 

 

187,670

 

 

857

 

1.81

%

 

 

199,835

 

 

845

 

1.68

%

 

 

178,913

 

 

865

 

1.96

%

 

 

200,772

 

 

884

 

1.79

%

Non-taxable investment securities

 

 

8,225

 

 

75

 

3.62

%

 

 

11,927

 

 

106 

 

3.56

%

 

 

6,113

 

 

56

 

3.72

%

 

 

10,094

 

 

90

 

3.62

%

Federal funds sold     %  8,967  12 0.54%  10,278  43 1.70%  

  

 

%
Interest-bearing deposits in banks  27,249  86  1.25%  18,300  24  0.52%  17,167  66  1.56%  19,735  40  0.82%

Total interest-earning assets

 

 

554,343

 

 

7,820

 

 

5.60

%

 

 

551,551

 

 

7,760 

 

 

5.63

%

 

 

565,739

 

 

8,119

 

 

5.82

%

 

 

555,715

 

 

7,510

 

 

5.48

%

Non-interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

58,786

 

 

 

 

 

 

 

 

49,796

 

 

 

 

 

 

 

 

58,565

 

 

 

 

 

 

 

 

53,668

 

 

 

 

 

 

Total

 

$

613,129

 

 

 

 

 

 

 

$

601,347

 

 

 

 

 

 

 

$

624,304

 

 

 

 

 

 

 

$

609,383

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

164,852

 

$

161

 

0.39

%

 

$

151,365

 

$

140

 

0.37

%

 

$

166,963

 

$

170

 

0.41

%

 

$

160,030

 

$

145

 

0.37

%

Savings deposits

 

 

82,201

 

 

53

 

0.26

%

 

 

78,415

 

 

37

 

0.19

%

 

 

84,684

 

 

71

 

0.34

%

 

 

77,379

 

 

36

 

0.19

%

Time deposits

 

 

182,405

 

 

403

 

0.88

%

 

 

182,567

 

 

355

 

 

0.78

%

 

 

180,267

 

 

460

 

1.03

%

 

 

184,359

 

 

347

 

 

0.76

%

Borrowings

 

 

20,099

 

 

68

 

 

1.34

%

 

 

20,289

 

 

55

 

 

1.08

%

 

 

24,675

 

 

104

 

 

1.71

%

 

 

25,599

 

 

63

 

 

1.00

%

Total interest-bearing liabilities

 

 

449,557

 

 

685

 

 

0.60

%

 

 

432,636

 

 

587

 

 

0.54

%

 

 

456,589

 

 

805

 

 

0.72

%

 

 

447,367

 

 

591

 

 

0.54

%

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

77,723

 

 

 

 

 

 

 

 

82,097

 

 

 

 

 

 

 

 

84,435

 

 

 

 

 

 

 

 

77,159

 

 

 

 

 

 

Other liabilities

 

 

7,282

 

 

 

 

 

 

 

 

7,919 

 

 

 

 

 

 

 

 

7,456

 

 

 

 

 

 

 

 

7,676

 

 

 

 

 

 

Shareholders’ equity

 

 

78,567

 

 

 

 

 

 

 

 

78,695

 

 

 

 

 

 

 

 

75,824

 

 

 

 

 

 

 

 

77,181

 

 

 

 

 

 

Total

 

$

613,129

 

 

 

 

 

 

 

$

601,347

 

 

 

 

 

 

 

$

624,304

 

 

 

 

 

 

 

$

609,383

 

 

 

 

 

 

Net interest income (Note B)

 

 

 

 

$

7,135

 

 

 

 

 

 

 

$

7,173

 

 

 

 

 

 

 

$

7,314

 

 

 

 

 

 

 

$

6,919

 

 

 

Net yield on interest-earning assets

 

 

 

 

 

 

 

 

5.11

%

 

 

 

 

 

 

 

 

5.20

%

 

 

 

 

 

 

 

 

5.24

%

 

 

 

 

 

 

 

 

5.05

%

 

 

Note A

 

 

For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. At the Bank, these loans averaged $0.3$0.4 million and $0.9$0.6 million for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively. At ALC, these loans averaged $1.6$1.7 million and $1.5$1.6 million for the respective periods presented.three months ended March 31, 2018 and 2017, respectively.

   

Note B

Loan fees are included in the interest amounts presented. At the Bank, loan fees totaled $0.1 million for botheach of the three-month periods ended September 30, 2017March 31, 2018 and 2016.2017. At ALC, loan fees totaled $0.5 million and $0.7 million for the respective periods presented.


 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

 

Average

Balance

 

 

Interest

 

 

Annualized

Yield/

Rate %

 

 

Average

Balance

 

 

Interest

 

 

Annualized

Yield/

Rate %

 

 

 

(Dollars in Thousands)

 

ASSETS

 

Interest-earning assets:

                        

Loans – Bank (Note A)

 

$

238,428

  

$

7,408

   

4.15

%

 

$

197,460

  

$

6,508

   

4.39

%

Loans – ALC (Note A)

  

88,918

   

12,520

   

18.83

%

  

85,504

   

12,684

   

19.78

%

Taxable investment securities

  

196,200

   

2,659

   

1.81

%

  

213,828

   

2,765

   

1.73

%

Non-taxable investment securities

  

8,989

   

245

   

3.64

%

  

14,073

   

382

   

3.62

%

Federal funds sold        %  4,288   17   0.53%

Interest-bearing deposits in banks

  

22,705

   

181

   

1.07

%

  

20,581

   

78

   

0.51

%

Total interest-earning assets

  

555,240

   

23,013

   

5.54

%

  

535,734

   

22,434

   

5.58

%

Non-interest-earning assets:

                        

Other assets

  

56,012

           

49,222

         

Total

 

$

611,252

          

$

584,956

         

LIABILITIES AND SHAREHOLDERS’ EQUITY

                        

Interest-bearing liabilities:

                        

Demand deposits

 

$

162,920

  

$

465

   

0.38

%

 

$

149,162

  

$

410

   

0.37

%

Savings deposits

  

80,364

   

132

   

0.22

%

  

77,411

   

108

   

0.19

%

Time deposits

  

183,242

   

1,116

   

0.81

%

  

180,949

   

1,050

   

0.77

%

Borrowings

  

21,596

   

189

   

1.17

%

  

15,467

   

115

   

0.99

%

Total interest-bearing liabilities

  

448,122

   

1,902

   

0.57

%

  

422,989

   

1,683

   

0.53

%

Non-interest-bearing liabilities:

                        

Demand deposits

  

77,976

           

76,157

         

Other liabilities

  

7,223

           

7,750

         

Shareholders’ equity

  

77,931

           

78,060

         

Total

 

$

611,252

          

$

584,956

         

Net interest income (Note B)

     

$

21,111

          

$

20,751

     

Net yield on interest-earning assets

          

5.08

%

          

5.16

%

Note A

For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. At the Bank, these loans averaged $0.5 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively. At ALC, these loans averaged $1.6 million for botheach of the periods presented.

