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 March 31,September 30, 2018

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 ifof 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 May 4November 8, , 2018

Common Stock, $0.01 par value

6,087,264 6,296,712 shares



1

 

 

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

 

  

PAGE

   
 

PART I. FINANCIAL INFORMATION

 
   

ITEM 1.

FINANCIAL STATEMENTS

 
   

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

4
   

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

5
   

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

6
   

Interim CondensedCondensed Consolidated Statements of Cash Flows for the ThreeNine Months Ended March 31,September 30, 2018 and 2017 (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

3640
   

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

4651
   

ITEM 4.

CONTROLS AND PROCEDURES

4652
   
 

PART II. OTHER INFORMATION

4753
   

ITEM 1.

LEGAL PROCEEDINGS

4753
   

ITEM 1A.

RISK FACTORS

4753
   

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

4753
   

ITEM 6.

EXHIBITS

4753
   

Signature Page

4854

 

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” 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's Annual Report on Form 10-K as of and for the year ended December 31, 2017. Specifically, with respect to statements relating to the sufficiency of the allowance for loan and lease losses, loan demand, cash flows, 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 cybersecurity threats. With respect to the proposedCompany’s 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-relatedintegration-related issues; and changes in asset quality and credit risk as a result of the transaction. With respect to statements relating to the lease of the unused remaining leasable space in Pump House Plaza, these factors include, but are not limited to, the adherence of the leasing counterparty to the terms and conditions of the lease agreement and commercial real estate conditions in the Birmingham, Alabama market in general. There can be no assurance that such factors or other factors will not affect the accuracy of such forward-looking statements. 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.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, Except Share and Per Share Data)Thousands)

 

 

March 31,

  

December 31,

  

September 30,

  

December 31,

 
 

2018

  

2017

  

2018

  

2017

 
 

(Unaudited)

      

(Unaudited)

     

ASSETS

ASSETS

 

ASSETS

 

Cash and due from banks

 $7,806  $7,577  $11,809  $7,577 

Interest-bearing deposits in banks

  26,667   19,547   38,274   19,547 

Total cash and cash equivalents

  34,473   27,124   50,083   27,124 
Federal funds sold     15,000   8,561   15,000 

Investment securities available-for-sale, at fair value

  156,642   153,871   137,258   153,871 

Investment securities held-to-maturity, at amortized cost

  25,300   26,279   22,238   26,279 

Federal Home Loan Bank stock, at cost

  1,413   1,609   703   1,609 

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

  353,805   346,121 

Loans and leases, net of allowance for loan and lease losses of $5,116 and $4,774, respectively

  519,822   346,121 

Premises and equipment, net

  26,197   26,433   27,120   26,433 

Cash surrender value of bank-owned life insurance

  15,000   14,923   15,158   14,923 

Accrued interest receivable

  2,011   2,057   2,444   2,057 
Goodwill and core deposit intangible, net 9,557   

Other real estate owned

  3,343   3,792   1,489   3,792 

Other assets

  9,135   8,372   8,162   8,372 

Total assets

 $627,319  $625,581  $802,595  $625,581 

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Deposits

 $525,273  $517,079  $715,761  $517,079 

Accrued interest payable

  387   381   355   381 

Other liabilities

  5,836   6,319   8,817   6,319 

Short-term borrowings

  10,298   15,594   192   15,594 

Long-term debt

  10,000   10,000      10,000 

Total liabilities

  551,794   549,373   725,125   549,373 

Commitments and contingencies

                

Shareholders’ equity:

                

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 

Common stock, par value $0.01 per share, 10,000,000 shares authorized; 7,560,914 and 7,345,946 shares issued, respectively; 6,296,712 and 6,081,744 shares outstanding, respectively

  75   73 

Surplus

  10,867   10,755   13,385   10,755 

Accumulated other comprehensive loss, net of tax

  (1,955)  (868)  (2,882)  (868)

Retained earnings

  86,965   86,673   87,317   86,673 

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

  (20,414

)

  (20,414

)

  (20,414

)

  (20,414)

Noncontrolling interest

  (11

)

  (11

)

  (11

)

  (11)

Total shareholders’ equity

  75,525   76,208   77,470   76,208 

Total liabilities and shareholders’ equity

 $627,319  $625,581  $802,595  $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

  

Three Months Ended

  Nine Months Ended  
 

March 31,

  

September 30,

  September 30,  
 

2018

  

2017

  

2018

  

2017

  2018  2017 
 

(Unaudited)

  

(Unaudited)

  (Unaudited) 

Interest income:

                        

Interest and fees on loans

 $7,089  $6,496  $8,395  $6,802  $22,815  $19,928 

Interest on investment securities

  1,030   1,014   1,057   1,018   3,146   3,085 

Total interest income

  8,119   7,510   9,452   7,820   25,961   23,013 
                        

Interest expense:

                        

Interest on deposits

  701   528   1,120   617   2,619   1,713 

Interest on borrowings

  104   63   4   68   198   189 

Total interest expense

  805   591   1,124   685   2,817   1,902 
                        

Net interest income

  7,314   6,919   8,328   7,135   23,144   21,111 
                        

Provision for loan losses

  658   515 

Provision for loan and lease losses

  789   373   2,149   1,464 
                        

Net interest income after provision for loan losses

  6,656   6,404 

Net interest income after provision for loan and lease losses

  7,539   6,762   20,995   19,647 
                        

Non-interest income:

                        

Service and other charges on deposit accounts

  467   464   489   481   1,400   1,406 

Credit insurance income

  218   256   198   160   516   459 

Net gain on sales and prepayments of investment securities

  3   49      178   105   228 
Net gain on settlement of derivative contracts 981    981   
Mortgage fees from secondary market  117      128   89   389   147 
Other income, net  335   398   316   328   993   1,093 

Total non-interest income

  1,140   1,167   2,112   1,236   4,384   3,333 
                        

Non-interest expense:

                        

Salaries and employee benefits

  4,567   4,398   4,643   4,370   13,743   13,048 

Net occupancy and equipment

  889   777   983   806   2,745   2,276 

Computer services

  292   387   328   337   937   1,036 
Fees for professional services  273   233   242   187   781   650 
Acquisition expenses 1,492    1,492   

Other expense

  1,280   1,242   1,454   1,490   4,237   4,080 

Total non-interest expense

  7,301   7,037   9,142   7,190   23,935   21,090 
                        

Income before income taxes

  495   534   509   808   1,444   1,890 

Provision for income taxes

  81   130   269   173   431   435 

Net income

 $414  $404  $240  $635  $1,013  $1,455 

Basic net income per share

 $0.07  $0.07  $0.04  $0.10  $0.17  $0.24 

Diluted net income per share

 $0.06  $0.06  $0.03  $0.10  $0.15  $0.22 

Dividends per share

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

 

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

 
  

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 
  

Three Months Ended

  Nine Months Ended 
  

September 30,

  September 30, 
  

2018

  

2017

  2018  2017 
  

(Unaudited)

  (Unaudited) 

Net income

 $240  $635  $1,013  $1,455 

Other comprehensive income (loss):

                

Unrealized holding gains (losses) on securities available-for-sale arising during period, net of tax expense (benefit) of $13, $(7), $(533) and $864, respectively

  39   (12)  (1,602)  1,481 

Reclassification adjustment for net gains on securities available-for-sale realized in net income, net of tax expense of $0, $66, $26 and $84, respectively

     (113

)

  (79)  (144)
Unrealized holding gains (losses) arising during the period on effective cash flow hedge derivatives, net of tax expense (benefit) of $0, $(1), $133 and $(20), respectively  (3)  (1)  398   (35)
Reclassification adjustment for net gains on cash flow hedge derivatives realized in net income, net of tax expense of $243, $0, $243 and $0, respectively  (731)     (731)   

Other comprehensive income (loss)

  (695)  (126)  (2,014)  1,302 

Total comprehensive income (loss)

 $(455) $509  $(1,001) $2,757 

 

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)

 

 

Three Months Ended

  

Nine Months Ended

 
 

March 31,

  

September 30,

 
 

2018

  

2017

  

2018

  

2017

 
 

(Unaudited)

  

(Unaudited)

 

Cash flows from operating activities:

                

Net income

 $414  $404  $1,013  $1,455 

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

                

Depreciation and amortization

  351   242   1,078   781 

Provision for loan losses

  658   515 

Provision for loan and lease losses

  2,149   1,464 

Deferred income tax provision

  79   128   821   231 

Net gain on sale and prepayment of investment securities

  (3

)

  (49

)

  (105

)

  (228

)

Stock-based compensation expense

  112   79   333   262 

Net amortization of securities

  225   313   618   869 
Amortization of intangible assets 43   

Net loss on premises and equipment and other real estate

  12   80   330   453 

Changes in assets and liabilities:

                

Decrease in accrued interest receivable

  46   63   148   110 

Increase in other assets

  (67)  (28)

Increase (decrease) in accrued interest payable

  6   (12

)

Decrease in other liabilities

  (483

)

  (262

)

Decrease (increase) in other assets

  (900)  57 

Increase (decrease) in accrued interest expense

  (26)  40 

Increase (decrease) in other liabilities

  2,061

 

  (114

)

Net cash provided by operating activities

  1,350   1,473   7,563   5,380 

Cash flows from investing activities:

                
Net decrease in federal funds sold  15,000     6,439   

Purchases of investment securities, available-for-sale

  (15,224

)

  (15,254

)

  (15,224

)

  (15,254

)

Purchases of investment securities, held-to-maturity

     (4,696

)

     (4,696

)

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

  4,221   1,749 

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

  10,367   14,228   30,909   38,570 

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

  949   925   3,950   3,119 

Net decrease (increase) in Federal Home Loan Bank stock

  196   (28)

Net decrease in Federal Home Loan Bank stock

  1,471   185 
Net cash paid for acquisition (21,313)  

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

  711   424   2,883   1,215 

Net decrease (increase) in loans

  (8,661)  4,397 

Net increase in loans

  (22,122)  (17,326)

Purchases of premises and equipment

  (115

)

  (4,087

)

  (653

)

  (9,858

)

Net cash provided by (used in) investing activities

  3,223   (4,091)

Net cash used in investing activities

  (9,439)  (2,296)

Cash flows from financing activities:

                

Net increase in deposits

  8,194   11,522   58,307   10,829 

Net increase (decrease) in short-term borrowings

  (5,296)  631   (25,402)  516 
Payments on long-term Federal Home Loan Bank advances  (10,000)  (5,000)
Net share-based compensation transactions     (39)     (41)
Issuance of common stock 2,299   

Dividends paid

  (122

)

  (121

)

  (369

)

  (364

)

Net cash provided by financing activities

  2,776   11,993   24,835   5,940 

Net increase in cash and cash equivalents

  7,349   9,375   22,959   9,024 

Cash and cash equivalents, beginning of period

  27,124   23,530   27,124   23,530 

Cash and cash equivalents, end of period

 $34,473  $32,905  $50,083  $32,554 

Supplemental disclosures:

                

Cash paid for:

                

Interest

 $799  $603  $2,843  $1,862 
Income taxes  136      137   77 

Non-cash transactions:

                

Assets acquired in settlement of loans

 $213  $183   649   608 

Reissuance of treasury stock as compensation

 $  $350 

 

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, 2018. 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, 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, 2017.