Note B

Loan fees are included in the interest amounts presented. At the Bank, loan fees totaled $0.3 million for both of the nine-monththree-month periods ended September 30, 2017March 31, 2018 and 2016. At ALC, loan fees totaled $1.6 million and $2.1 million for the respective periods presented.2017.

 

Interest income earned on loans atfor both the Bank and ALC increased in bothcomparing the three- and nine- month periodsthree months ended September 30, 2017 comparedMarch 31, 2018 to the corresponding periods of the previous yearthree months ended March 31, 2017, primarily as a result of growth in average loan volume.  At ALC, despite continued growth in loan volume, interest income decreased during both 2017 periods compared to the corresponding periods of 2016 as a result of reductions in yield.  The decrease in yield at ALC was due to continued focus on credit quality improvement.  These activities have been ongoing for the past several years and have resulted in significant improvement in the credit quality of ALC’s portfolio, with a corresponding decrease in yield commensurate with reduced risk. The loan volume increases were partially offset by decreases in the average balances of taxable and non-taxable investments and federal funds sold.interest-bearing deposits in banks. The shift in the mix of earning assets is consistent with management’s ongoing strategy to utilize cash flows from the maturity and paydown of investment securities to fund loan growth as opportunities permit. The investment portfolio has been structured to provide monthly cash flows through the maturity and paydown of securities in a manner that management believes can continue to fund a substantial portion of loan growth over time.

 


Interest expense increased in bothcomparing the three-three months ended March 31, 2018 and nine-month periods ended September 30, 2017 compared to the corresponding periods of 2016 due to increases in the volume of interest-bearing liabilities, as well as modest increases in raterates commensurate withwith the interest rate environment experienced during the ninetwelve months ended September 30,between March 31, 2018 and 2017.

 

We expect that continued growth in net loan volume at both the Bank and ALC with loans of sufficient credit quality will enhance net interest income, particularly as resources are shifted from lower-earning investment securities to higher-earning loan balances. However, the competitive environment is significant relative to the generation of loans of high credit quality. At both the Bank and ALC, management is continuing to focus efforts on new loan origination within the parameters of established credit policy, while also maintaining vigilance in the deployment of strategies to effectively manage risks associated with interest rate fluctuations. Net interest income could experience downward pressure as a result of increased competition for quality loan opportunities, lower reinvestment yields and fewer opportunities to reduce future funding costs.

 

39

Provision (Reduction in Reserve) for Loan Losses

 

The provision for loan losses is an expense used to establish the allowance for loan losses. Actual loan losses, net of recoveries, are charged directly to the allowance for loan losses. The expense recorded for each reporting period is a reflection of actual net losses experienced during the period and management’s judgment as to the adequacy of the allowance to absorb losses inherent in the portfolio as of the balance sheet date.The following table presents the provision (reduction in reserve) for loan losses for the Bank and ALC for the three and nine months ended September 30, 2017March 31, 2018 and 2016.2017.

 

 

Three Months Ended

       Nine Months Ended  

Three Months Ended

 
 

September 30,

  

September 30,

   September 30,   September 30,  

March 31,

  

March 31,

 
 

2017

  

2016

    2017    2016  

2018

  

2017

 
 (Dollars in Thousands)  (Dollars in Thousands)   (Dollars in Thousands) 

Bank

 $(130

)

 $100

 

  $(130)  $(350 $39

 

 $

 

ALC

  503   580   1,594   1,733   619   515 

Total

 $373  $680

 

  $1,464   $1,383  $658

 

 $515

 

 

At the Bank, during both the three- and nine-month periodsthree months ended September 30, 2017,March 31, 2018, recoveries of previously charged-off loans exceeded current period charge-offs.  In addition, during The increase in provision expense comparing the thirdthree months ended March 31, 2018 and 2017 was due to substantial loan growth in the first quarter of 2018 that was not experienced in the Bank resolved a previously impaired loan relationship through the collectionfirst quarter of contractual amounts due.  The resolution of the impairment, combined with continued net recoveries, enabled the Bank to reduce the allowance for loan losses by $0.1 million during the third quarter.2017. The Bank’s allowance for loan losses as a percentage of loans totaled 0.96% as of September 30, 2017,March 31, 2018, compared to 1.01%0.95% as of December 31, 2016.2017 and 1.07% as of March 31, 2017.

 

At ALC, the provision for loan losses decreased during bothincreased comparing the three-three months ended March 31, 2018 and nine- month periods ended September 30, 2017, based primarily on modest improvementsgrowth in charge-off experience during the period.ALC’s loan balances. ALC’s allowance for loan losses as a percentage of loans totaled 2.60%2.40% as of September 30, 2017,March 31, 2018, compared to 2.78%2.48% as of December 31, 2016.2017 and 2.71% as of March 31, 2017. The decrease in the allowance for loan losses as a percentage of loans was due to the changing mix of ALC’s portfolio to point-of-sale indirect lending, which has enhanced the credit quality of ALC’s loan portfolio.

 

For the Company, the allowance for loan losses as a percentage of loans totaled 1.40%1.35% as of September 30, 2017,March 31, 2018, compared to 1.48%1.36% as of December 31, 2016.2017 and 1.51% as of March 31, 2017.  Based on our evaluation of the loan portfolio, we believe that the allowance for loan losses at both the Bank and ALC is adequate to absorb losses inherent in the loan portfolio as of September 30, 2017.March 31, 2018. While we believe that the methodologies and calculations that have been used in the determination of the allowance are adequate, our conclusions are based on estimates and judgments and are, therefore, approximate and imprecise. Factors beyond our control, such as changes in economic conditions impacting the national economy or the local service areas in which the Bank and ALC operate, may negatively and materially affect asset quality and the adequacy of the allowance for loan losses, as well as the resulting provision for loan losses. In general, we expect the provision for loan losses to increase commensurate with growth in loan volume at both the Bank and ALC; however, we would also expect such increases to be partially offset should credit quality of the portfolio continue to improve.

 


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. Expanded discussion of certain significant non-interest income items and fluctuations is provided below the table.

 

 

Three Months Ended

September 30,

           

Nine Months Ended

September 30,

           

Three Months Ended

March 31,

         
 

2017

  

2016

  

$

Change

  

%

Change

   2017  2016  

$

Change

  

%

Change

   

2018

  

2017

  

$

Change

  

%

Change

 
 

(Dollars in Thousands)

       (Dollars in Thousands)       

(Dollars in Thousands)   

    

Service charges and other fees on deposit accounts

 $481  $463  $18   3.9 

%

 $1,406  $1,306  $100   7.7 % $467  $464  $3   0.6

%

Credit insurance commissions and fees

  160   256   (96)  (37.5)

%

  459   570   (111)  (19.5)%  218   256   (38)  (14.8

)%

Bank-owned life insurance

  106   105   1   0.1 

%

  318   316   2   0.6 %  105   106   (1)  (0.9

)%

Net gain on sale and prepayment of investment securities  178   259   (81)  (31.3)%  228   657   (429)  (65.3)% 

3

  49  (46) (93.9)%
Mortgage fees from secondary market 117    117  100%

Other income

  311   484   (173)  (35.7)

%

  922   1,187   (265)  (22.3)%  230   292   (62)  (21.2

)%

Total non-interest income

 $1,236  $1,567  $(331)  (21.1)

%

 $3,333  $4,036  $(703)  (17.4)% $1,140  $1,167  $(27)  (2.3

)%

 

Service Charges and Other Fees on Deposit Accounts

 

ServiceNon-interest income at the Bank consists of service charges and other fees are generated on deposit accounts held ataccounts; bank-owned life insurance; net gains on the Bank. The increase in this categorysale and prepayment of investment securities; mortgage fees from the secondary market; and other non-interest income, during the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 resulted primarily from increased fees generated from service charges on deposit accounts.  Periodically, management evaluates the fee structure on the Bank’s deposit accounts in order to ensure that fees charged are competitive in the current environment and compliant with regulatory guidance. In addition, management continues to evaluate opportunities for deposit growth through further penetration in existing service territories.  We expect that income from these sources will grow over time as deposit levels grow.  However, there is significant competition among financial institutions for deposits.  Accordingly, we cannot predict with certainty the level of revenues that will be derived in this category in the future.

Credit Insurance Commissions and Fees

Credit insurance commissions and fees are generated from credit life and credit accident and health insurance policies offered primarily at ALC to consumer loan customers through FUSB Reinsurance. The decrease in non-interest income in this category during the three and nine months ended September 30, 2017 compared to the corresponding periods of 2016 resulted primarily from a focus by ALC management on product lines that do not facilitate the generation of these types of sales.  Although revenues in this category decreased during the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016, such revenues are generally dependent on the mix of product lines offered at ALC and the specific needs of borrowers. Management continues to seek opportunities to grow revenues in this category when opportunities arise based on customer needs and in accordance with regulatory guidelines; however, we cannot predict with certainty the level of revenues that will be derived from this category in the future.

Bank-owned Life Insurance

The Bank utilizes bank-owned life insurance as a tool to offset the cost of certain retirement benefit programs. The income derived from bank-owned life insurance represents the increase in the cash surrender value of the policies (which is generally non-taxable) over the periods presented. The cash surrender value of the policies totaled $14.8 million and $14.6 million as of September 30, 2017 and December 31, 2016, respectively. The insurance policies are adjustable-rate assets with minimum guaranteed rates of interest between 2% and 4%. Accordingly, management does not expect significant fluctuation in the income derived from these assets.


Net Gain on Sale and Prepayment of Investment Securities

The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding.  Management reviews the securities in the investment portfolio periodically and, from time to time, may determine that it is appropriate to sell securities that are designated as securities available-for-sale.  When this occurs, a gain or loss is recorded as the difference between the fair value of the security on the date of sale and the security’s carrying value.  In addition, a gain may be recognized for prepayment penalties earned by the Company when a security is called by the debtor prior to its maturity date.  Because determinations of whether to sell investment securities are made by management based on specific facts and circumstances at a given point in time, no assessment can be made as to the level of gains or losses that could be incurred related to sales of investment securities or prepayment penalties in the future.

Other Income

Other non-interest incomewhich 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 letters of credit, ATMs, debit and credit cards, wire transfers and real estate rental.  In addition, other non-interest income is generated at ALC for ancillary services, including ALC’ss auto club membership program, which provides members with emergency roadside assistance, lock and key services and reimbursement for emergency travel expenses.program. The decrease in other non-interest income duringfor the three and nine months ended September 30, 2017March 31, 2018 compared to the corresponding periods of 2016same period in 2017 resulted primarily from reductions in ACH feesgains on the sale and servicesprepayment of investment securities at the Bank, as well as reductions in credit insurance commissions and fees at ALC, and was partially offset by an increase in ALC’s auto club membership revenue.  In addition, othermortgage fees from secondary market transactions at the Bank. The Bank’s mortgage division, which began operating in the second quarter of 2017, generates non-interest income was reduced as a result of collection of settlement amounts associated with a nonaccrual assetby closing loans in 2016 that was not repeated in 2017.the secondary market. Given the nature of the types of revenues categorized as othernon-interest income, there is uncertainty as to the level of revenue that will be derived from these sources in the future.

 


40

 

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.  Expanded discussion

  

Three Months Ended

March 31,

         
  

2018

  

2017

  

$

Change

  

%

Change

 
  

(Dollars in Thousands)  

     

Salaries and employee benefits

 $4,567  $4,398  $169   3.8

%

Net occupancy and equipment expense

  889   777   112   14.4

%

Computer services  292   387   (95)  (24.5)%
Insurance expense and assessments  186   161   25   15.5%
Fees for professional services  273   233   40   17.2%
Postage, stationery and supplies  212   154   58   37.7%
Telephone/data communication  195   221   (26)  (11.8)%

Other real estate/foreclosure expense:

                

Write-downs, net of gain or loss on sale

  (51)  2   (53)  NM

 

Carrying costs

  40   82   (42)  NM

 

Total other real estate/foreclosure expense

  (11)  84   (95)  NM

 

Other

  698   622   76   12.2

%

Total non-interest expense

 $7,301  $7,037  $264   3.8

%

NM: Not meaningful

Non-interest expense consists of certain significantthe items noted above. The increase in non-interest expense items and fluctuations is provided below the table.