 

Net Income Per Share

 

Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding (basic shares). Included in basic shares are certain shares that have been accrued as of the balance sheet date as deferred compensation 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, adjusted for the effect of potentially dilutive stock awards outstanding during the 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

  

Three Months Ended

  

Nine Months Ended

 
 

March 31,

  

September 30,

  

September 30,

 
 

2018

  

2017

  

2018

  

2017

  

2018

  

2017

 

Basic shares

  6,188,861   6,158,399   6,304,717   6,176,381   6,236,197   6,170,892 

Dilutive shares

  379,701   320,500   377,951   320,501   377,951   320,501 

Diluted shares

  6,568,562   6,478,899   6,682,668   6,496,882   6,614,148   6,491,393 

 

 

Three Months Ended

  

Three Months Ended

  

Nine Months Ended

 
 

March 31,

  

September 30,

  

September 30,

 
 

2018

  

2017

  

2018

  

2017

  

2018

  

2017

 
 

(Dollars in Thousands, Except Per Share Data)

  

(Dollars in Thousands, Except Per Share Data)

 

Net income

 $414  $404  $240  $635  $1,013  $1,455 

Basic net income per share

 $0.07  $0.07  $0.04  $0.10  $0.17  $0.24 

Diluted net income per share

 $0.06  $0.06  $0.03  $0.10  $0.15  $0.22 

 

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’sCompany’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, settlement of derivative contracts or changes in the fair value of cash flow derivatives.

 

8

Table of Contents

 

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

 

Accounting Standards Update (“ASU”) 2017-122017-12, “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 2017-122017-12 to have a material impact on the Company's consolidated financial statements.

 

ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”  Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective prospectively for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial InstrumentsInstruments.”.” 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; 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 beginning after December 15, 2019, and for interim periods within those fiscal years beginning after December 15, 2019. years. 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.statements.

 

ASU 2016-02,Leases “Leases (Topic 842).” Issued in February 2016, ASU 2016-022016-02 was issued by the Financial Accounting Standards Board (“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. 2018, and interim periods within those years. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial 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,Financial “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of FASB ASC 825).” Issued in January 2016, ASU 2016-012016-01 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 2016-012016-01 became effective for the Company on January 1, 2018. The adoption of ASU 2016-012016-01 did not have a material impact on the Company's consolidated financial statements.

 

ASU 2014-09,Revenue “Revenue from Contracts with Customers (Topic 606)606).” Issued in May 2014, ASU 2014-092014-09 added FASB ASC Topic 606, Revenue from Contracts with Customers, and superseded revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition and certain cost guidance in FASB ASC Topic 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 2014-092014-09 became effective for the Company on January 1, 2018. The adoption of ASU 2014-092014-09 did not have a material impact on the Company's consolidated financial statements.

 

Revenue

 

On January 1, 2018, the Company implemented Accounting Standards Update2014-09,ASU 2014-09, Revenue from Contracts with Customers, codified at ASC Topic 606. The Company adopted ASC 606 using the modified retrospective transition method. As of December 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 nine-month period ended September 30, 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 is 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 scope of ASC 606.


 

All of the Company’s 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 consistedconsists 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 threenine months ended March 31,September 30, 2018 and 2017 was $0.8$2.4 million and $0.7$2.2 million, respectively, and for the three months ended September 30, 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 MarchSeptember 30, 2018.

3.

ACQUISITION ACTIVITY

On August 31, 2018, the Company completed the acquisition of The Peoples Bank (“TPB”) and then merged TPB with and into its wholly owned subsidiary, First US Bank (the “Bank”). As of the acquisition date, TPB’s assets totaled $166.5 million, consisting primarily of pre-discounted gross loans totaling $156.8 million. Total deposits were $140.0 million.  Preliminary purchase accounting adjustments were recorded as of the acquisition date, resulting in goodwill of $7.6 million. 

The acquisition of TPB was accounted for using the purchase method of accounting in accordance with ASC 805, Business Combinations. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

In accordance with the transaction agreement, the Company acquired 100% of the capital stock of TPB for the purchase price of $23.4 million calculated on the net book value of TPB as of December 31, 2017 and a mutually agreed upon multiple of 1.62, less certain mutually agreed upon deductions that are described in the transaction agreement. Approximately 90% of the purchase price was paid in cash, which totaled approximately $20.7 million, and approximately 10% was paid in the form of unregistered shares of the Company’s common stock, which consisted of 204,355 shares of FUSB common stock. The aggregate purchase price was subject to adjustment following the closing date of the transaction based on determination of TPB’s final net book value as of the date of closing, which resulted in the payment by the Company of an additional cash amount of approximately $1.4 million.