  

Three Months Ended

September 30,

           

Nine Months Ended

September 30,

          
  

2017

  

2016

  

$

Change

  

%

Change

   2017  2016  

$
Change

  %
Change
  
  

(Dollars in Thousands)

       (Dollars in Thousands)      

Salaries and employee benefits

 $4,370  $4,334  $36   0.8

 

% $13,048  $12,734  $314   2.5 %

Net occupancy and equipment expense

  806   830   (24)  (2.9

)

%  2,276   2,381   (105)  (4.4)%
Computer services  337   364   (27)  (7.4)%  1,035   1,021   14   1.4 %
Insurance expense and assessments  161   255   (94)  (36.9)%  479   775   (296)  (38.2)%
Fees for professional services  187   231   (44)  (19.0)%  650   748   (98)  (13.1)%
Postage, stationery and supplies  174   183   (9)  (4.9)%  479   562   (83)  (14.8)%
Telephone/data communications  206   164   42   25.6 %  628   502   126   25.1 %

Other real estate/foreclosure expense:

                                  

Write-downs, net of gain or loss on sale

  196   47   149   317.0

 

%  277   137   140   102.2 %

Carrying costs

  48   77   (29)  (37.7

)

%  184   233   (49)  (21.0)%

Total other real estate/foreclosure expense

  244   124   120   96.8

 

%  461   370   91   24.6 %

Other

  705   863   (158)  (18.3

)

%  2,034   2,576   (542)  (21.0)%

Total non-interest expense

 $7,190  $7,348  $(158)  (2.2

)

% $21,090  $21,669  $(579)  (2.7)%

Salaries and Employee Benefits

Salaries and employee benefits expense, the largest category of non-interest expense, totaled $3.0 million at the Bank and $1.4 million at ALC for the third quarter of 2017,three months ended March 31, 2018 compared to $2.9 million at the Bank and $1.4 million at ALC during the third quarter of 2016. For the nine-monthsame period ended September 30,in 2017 resulted primarily from increases in salaries and benefits expense totaled $8.7 million at the Bank and $4.3 million at ALC, compared to $8.3 million at the Bankoccupancy and $4.4 million at ALC for the nine-month period ended September 30, 2016. Theequipment expense, amounts for the Bank are inclusive of salaries and benefits paid to certain members of management and employees for work performed on behalf of Bancshares, as well as current and deferred fees paid to members of the Bank’s and Bancshares’ Boards of Directors. Management remains committed to providing salaries and benefits packages to employees at competitive levels in order to ensure that we continue to provide quality service to our customers. Accordingly, we expect salaries and employee benefits expense to generally increase commensurate with our growth and trends in the employment market over time.

Net Occupancy and Equipment Expense

This category of non-interest expense includes expenses associated with depreciation of buildings, equipment and furniture and fixtures, rent of office space, utilities expense and maintenance and repair costs. The majority of the Bank’s office space is owned, while the majority of ALC’s office space is leased. The decrease in this category for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 resulted primarily frompartially offset by a decrease in maintenance and repaircomputer services expense. Non-interest expense at the Bank. Occupancy and equipment expense is expected to increase over time as the Company depreciates expenditures associated with capital improvements. During the three and nine months ended September 30, 2017, the Company recorded $0.8 million and $8.7 million, respectively, in additions to premises and equipment. The majority of these expenditures were associated with the construction of an office complex in Birmingham, Alabama. Initial construction of the office complex was completed during the third quarter, and the headquarters of the Company and the Bank were relocated to that location at the end of the third quarter.  Approximately 25% of the square footage of the office complex is being utilized by the Bank, with the remainder to be leased to commercial tenants. Based on management's current estimates, it is expected that placement of the office complex into service will result in approximately $0.5 million in additional depreciation expense annually. Upon full lease-up of the office complex, management expects that the majority of depreciation expense, as well as additional operating costs associated with the complex, will be recovered through lease revenue; however, no assurance can be given regarding the office complex being fully leased by third-party tenants or the timing of such third-party leases.


Computer Services

Computer services expenses were primarily associated with core processing at the Bank and ALC. Due to the differing nature of their businesses, the Bank and ALC utilize different core processors. The increase in expense in this category comparing the nine months ended September 30, 2017 to the nine months ended September 30, 2016 was associated with additional information technology services provided by the Bank’s core processor that significantly enhanced the Bank’s technology platform, including increased protections against data security risk and enhanced disaster recovery planning. Given the rapid pace of technological change, increases in this category of expense are generally expected to occur at a more rapid pace than in other expense categories.

Insurance Expense and Assessments

This category of non-interest expense includes the cost of corporate insurance maintained by the Company, as well as FDIC insurance and state banking assessments.  The Bank pays assessments to the FDIC based on a prescribed regulatory calculation that factors in average total assets and the Company’s supervisory ratings, as determined by regulatory examinations. The decrease in this expense category comparing the three and nine months ended September 30, 2017 to the three and nine months ended September 30, 2016 resulted primarily from reductions in FDIC assessments. In the near term, based on current regulatory guidelines, this category of expense is expected to decline. However, over a longer-term time horizon, management expects this category of expenses to increase based on growth in the Company’s balance sheet and expansion of the Company’s activities.

Fees for Professional Services

Fees for professional services include fees associated with legal, accounting and auditing, compliance and other consulting services. The decrease in these expenses for the three and nine months ended September 30, 2017 compared to the same periods in 2016 resulted primarily from a decrease in professional fees associated with collections and other legal matters, which have decreased over time as a result of the increased credit quality in the Bank’s loan portfolio.  Although we do not anticipate significant fluctuations in this category of expense, we do expect inflationary increases over time, as well as increases associated with increased regulatory oversight and reporting requirements commensurate with the Company’s growth and development.

Postage, Stationery and Supplies

The decrease in expense in this category comparing the three and nine months ended September 30, 2017 to the three and nine months ended September 30, 2016 resulted from continued efforts by management at the Bank and ALC to manage controllable expenses. We will continue efforts to control these expenses in a prudent manner; however, expense in this category is generally expected to increase over time due to inflationary growth, as well as expanded penetration by the Bank into metropolitan service territories.

Telephone / Data Communications

The increase in this expense category for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 was primarily associated with management’s efforts to enhance network and telephone capabilities. During 2016, the Company began efforts to upgrade its computer and telephone network systems. These efforts are expected to create long-term benefits in improved efficiency and technical capabilities that will benefit both the Bank and ALC. In the short-term, however, we expect increases in this category of expenses as the Company continues upgrades.

Other Real Estate / Foreclosure Expense

Other real estate / foreclosure expense includes both the cost of carrying OREO and write-downs of OREO. Cost of carrying OREO includes property taxes, attorneys’ fees, maintenance costs, security costs and the cost of obtaining independent property appraisals. Write-downs include impairments recorded on existing OREO properties in order to carry the property at the lower of cost or fair value, less estimated cost to sell.

OREO carrying costs decreased during the three and nine months ended September 30, 2017 compared to the corresponding periods of 2016 as a result of continued reduction in the level of OREO at both the Bank and ALC. Write-downs, however, increased during the three and nine months ended September 30, 2017 compared to the same periods of 2016 due to impairment charges taken on a portion of the Bank’s OREO properties during the third quarter of 2017. OREO totaled $3.5 million and $0.3 million at the Bank and ALC, respectively, as of September 30, 2017, compared to $4.9 million and $0.5 million, respectively, as of September 30, 2016, a decrease of $1.6 million for the Company on a consolidated basis.

Although management continued to reduce OREO levels during the nine-month period ended September 30, 2017, there is inherent uncertainty with respect to economic conditions and real estate values in certain of the service areas in which both the Bank and ALC operate. In addition, as the level of OREO is reduced, it becomes more difficult to work out remaining OREO at the same pace as experienced when OREO volumes were higher. Accordingly, continued reduction of carrying costs cannot be expected with any level of certainty. Furthermore, if the national or local economy weakens, or if real estate values decline further in the Company’s primary service areas, additional write-downs of existing OREO could be required. Additionally, the pace of migration of properties into OREO could increase, resulting in the potential for increased levels of both write-downs and carrying costs.


Other

This category encompasses a variety of expenses, including business development, security services, sales and other taxes, employee training, expenses associated with fixed asset write-downs and other miscellaneous expenses. Comparing the three and nine months ended September 30, 2017 to the three and nine months ended September 30, 2016, expenses in this category decreased due to reductions in a number of expense categories, including collection fees, debit card fraud, impairment on closed branch assets and reserves for accident and health policies sold through FUSB Reinsurance. Certain of these reductions are expected to be offset in future quarters;pressures; however, management continues to maintain vigilance in efforts to reduce these costs where opportunities to do so exist. Additionally, management expects to incur increased expenses in upcoming quarters in connection with the proposed acquisition of The Peoples Bank, as discussed above.

 

Provision for Income Taxes

 

The provision for income taxes was $0.2$0.1 million for both of the three-month periods ended September 30, 2017March 31, 2018 and 2016.2017. The Company’sCompanys effective tax rate was 21.4%16.4% and 24.3% for the third quartersame periods. The reduced effective tax rate resulted from the reduction in the Companys statutory federal income tax rate under the Tax Cuts and Jobs Act of 2017 compared to 22.8% for(“Tax Reform”). Under Tax Reform, beginning January 1, 2018, the third quarterCompanys federal statutory income tax rate was set at 21%, reduced from the 34% statutory income tax rate previously applied. Aside from the impact of 2016. For the nine months ended September 30, 2017 and 2016,Tax Reform, the effective tax rate was 23.0% and 23.4%, respectively. The effective tax rate is also expected to fluctuate based on 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’sCompanys overall strategy. The Company’sCompanys effective tax rate is expected to fluctuate commensurate with the level of these investments as compared to total pre-tax income.

 

41


BALANCE SHEET ANALYSIS

 

Investment Securities

 

The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering the duration, composition and/or balance of the portfolio. The expected average life of securities in the investment portfolio was 2.7 years and 3.12.8 years as of September 30, 2017both March 31, 2018 and December 31, 2016, respectively.2017.

 

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 of September 30, 2017,March 31, 2018, available-for-sale securities totaled $158.4$156.6 million, or 85.3%86.1% of the total investment portfolio, compared to $181.9153.9 million, or 87.5%85.4% of the total investment portfolio, as of December 31, 2016.2017. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities obligations of U.S. government-sponsored agencies,and obligations of state and political subdivisions and corporate notes.subdivisions.

 

Held-to-maturity securities are recorded at amortized cost and represent securities that the Company both intends and has the ability to hold to maturity. As of September 30, 2017,March 31, 2018, held-to-maturity securities totaled $27.4$25.3 million, or 14.7%13.9% of  the total investment portfolio, compared to $25.9$26.3 million, or 12.5%14.6% of the total investment portfolio, as of December 31, 2016.2017. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies and obligations of state and political subdivisions.


 

Loans and Allowance for Loan Losses

 

The tables below summarize loan balances by portfolio category for both the Bank and ALC at the end of each of the most recent five quarters as of September 30, 2017.March 31, 2018.

 

 

Bank

  

Bank

 
 2017  2016  

2018

  

2017

 
 

September

30,

  

June

30,

  

March

31,

  

December

31,

  

September

30,

  

March

31,

  

December

31,

  

September

30,

  

June

30,

  

March

31,

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Real estate loans:

                                        

Construction, land development and other land loans

 $20,213  $12,424  $25,853  $23,772  $24,610  $25,965  $26,143  $20,213  $12,424  $25,853 

Secured by 1-4 family residential properties

  35,125   32,227   32,535   32,955   32,559   36,618   34,272   35,125   32,227   32,535 

Secured by multi-family residential properties

  16,498   16,702   16,464   16,627   16,801   16,396   16,579   16,498   16,702   16,464 

Secured by non-farm, non-residential properties

  107,679   113,037   97,294   102,112   97,859   111,546   105,133   107,679   113,037   97,294 

Other

  223   226   230   234   185   188   190   223   226   230 

Commercial and industrial loans

  66,320   65,087   57,253   57,963   54,459   65,996   69,969   66,320   65,087   57,253 

Consumer loans

  5,431   5,671   6,057   6,206   6,335   5,416   5,217   5,431   5,671   6,057 

Total loans

 $251,489  $245,374  $235,686  $239,869  $232,808  $262,125  $257,503  $251,489  $245,374  $235,686 

Less unearned interest, fees and deferred cost

  367   371   249   218   191   349   374   367   371   249 

Allowance for loan losses

  2,422   2,526   2,521   2,409   1,216   2,500   2,447   2,422   2,526   2,521 

Net loans

 $248,700  $242,477  $232,916  $237,242  $231,401  $259,276  $254,682  $248,700  $242,477  $232,916 

 

 

ALC

  

ALC

 
 2017  2016  

2018

  