A summary, at fair value, of the assets acquired and liabilities assumed in the TPB transaction, as of the acquisition date, is as follows:

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

NET ASSETS ACQUIRED FROM THE PEOPLES BANK

AUGUST 31, 2018

(Dollars in Thousands)

  

Acquired from TPB

  

Fair Value Adjustments

  

Fair Value as of August 31, 2018

 

Assets Acquired:

            

Cash and cash equivalents

 $3,085  $  $3,085 

Investment securities, available-for-sale

  5,977      5,977 

Federal Home Loan Bank stock, at cost

  565      565 

Loans

  156,772   (2,395)  154,377 
Allowance for loan losses  (1,702)  1,702    
Net loans  155,070   (693)  154,377 
Premises and equipment, net  1,198   17   1,215 
Other real estate owned  85      85 

Other assets

  551   (245)  306 
Core deposit intangible     2,048   2,048 

Total assets acquired

 $166,531  $1,127  $167,658 

 

            

Liabilities Assumed:

            
Deposits  140,033   342   140,375 
Short-term borrowings  10,000      10,000 

Other liabilities

  437      437 

Total liabilities assumed

  150,470   342   150,812 

Shareholders’ Equity Assumed:

            
Common stock  1,027   (1,027)   
Surplus  5,280   (5,280)   
Accumulated other comprehensive income, net of tax  17   (17)   

Retained earnings

  9,737   (9,737)   
Total shareholders’ equity assumed  16,061   (16,061)   

Total liabilities and shareholders’ equity assumed

 $166,531  $(15,719) $150,812 
             
Net assets acquired  $16,846 
Purchase price   24,398 
Goodwill  $7,552 

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented in the acquisition above.

Cash and cash equivalents — The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of the assets.


Investment securities — Prior to acquisition, the investment securities acquired were classified as available-for-sale and, accordingly, were recorded at fair value on a recurring basis. Fair value for most of the securities was based upon quoted prices of like or similar securities and determined using observable data including, among other things, dealer quotes, market spreads, cash flow, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus, prepayment speeds, credit information and the securities’ terms and conditions. 

Federal Home Loan Bank stock, at cost — Prior to acquisition, TPB maintained a required investment in the Federal Home Loan Bank (FHLB) of Atlanta which was, in part, based on TPB’s amount of borrowings with the FHLB. The investment was carried at cost as it is not readily marketable and, accordingly, there is no established market price for the investment. Upon acquisition, the Bank was able to absorb the investment into its own holdings of stock with the FHLB of Atlanta. The Bank has the ability to be reimbursed by the FHLB of Atlanta at cost for stock holdings as borrowings with the FHLB are paid down.  Accordingly, the carrying amount of the assets is considered a reasonable estimate of fair value. 

Loans — Fair values for performing loans were determined based on a discounted cash flow methodology that aggregated model inputs and loan information into selected pools and calculated the loan level cash flows used to value the pools.  The model calculated the contractual cash flows and expected cash flows, and then discounted the expected cash flows to present value in order to determine fair value.  The assumptions used to estimate the fair value of the loans included unpaid principal balance, maturity date, coupon, prepayment speed, expected credit losses, and discount rates.  Purchased credit impaired loans were valued using the cost recovery method. 

Allowance for loan losses — In accordance with U.S. GAAP, the fair value of the acquired loans were adjusted to fair value and the pre-acquisition allowance for loan losses on TPB’s balance sheet was reversed.

Premises and equipment — The fair value of acquired land and buildings was determined based on independent appraisals performed by a third-party appraiser. The fair value adjustment represents the difference between fair value and the carrying value at the date of acquisition. For furniture and fixtures, carrying value was considered to be a reasonable estimate of fair value.

Other real estate owned — These assets are presented at the estimated net realizable value that management expects to receive when the properties are sold, net of related costs of disposal.

Other assets — The fair value adjustment was due primarily to changes in deferred tax assets related to the transaction, as well as adjustment of certain prepaid assets associated with the TPB’s core processing vendor. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.

Core deposit intangible — This intangible asset represents the value of the relationships that TPB had with its deposit customers. The fair value of the core deposit intangible was estimated using a discounted cash flow methodology that gave consideration to expected customer attrition rates, cost of the deposit base and the net maintenance cost attributable to customer deposits.

Deposits — The fair values used for the demand and savings deposits that comprise the transaction accounts acquired equal the amount payable on demand at the acquisition date.  The fair value of certificates of deposit was determined using a discounted cash flow methodology whereby an estimate of the present value of contractual payments over the remaining life of the time deposit was determined.  Future cash flows were discounted using market interest rates estimated based on the median offering rates of peer institutions at the time of the acquisition.

Short-term borrowings — TPB’s short-term borrowings were comprised of daily renewable FHLB advances.  Based on the short-term nature of the borrowings, the carrying amount of the liability was determined to be a reasonable approximation of fair value.

Other liabilities — The carrying amount of these other liabilities was deemed to be a reasonable estimate of fair value.

Pro Forma Financial Information

The results of operations of TPB have been included in the Company’s consolidated financial statements since the acquisition date. The following schedule includes pro forma results (unaudited) for the three and nine months ended September 30, 2018 and 2017, as if the TPB acquisition occurred as of the beginning of the reporting periods presented. Non-recurring acquisition-related expenses totaling approximately $1.5 million are included in non-interest expense for both the three and nine months ended September 30, 2018.

 

 

9
  

Three Months Ended

  Nine Months Ended  
  

September 30,

  September 30,  
  

2018

  

2017

  2018  2017 
  

(Dollars in Thousands, Except Per Share Data)

 

Summary of Operations

                

Net interest income

 $9,725  $9,045  $28,565  $26,609 

Provision for loan and lease losses

  789   373   2,149   1,464 
Net interest income after provision for loan and lease losses  8,936   8,672   26,416   25,145 

Non-interest income

  2,166   1,292   4,604   3,555 

Non-interest expense

  10,175   8,178   26,914   23,971 
Income before income taxes  927   1,786   4,106   4,729 
Provision for income taxes  370   530   1,072   1,433 

Net income

 $557  $1,256  $3,034  $3,296 
Basic net income per share $0.09  $0.20  $0.47  $0.52 

Diluted net income per share

 $0.08  $0.19  $0.45  $0.49 

Table

The pro forma information is presented for information purposes only and is not indicative of Contentsthe results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.