2017

 
 

September

30,

  

June

30,

  

March

31,

  

December

31,

  

September

30,

  

March

31,

  

December

31,

  

September

30,

  

June

30,

  

March

31,

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Real estate loans:

                                        

Construction, land development and other land loans

 $

  $  $  $  $  $  $  $  $  $ 

Secured by 1-4 family residential properties

  11,490   12,229   12,993   13,724   14,462   9,963   10,801   11,490   12,229   12,993 

Secured by multi-family residential properties

  

                            

Secured by non-farm, non-residential properties

  

                            

Other

  

                            

Commercial and industrial loans

  

                            
Consumer loans:                              

Consumer

  35,650   31,920   32,892   36,413   35,533   32,758   34,083   35,650   31,920   32,892 

Indirect sales

  

50,553

   52,134   47,196   44,775   45,382   60,157   55,071   50,553   52,134   47,196 

Total loans

 $97,693  $96,283  $93,081  $94,912  $95,377  $102,878  $99,955  $97,693  $96,283  $93,081 

Less unearned interest, fees and deferred cost

  5,981   5,855   5,962   6,935   7,205   6,020   6,189   5,981   5,855   5,962 

Allowance for loan losses

  2,386   2,379   2,358   2,447   2,452   2,329   2,327   2,386   2,379   2,358 

Net loans

 $89,326  $88,049  $84,761  $85,530  $85,720  $94,529  $91,439  $89,326  $88,049  $84,761 

 

 

 


42

 

The tables below summarize changes in the allowance for loan losses at the end offor each of the most recent five quarters as of September 30, 2017March 31, 2018 at both the Bank and ALC.

 

 

Bank

  

Bank

 
 20172016  

2018

  

2017

 
 

Third

Quarter

  

Second

Quarter

  

First

Quarter

  

Fourth

Quarter

  

Third

Quarter

  

First

Quarter

  

Fourth

Quarter

  

Third

Quarter

  

Second

Quarter

  

First

Quarter

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Balance at beginning of period

 $2,526  $2,521  $2,409  $1,216  $1,138  $2,447  $2,422  $2,526  $2,521  $2,409 

Charge-offs:

                                        
Real estate loans:                      
Construction, land development and other land loans              
Secured by 1-4 family residential properties     (56) (3) (8)     
Secured by multi-family residential properties             
Secured by non-farm, non-residential properties            
Other            

Commercial and industrial

  

   (16)     (1)  (41)           (16)   
Consumer loans (1) (60) (2) (13) (3)  

 

  

 

  (1

)

  (60

)

  (2

)

Other loans

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Total charge-offs

  (1

)

  (76

)

  (2

)

  (70

)

  (47

)

  (8

)

  

 

  (1

)

  (76

)

  (2

)

Recoveries

  27   81   114   28   25   22   25   27   81   114 

Net recoveries (charge-offs)

  26

 

  5

 

  112

 

  (42

)

  (22

)

  14

 

  25

 

  26

 

  5

 

  112

 

Provision (reduction in reserve) for loan losses

  (130

)

  

 

  

 

  1,235

 

  100

 

  39

 

  

 

  (130

)

  

 

  

 

Ending balance

 $2,422  $2,526  $2,521  $2,409  $1,216  $2,500  $2,447  $2,422  $2,526  $2,521 

as a percentage of loans

  0.96

%

  1.03

%

  1.07

%

  1.01

%

  0.52

%

as a % of loans

  0.96

%

  0.95

%

  0.96

%

  1.03

%

  1.07

%

 

 

ALC

  

ALC

 
 20172016  

2018

  

2017

 
 

Third

Quarter

  

Second

Quarter

  

First

Quarter

  

Fourth

Quarter

  

Third

Quarter

  

First

Quarter

  

Fourth

Quarter

  

Third

Quarter

  

Second

Quarter

  

First

Quarter

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Balance at beginning of period

 $2,379  $2,358  $2,447  $2,452  $2,453  $2,327  $2,386  $2,379  $2,358  $2,447 

Charge-offs:

                                        
Real estate loans:                        
Construction, land development and other land loans              
Secured by 1-4 family residential properties (10) (4) (13) (7) (28) (14) (1) (10) (4) (13)
Secured by multi-family residential properties              
Secured by non-farm, non-residential properties              
Other              

Commercial and industrial

  

            

                

Consumer loans:

  

 

                                

Consumer

  (494

)

  (569

)

  (658

)

  (398

)

  (596

)

  (604)  (576)  (494)  (569)  (658)
Indirect sales (150) (160) (135) (354) (111)  (147

)

  (142

)

  (150

)

  (160

)

  (135

)

Other loans

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

Total charge-offs

  (654

)

  (733

)

  (806

)

  (759

)

  (735

)

  (765

)

  (719

)

  (654

)

  (733

)

  (806

)

Recoveries

  158   178   202   176   154   148   137   158   178   202 

Net recoveries (charge-offs)

  (496

)

  (555

)

  (604

)

  (583

)

  (581

)

  (617

)

  (582

)

  (496

)

  (555

)

  (604

)

Provision (reduction in reserve) for loan losses

  503   576   515   578   580   619   523   503   576   515 

Ending balance

 $2,386  $2,379  $2,358  $2,447  $2,452  $2,329  $2,327  $2,386  $2,379  $2,358 

as a percentage of loans

  2.60

%

  2.63

%

  2.71

%

  2.78

%

  2.78

%

as a % of loans

  2.40

%

  2.48

%

  2.60

%

  2.63

%

  2.71

%

 


43

 

Nonperforming Assets

 

Nonperforming assets at the end of the five most recent quarters as of September 30, 2017March 31, 2018 were as follows:

 

 

Consolidated

  

Consolidated

 
 20172016  2018  

2017

 
 

September

30,

  

June

30,

  

March

31,

  

December

31,

  

September

30,

  

March

31,

  

December

31,

  

September

30,

  

June

30,

  

March

31,

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Non-accrual loans

 $1,956  $1,847  $2,205  $2,417  $2,266  $2,037  $2,148  $1,956  $1,847  $2,205 

Other real estate owned

  3,819   4,351   4,587   4,858   5,391   3,343   3,792   3,819   4,351   4,587 

Total

 $5,775  $6,198  $6,792  $7,275  $7,657  $5,380  $5,940  $5,775  $6,198  $6,792 

Nonperforming assets as a percentage of loans and other real estate

  1.67

%

  1.82

%

  2.08

%

  2.19

%

  2.37

%

  1.49

%

  1.67

%

  1.67

%

  1.82

%

  2.08

%

Nonperforming assets as a percentage of total assets

  0.94

%

  1.01

%

  1.10

%

  1.20

%

  1.28

%

  0.86

%

  0.95

%

  0.94

%

  1.01

%

  1.10

%

 

 

Bank

  

Bank

 
 20172016  

2018

  

2017

 
 

September

30,

  

June

30,

  

March

31,

  

December

31,

  

September

30,

  

March

31,

  

December

31,

  

September

30,

  

June

30,

  

March

31,

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Non-accrual loans

 $332  $343  $609  $603  $766  $369  $315  $332  $343  $609 

Other real estate owned

  3,527   3,951   4,161   4,353   4,887   3,100   3,527   3,527   3,951   4,161 

Total

 $3,859  $4,294  $4,770  $4,956  $5,653  $3,469  $3,842  $3,859  $4,294  $4,770 

Nonperforming assets as a percentage of loans and other real estate

  1.52

%

  1.72

%

  1.99

%

  2.03

%

  2.38

%

  1.31

%

  1.47

%

  1.52

%

  1.72

%

  1.99

%

Nonperforming assets as a percentage of total assets

  0.63

%

  0.69

%

  0.77

%

  0.81

%

  0.94

%

  0.55

%

  0.61

%

  0.63

%

  0.69

%

  0.77

%

 

 

ALC

  

ALC

 
 20172016  

2018

  

2017

 
 

September

30,

  

June

30,

  

March

31,

  

December

31,

  

September

30,

  

March

31,

  

December

31,

  

September

30,

  

June

30,

  

March

31,

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Non-accrual loans

 $1,624  $1,504  $1,596  $1,814  $1,500  $1,668  $1,833  $1,624  $1,504  $1,596 

Other real estate owned

  292   400   426   505   504   243   265   292   400   426 

Total

 $1,916  $1,904  $2,022  $2,319  $2,004  $1,911  $2,098  $1,916  $1,904  $2,022 

Nonperforming assets as a percentage of loans and other real estate

  2.08

%

  2.10

%

  2.31

%

  2.62

%

  2.26

%

  1.97

%

  2.23

%

  2.08

%

  2.10

%

  2.31

%

Nonperforming assets as a percentage of total assets

  2.06

%

  2.08

%

  2.29

%

  2.59

%

  2.24

%

  1.96

%

  2.22

%

  2.06

%

  2.08

%

  2.29

%

 

 

 


44

 

Deposits

 

Total deposits increased by 2.2%1.6% to $508.4$525.3 million as of September 30, 2017,March 31, 2018, from $497.6$517.1 million as of December 31, 2016.2017. Core deposits, which exclude time deposits of $250 thousand or more, provide for a relatively stable funding source that supports earning assets. Core deposits totaled $479.7$502.2 million, or 94.4%95.6% of total deposits, as of September 30, 2017,March 31, 2018, compared to $461.8$489.0 million, or 92.8%94.6% of total deposits, as of December 31, 2016.2017.

 

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 one of the Company’s primary sources of funding in the future, and 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 the Federal Reserve and other central banks.

 

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 thirdfirst quarter of 2017,2018, these borrowings represented 4.5%5.4% of average interest-bearing liabilities, compared to 2.6%5.7% in the thirdfirst quarter of 2016.2017.

 

Shareholders’ Equity

 

The Company has historically placed great emphasis on maintaining its strong capital base. As of September 30, 2017,March 31, 2018, shareholders’ equity totaled $78.9$75.5 million, or 12.8%12.0% of total assets, compared to $76.2 million, or 12.6%12.2% of total assets, as of December 31, 2016.2017. 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. The increasedecrease in shareholders’ equity during the period ended September 30, 2017March 31, 2018 resulted primarily from increasesan increase in accumulated other comprehensive income related to changesloss associated with unrealized losses in the fair value of investmentavailable-for-sale securities available-for-sale.during the first quarter of 2018, which was partially offset by growth in retained earnings. The fair value of the available-for-sale portfolio fluctuates based primarily on changes in interest rates. Accordingly, the net unrealized gainslosses during the thirdfirst quarter of 20172018 are 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 our desire to maintain a strong capital base, as well as regulatory requirements relating to the payment of dividends. During each of the three-month periods ended September 30,March 31, 2018 and 2017, and 2016, Bancshares declared dividendsa dividend of $0.02 per common share, or approximately $0.1 million in aggregate amount.

 

As of September 30, 2017both March 31, 2018 and December 31, 2016,2017, the Company retained approximately $20.4 million and $20.8 million in treasury stock, respectively.stock. The Company initiated a share repurchase program in January 2006, under which the Company was authorized to repurchase up to 642,785 shares of BancsharesBancshares’ common stock before December 31, 2007. In December 2007, and in each year since, the Board of Directors has extended the expiration date of the share repurchase program for an additional year. Currently, the share repurchase program is set to expire on December 31, 2017.2018. There are 242,303 shares available for repurchase under this program, at management’s discretion. No shares were purchased under this program to date in 20172018 or in 2016.2017.

 

As of September 30, 2017March 31, 2018 and December 31, 2016,2017, a total of 100,990106,566 and 114,547103,620 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'directors’ fees allocated to be paid in shares of stock as equity surplus. The Company uses shares of treasury stock to satisfy these obligations when due.

 


LIQUIDITY AND CAPITAL RESOURCES

 

Theasset portion of the balance sheet provides liquidity primarily from two sources: (1) principal payments and maturities of loans and (2) maturities and principal payments from the investment portfolio. Other short-term investments, such as federal funds sold, may also provide additional sources of liquidity. Loans maturing or repricing in one year or less amounted to $114.6$111.1 million as of September 30, 2017March 31, 2018 and $127.3$117.3 million as of December 31, 2016.2017. Investment securities forecasted to mature or reprice in one year or less were estimated to be $10.5$10.2 million of the investment portfolio as of September 30, 2017.March 31, 2018.

 

Although a substantial portion of 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 consistsconsists of securities that are readily marketable and easily convertible into cash on short notice. As of September 30, 2017,March 31, 2018, the investment securities portfolio had an estimated average life of 2.72.8 years, and approximately 86.33%86.7% of the portfolio (including both available-for-sale and held-to-maturity investments) was expected to be repaid within five years. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

 

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

 

As of September 30, 2017March 31, 2018 and December 31, 2016,2017, the Company had $20.0 million and $25.0 million, respectively, in outstanding borrowings under FHLB advances. The Company had up to $164.8$167.6 million and $155.0$159.3 million in remaining unused credit from the FHLB (subject to available collateral) as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. In addition, the Company had $18.8 million in unused established federal funds lines as of both September 30, 2017March 31, 2018 and December 31, 2016.2017.