 

 

3.4.

INVESTMENT SECURITIES

 

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

 

 

Available-for-Sale

  

Available-for-Sale

 
 

March 31, 2018

  

September 30, 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

 $87,463  $202  $(1,983

)

 $85,682  $76,064  $144  $(1,897

)

 $74,311 

Commercial

  67,846   16   (1,868

)

  65,994   59,796   11   (2,091

)

  57,716 

Obligations of states and political subdivisions

  4,749   140   (3

)

  4,886   5,160   36   (45

)

  5,151 

U.S. Treasury securities

  80         80   80         80 

Total

 $160,138  $358  $(3,854

)

 $156,642  $141,100  $191  $(4,033

)

 $137,258 

 

 

Held-to-Maturity

  

Held-to-Maturity

 
 

March 31, 2018

  

September 30, 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

 $14,237  $  $(342

)

 $13,895  $12,357  $  $(408

)

 $11,949 

Obligations of U.S. government-sponsored agencies

  9,209      (255

)

  8,954   8,126      (323

)

  7,803 

Obligations of states and political subdivisions

  1,854      (16

)

  1,838   1,755      (28

)

  1,727 

Total

 $25,300  $  $(613

)

 $24,687  $22,238  $  $(759

)

 $21,479 

 

  

Available-for-Sale

 
  

December 31, 2017

 
      

Gross

  

Gross

  

Estimated

 
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 
  

(Dollars in Thousands)

 

Mortgage-backed securities:

                

Residential

 $83,360  $286  $(860

)

 $82,786 

Commercial

  67,281   27   (1,234

)

  66,074 

Obligations of states and political subdivisions

  4,752   182   (3

)

  4,931 

U.S. Treasury securities

  80         80 

Total

 $155,473  $495  $(2,097

)

 $153,871 

 

  

Held-to-Maturity

 
  

December 31, 2017

 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Estimated

Fair

Value

 
  

(Dollars in Thousands)

 

Mortgage-backed securities:

                

Commercial

 $15,065  $1  $(186

)

 $14,880 

Obligations of U.S. government-sponsored agencies

  9,326   7   (144

)

  9,189 

Obligations of states and political subdivisions

  1,888   5   (13

)

  1,880 

Total

 $26,279  $13  $(343

)

 $25,949 

10

 

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

 

 

Available-for-Sale

  

Held-to-Maturity

  

Available-for-Sale

  

Held-to-Maturity

 
 

Amortized

Cost

  

Estimated

Fair

Value

  

Amortized

Cost

  

Estimated

Fair

Value

  

Amortized

Cost

  

Estimated

Fair

Value

  

Amortized

Cost

  

Estimated

Fair

Value

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Maturing within one year

 $699  $707  $  $  $1,351  $1,351  $  $ 

Maturing after one to five years

  22,234   21,719   1,827   1,813   38,063   37,271   1,116   1,106 

Maturing after five to ten years

  80,332   78,419   4,293   4,217   59,244   57,214   7,564   7,327 

Maturing after ten years

  56,873   55,797   19,180   18,657   42,442   41,422   13,558   13,046 

Total

 $160,138  $156,642  $25,300  $24,687  $141,100  $137,258  $22,238  $21,479 


 

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.

 

11

Table of Contents

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 March 31,30, 2018 and December 31, 2017.

 

 

Available-for-Sale

  

Available-for-Sale

 
 

March 31, 2018

  

September 30, 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

 $56,885  $(1,209

)

 $21,126  $(774

)

 $28,238  $(591

)

 $39,667  $(1,305

)

Commercial

  20,155   (398

)

  44,735   (1,470

)

  9,681   (252

)

  47,607   (1,839

)

Obligations of states and political subdivisions  426   (3)        1,645   (22)  1,487   (24)

U.S. Treasury securities

  80            80          

Total

 $77,546  $(1,610

)

 $65,861  $(2,244

)

 $39,644  $(865

)

 $88,761  $(3,168

)

 

 

Held-to-Maturity

  

Held-to-Maturity

 
 

March 31, 2018

  

September 30, 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

 $7,642  $(150

)

 $6,253  $(192) $3,797  $(111) $8,152  $(297)

Obligations of U.S. government-sponsored agencies

  1,656   (23

)

  7,298   (232

)

  660   (14)  7,143   (310)

Obligations of states and political subdivisions

  1,311   (8

)

  527   (8)  1,209   (21

)

  518   (6)

Total

 $10,609  $(181

)

 $14,078  $(432

)

 $5,666  $(146

)

 $15,813  $(613

)

 

  

Available-for-Sale

 
  

December 31, 2017

 
  

Less than 12 Months

  

12 Months or More

 
  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

 
  

(Dollars in Thousands)

 

Mortgage-backed securities:

                

Residential

 $47,007  $(467

)

 $21,122  $(393

)

Commercial

  18,554   (180

)

  46,312   (1,054

)

Obligations of states and political subdivisions

  428   (3)      

U.S. Treasury securities

  80          

Total

 $66,069  $(650

)

 $67,434  $(1,447

)

 

  

Held-to-Maturity

 
  

December 31, 2017

 
  

Less than 12 Months

  

12 Months or More

 
  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

 
  

(Dollars in Thousands)

 

Mortgage-backed securities:

                

Commercial

 $7,895  $(63

)

 $6,675  $(123)

Obligations of U.S. government-sponsored agencies

  865   (2

)

  7,388   (142

)

Obligations of states and political subdivisions

  571   (3

)

  531   (10)

Total

 $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.

 

12

Table of Contents

 

As of September March 31,30, 2018, 75123 debt securities had been in a loss position for more than 12 months, and 9456 debt securities had been in a loss position for less than 12 months. As of December 31, 2017, 72 debt securities had been in a loss position for more than 12 months, and 83 debt securities had been in a loss position for less than 12 months. As of both March 31,September 30, 2018 and December 31, 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 March 31,September 30, 2018 or December 31, 2017.

 

Investment securities with a carrying value of $78.0$55.9 million and $86.8$86.8 million as of March 31,September 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and for other purposes.

 

 

4.5.

LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES

 

Portfolio Segments

 

The Company has divided the loan and lease 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 1-4 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 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 loansand leases – This portfolio segment includes loans and leases to commercial customers for use in the normal course of business. These credits may be loans, and lines of credit and leases 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 March 31,30, 2018 and December 31, 2017, the composition of the loan and lease portfolio by reporting segment and portfolio segment was as follows:

 

 

March 31, 2018

  

September 30, 2018

 
 

Bank

  

ALC

  

Total

  

Bank

  

ALC

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Real estate loans:

                        

Construction, land development and other land loans

 $25,965  $  $25,965  $43,501  $  $43,501 

Secured by 1-4 family residential properties

  36,618   9,963   46,581   111,555   8,472   120,027 

Secured by multi-family residential properties

  16,396      16,396   22,915      22,915 

Secured by non-farm, non-residential properties

  111,546      111,546   150,523      150,523 

Other

  188      188   1,100      1,100 

Commercial and industrial loans

  65,996      65,996 

Commercial and industrial loans and leases(1)

  83,087      83,087 
Consumer loans:                        

Consumer

  5,416   32,758   38,174   7,075   31,965   39,040 

Indirect sales

     60,157   60,157      71,005   71,005 

Total loans

  262,125   102,878   365,003   419,756   111,442   531,198 

Less: Unearned interest, fees and deferred cost

  349   6,020   6,369   331   5,929   6,260 

Allowance for loan losses

  2,500   2,329   4,829   2,709   2,407   5,116 

Net loans

 $259,276  $94,529  $353,805  $416,716  $103,106  $519,822 

(1) Includes equipment financing leases.

 

  

December 31, 2017

 
  

Bank

  

ALC

  

Total

 
  

(Dollars in Thousands)

 

Real estate loans:

            

Construction, land development and other land loans

 $26,143  $  $26,143 

Secured by 1-4 family residential properties

  34,272   10,801   45,073 

Secured by multi-family residential properties

  16,579      16,579 

Secured by non-farm, non-residential properties

  105,133      105,133 

Other

  190      190 

Commercial and industrial loans

  69,969      69,969 

Consumer loans:

            
Consumer  5,217   34,083   39,300 

Indirect sales

     55,071   55,071 

Total loans

  257,503   99,955   357,458 

Less: Unearned interest, fees and deferred cost

  374   6,189   6,563 

Allowance for loan losses

  2,447   2,327   4,774 

Net loans

 $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, 5563.6.0%% and 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 March 31,September 30, 2018 and December 31, 2017, respectively.

 

Loans with a carrying value of $27.0 million were pledged as collateral to secure FHLB borrowings as of September 30, 2018. No loans were pledged as collateral as of December 31, 2017.

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 unrelated 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 MarchSeptember 30, 2018 and December 31, 2018 and December 31,2017 were $0.4$0.8 million and $0.5$0.5 million, respectively. During the threenine months ended March 31,September 30, 2018, there were no$0.5 million of new loans to these parties, and repayments by active related parties were $0.1$0.2 million. During the year ended December 31, 2017, there were no new loans to these related parties, and repayments by active related parties were $11 thousand.$11 thousand.

 

14

Table

Acquired Loans

The Company acquired loans during the quarter ended September 30, 2018. At acquisition, certain acquired loans evidenced deterioration of Contentscredit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date.

The carrying amount of these loans is included in the balance sheet amount of loans receivable at September 30, 2018. The amount of these loans is shown below:

  September 30, 2018 
  

(Dollars in Thousands)

 
Real estate loans:    
Construction, land development and other land loans $75 
Secured by 1-4 family residential properties  2,227 
Secured by non-farm, non-residential properties  207 
Other  7 

Outstanding balance

 $2,516 

Carrying amount, net of fair value adjustment of $278 thousand at September 30, 2018

 $2,238 

The Company did not recognize any accretable yield, or income expected to be collected, associated with these loans. Additionally, during the three months ended September 30, 2018, the Company did not increase or reverse the allowance for loan losses related to these purchased credit impaired loans.