45

The Company’s acquisition of The Peoples Bank is expected to close in the third quarter of 2018, subject to the satisfaction of customary closing conditions, including receipt of regulatory approvals. The total purchase price of approximately $23 million, subject to adjustment in accordance with the terms of the Stock Purchase and Affiliate Merger Agreement governing the transaction, will be settled in cash (90%) and Bancshares common stock (10%). The Company expects to fund the cash portion of the purchase price with available cash, including cash expected from a special, one-time dividend from the Bank to Bancshares, as the sole shareholder of the Bank.

 

Management believes that the Company has adequate sources of liquidity to more than cover its contractual obligations and commitments over the next twelve months. Management is not aware of any condition that currently exists that would have an adverse effect on the liquidity, capital resources or operation of the Company.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

Financial simulation models are the primary tools used by the Asset/Liability Committee of the Bank'sBanks board of directors to measure interest rate exposure. Using a wide range of scenarios, management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. In these simulations, assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of the Company’s balance sheet resulting from both strategic plans and customer behavior. Simulation models also incorporate management’s assumptions regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates.


 

Measuring Interest Rate Sensitivity

 

Interest rate sensitivity is a function of the repricing characteristics of all of the Company’s portfolio of assets and liabilities. These repricing characteristics are the timeframes during which the interest-bearing assets and liabilities are subject to fluctuation based on changes in interest rates, either at replacement or maturity, during the life of the instruments. Measuring interest rate sensitivity is a function of the differences in the volume of assets and the volume of liabilities that are subject to repricing in future time periods. These differences are known as interest sensitivity gaps and are usually calculated for segments of time and on a cumulative basis.

 

The Company measures changes in net interest income and net interest margin on a monthly basis through income simulation over various interest rate shock scenarios, including plus or minus 1%, 2%, 3% and 4% scenarios. Each month, management evaluates how changes in short- and long-term interest rates may impact future profitability, as reflected in the Company’s net interest margin.

 

Also on a monthly basis, management calculates how changes in interest rates would impact the market value of the Company’s assets and liabilities, as well as its long-term profitability. The process is similar to assessing short-term risk but emphasizes and is measured over a five-year time period, which allows for a more comprehensive assessment of longer-term repricing and cash flow imbalances that may not be captured by short-term net interest margin simulations. The results of these calculations are representative of long-term interest rate risk, both in terms of changes in the present value of the Company’s assets and liabilities and long-term changes in core profitability.

 

See Part II, Item 7A, “Quantitative“ Quantitative and Qualitative Disclosures About Market Risk,” of Bancshares’Bancshares' Annual Report on Form 10-K as of and for the year ended December 31, 20162017 for additional disclosures related to market risk. Management’s evaluation as of September 30, 2017March 31, 2018 did not indicate any significant increase in the Company’s exposure to market risk from those disclosed as of December 31, 2016.2017.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

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

 

Bancshares’Bancshares management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Bancshares’ disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of September 30, 2017,March 31, 2018, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based on that evaluation, Bancshares’ management concluded, as of September 30, 2017,March 31, 2018, that Bancshares’ disclosure controls and procedures are effective to ensure that the information required to be disclosed in Bancshares’ periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 


46

 

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

The Company is a party to certain ordinary course litigation from time to time, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.

 

ITEM 1A.

RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 20162017 that could materially affect the Company’s business, financial condition or future results. The risks described in Bancshares’ Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The followingAs noted in the table sets forthbelow, there were no 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 thirdfirst quarter of 2017.2018.

 

Issuer Purchases of Equity Securities

 

Period

 

Total Number

of Shares

Purchased(2)

  

Average

Price Paid

per Share

  

Total Number of

Shares Purchased as

Part of Publicly

Announced

Programs (1)

  

Maximum Number (or

Approximate Dollar Value)

of Shares that May Yet Be

Purchased Under

the Programs (1)

 

JulyJanuary 1 – July 31

$

242,303

August 1 – AugustJanuary 31

  

  $

      242,303 

SeptemberFebruary 1September 30February 28

  

  $

      242,303 

March 1 – March 31

$242,303

Total

  

(2) $

      242,303 

 

(1)

On December 16, 2016,20, 2017, the Board of Directors extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, Bancshares is authorized to repurchase up to 642,785 shares of its common stock. The expiration date of the extended repurchase program isstock before December 31, 2017. As2018, of September 30, 2017, there werewhich 242,303 shares still available for purchase under the program.remain available.

(2)

ThereNo shares were no shares purchased in open-market transactions by an independent trustee for Bancshares’ 401(k) Plan during the thirdfirst quarter of 2017.2018.

 

ITEM 6.

EXHIBITS

 

The exhibits listed in the Index to Exhibits below are filed herewith and are incorporated herein by reference.

 


47

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FIRST US BANCSHARES, INC.

 

DATE: November 8, 2017May 4, 2018

 

BY:

 

/s/ Thomas S. Elley

  

Thomas S. Elley

  

Its Vice President, Treasurer and Assistant Secretary, Chief Financial Officer and Principal Accounting Officer

  

(Duly Authorized Officer and Principal Financial Officer)

 


48

 

INDEX TO EXHIBITS

 

Exhibit No.

 

Description

   
2.1Stock Purchase and Affiliate Merger Agreement, dated April 16, 2018, by and among First US Bancshares, Inc., First US Bank, The Peoples Bank, Tracy E. Thompson and Tyler S. Thompson, and Tracy E. Thompson as shareholder representative (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 000-14549), filed on April 17, 2018).

3.1

 

Certificate of Incorporation of United Security Bancshares, Inc. (incorporated herein by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 000-14549), as filed on November 12, 1999).

   

3.1A

 

Certificate of Amendment to the Certificate of Incorporation of United Security Bancshares, Inc., effective as of October 11, 2016 (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 000-14549), filed on October 11, 2016).

   

3.2

 

Bylaws of First US Bancshares, Inc., effective as of October 11, 2016 (incorporated herein by reference to Exhibit 3.2 to the Current Report on Form 8-K (File No. 000-14549), filed on October 11, 2016).

   

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

   

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

   

32

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

    101

 

Interactive Data Files for the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017.March 31, 2018.