 

Allowance for Loan Losses

 

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

 

 

Bank

  

Bank

 
 

Three Months Ended March 31, 2018

  

Nine Months Ended September 30, 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

 $203  $238  $116  $777  $2  $1,049  $62  $  $2,447  $203  $238  $116  $777  $2  $1,049  $62  $  $2,447 

Charge-offs

     (8)                    (8)     (9)           (2)  (3)     (14)

Recoveries

     10      3      5   4      22      36      4      8   13      61 

Provision

  (7)  14   (1)  18      36   (21)     39   4   52   11   42      97   9      215 

Ending balance

 $196  $254  $115  $798  $2  $1,090  $45  $  $2,500  $207  $317  $127  $823  $2  $1,152  $81  $  $2,709 
                                                                        
Ending balance of allowance attributable to loans:                                                                        

Individually evaluated for impairment

 $  $5  $  $14  $  $69  $  $  $88  $31  $51  $  $7  $  $67  $22  $  $178 

Collectively evaluated for impairment

  196   249   115   784   2   1,021   45      2,412   176   266   127   816   2   1,085   59      2,531 
Loans acquired with deteriorated credit quality                       ��   
Total allowance for loan losses $196  $254  $115  $798  $2  $1,090  $45  $  $2,500  $207  $317  $127  $823  $2  $1,152  $81  $  $2,709 

Ending balance of loans receivable:

                                                                        
Individually evaluated for impairment $  $186  $  $524  $  $69  $  $  $779  $155  $58  $  $517  $  $67  $45  $  $842 

Collectively evaluated for impairment

  25,965   36,432   16,396   111,022   188   65,927   5,416      261,346   43,273   109,347   22,915   149,998   1,093   83,020   7,030      416,676 
Loans acquired with deteriorated credit quality  73   2,150      8   7            2,238 

Total loans receivable

 $25,965  $36,618  $16,396  $111,546  $188  $65,996  $5,416  $  $262,125  $43,501  $111,555  $22,915  $150,523  $1,100  $83,087  $7,075  $  $419,756 

 

  

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

 $  $52  $  $  $  $  $1,653  $622  $2,327 

Charge-offs

     (14)              (604)  (147)  (765)

Recoveries

     5               122   21   148 

Provision

     (7)              481   145   619 

Ending balance

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

Individually evaluated for impairment

 $  $  $  $  $  $  $  $  $ 

Collectively evaluated for impairment

     36               1,652   641   2,329 
Total allowance for loan losses $  $36  $  $  $  $  $1,652  $641  $2,329 

Ending balance of loans receivable:

                                    

Individually evaluated for impairment

 $  $  $  $  $  $  $  $  $ 
Collectively evaluated for impairment     9,963               32,758   60,157   102,878 

Total loans receivable

 $  $9,963  $  $  $  $  $32,758  $60,157  $102,878 

15

Table of Contents

  

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

  

ALC

 
 

Year Ended December 31, 2017

  

Nine Months Ended September 30, 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  $  $52  $  $  $  $  $1,653  $622  $2,327 

Charge-offs

                 (16)  (63)     (79)     (73)              (1,841)  (423)  (2,337)

Recoveries

     103      69      19   56      247      12               396   75   483 

Provision

  (332)  (169)  28   (195)     519   19      (130)     35               1,488   411   1,934 

Ending balance

 $203  $238  $116  $777  $2  $1,049  $62  $  $2,447  $  $26  $  $  $  $  $1,696  $685  $2,407 
                                                                        
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      26               1,696   685   2,407 
Total allowance for loan losses $203  $238  $116  $777  $2  $1,049  $62  $  $2,447  $  $26  $  $  $  $  $1,696  $685  $2,407 

Loan receivables:

                                    

Ending balance of loans receivable:

                                    

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      8,472               31,965   71,005   111,442 

Total loans receivable

 $26,143  $34,272  $16,579  $105,133  $190  $69,969  $5,217  $  $257,503  $  $8,472  $  $  $  $  $31,965  $71,005  $111,442 

 

 

16

Table of Contents
  

Bank and ALC

 
  

Nine Months Ended September 30, 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

     (82)           (2)  (1,844)  (423)  (2,351)

Recoveries

     48      4      8   409   75   544 

Provision

  4   87   11   42      97   1,497   411   2,149 

Ending balance

 $207  $343  $127  $823  $2  $1,152  $1,777  $685  $5,116 
                                     
Ending balance of allowance attributable to loans:                                    

Individually evaluated for impairment

 $31  $51  $  $7  $  $67  $22  $  $178 

Collectively evaluated for impairment

  176   292   127   816   2   1,085   1,755   685   4,938 
Loans acquired with deteriorated credit quality                           
Total allowance for loan losses $207  $343  $127  $823  $2  $1,152  $1,777  $685  $5,116 

Ending balance of loans receivable:

                                    

Individually evaluated for impairment

 $155  $58  $  $517  $  $67  $45  $  $842 
Collectively evaluated for impairment  43,273   117,819   22,915   149,998   1,093   83,020   38,995   71,005   528,118 
Loans acquired with deteriorated credit quality  73   2,150      8   7            2,238 

Total loans receivable

 $43,501  $120,027  $22,915  $150,523  $1,100  $83,087  $39,040  $71,005  $531,198 

  

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 

Ending balance of loans receivable:

                                    

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 


 

  

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

  

Bank and ALC

 
 

Year Ended December 31, 2017

  

Year Ended December 31, 2017

 
 

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

Charge-offs

     (28

)

           (16

)

  (2,360

)

  (587)  (2,991

)

     (28

)

           (16

)

  (2,360

)

  (587)  (2,991

)

Recoveries

     135      69      19   601   98   922      135      69      19   601   98   922 

Provision

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

Ending balance

 $203  $290  $116  $777  $2  $1,049  $1,715  $622  $4,774  $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  $  $5  $  $21  $  $72  $  $  $98 

Collectively evaluated for impairment

  203   285   116   756   2   977   1,715   622   4,676   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  $203  $290  $116  $777  $2  $1,049  $1,715  $622  $4,774 

Loan receivables:

                                    

Ending balance of loans receivable:

                                    

Individually evaluated for impairment

 $  $187  $  $532  $  $72  $  $  $791  $  $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   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  $26,143  $45,073  $16,579  $105,133  $190  $69,969  $39,300  $55,071  $357,458 

 

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.

 

17

Table of Contents

 

 

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 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 assets, even though partial recovery may be 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 March 31, 2018.30, 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

 $25,697  $85  $183  $  $25,965  $42,761  $511  $229  $  $43,501 

Secured by 1-4 family residential properties

  35,569   335   714      36,618   107,276   266   4,013      111,555 

Secured by multi-family residential properties

  16,396            16,396   22,915            22,915 

Secured by non-farm, non-residential properties

  108,933   2,104   509      111,546   147,302   2,099   1,122      150,523 

Other

  188            188   1,093   7         1,100 

Commercial and industrial loans

  63,764   2,033   199      65,996   80,853   2,077   157      83,087 

Consumer loans

  5,358      58      5,416   6,990      85      7,075 

Other loans

               

Total

 $255,905  $4,557  $1,663  $  $262,125  $409,190  $4,960  $5,606  $  $419,756 

 

The above amounts include purchased credit impaired loans. As of September 30, 2018, $2.2 million of purchased credit impaired loans were rated “Substandard.”

 

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

 $9,732  $231  $9,963  $8,379  $93  $8,472 
Consumer loans:                        
Consumer  31,861   897   32,758   31,149   816   31,965 

Indirect sales

  59,617   540   60,157   70,713   292   71,005 

Total

 $101,210  $1,668  $102,878  $110,241  $1,201  $111,442 

 

18

Table of Contents

 

The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31,2017. 2017:

 

  

Bank

 
  

Pass

1-5

  

Special

Mention

6

  

Substandard

7

  

Doubtful

8

  

Total

 
  

(Dollars in Thousands)

 

Loans secured by real estate:

                    

Construction, land development and other land loans

 $25,872  $84  $187  $  $26,143 

Secured by 1-4 family residential properties

  33,278   339   655      34,272 

Secured by multi-family residential properties

  16,579            16,579 

Secured by non-farm, non-residential properties

  99,847   4,766   520      105,133 

Other

  190            190 

Commercial and industrial loans

  67,689   2,066   214      69,969 

Consumer loans

  5,155      62      5,217 

Total

 $248,610  $7,255  $1,638  $  $257,503 

 

  

ALC

 
  

Performing

  

Nonperforming

  

Total

 
  

(Dollars in Thousands)

 

Loans secured by real estate:

            

Secured by 1-4 family residential properties

 $10,495  $306  $10,801 
Consumer loans:            
Consumer  32,933   1,150   34,083 

Indirect sales

  54,611   460   55,071 

Total

 $98,039  $1,916  $99,955 

 

The following tables provide an aging analysis of past due loans by class as of September March 31, 2018.30, 2018:

 

 

Bank

  

Bank

 
 

As of March 31, 2018

  

As of September 30, 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

 $  $  $  $  $25,965  $25,965  $  $459  $  $74  $533  $42,968  $43,501  $ 

Secured by 1-4 family residential properties

  154   19   82   255   36,363   36,618      1,980   78   2,123   4,181   107,374   111,555    

Secured by multi-family residential properties

              16,396   16,396                  22,915   22,915    

Secured by non-farm, non-residential properties

  115         115   111,431   111,546      14      8   22   150,501   150,523    

Other

              188   188                  1,100   1,100    

Commercial and industrial loans

  36   21      57   65,939   65,996      428   23      451   82,636   83,087    

Consumer loans

  21         21   5,395   5,416      21   4      25   7,050   7,075    

Total

 $326  $40  $82  $448  $261,677  $262,125  $  $2,902  $105  $2,205  $5,212  $414,544  $419,756  $ 

The above amounts include purchased credit impaired loans. As of September 30, 2018, $0.2 million of purchased credit impaired loans were 30-59 days past due and $2.0 million were 90 or more days past due.

 

19

Table of Contents

 

 

ALC

  

ALC

 
 

As of March 31, 2018

  

As of September 30, 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

  104   28   231   363   9,600   9,963      122   2   93   217   8,255   8,472    

Secured by multi-family residential properties

                                          

Secured by non-farm, non-residential properties

                                          

Other

                                          

Commercial and industrial loans

                                          

Consumer loans:

                                                        
Consumer  526   323   897   1,746   31,012   32,758      599   428   816   1,843   30,122   31,965    

Indirect sales

  244   176   540   960   59,197   60,157      323   122   292   737   70,268   71,005    

Total

 $874  $527  $1,668  $3,069  $99,809  $102,878  $  $1,044  $552  $1,201  $2,797  $108,645  $111,442  $ 

 

The following tables provide an aging analysis of past due loans by class as of December 31, 2017.2017:

 

  

Bank

 
  

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

 
  

(Dollars in Thousands)

 

Loans secured by real estate:

                            

Construction, land development and other land loans

 $  $  $  $  $26,143  $26,143  $ 

Secured by 1-4 family residential properties

  227      52   279   33,993   34,272    

Secured by multi-family residential properties

              16,579   16,579    

Secured by non-farm, non-residential properties

  13         13   105,120   105,133    

Other

              190   190    

Commercial and industrial loans

  70         70   69,899   69,969    

Consumer loans

  42         42   5,175   5,217    

Total

 $352  $  $52  $404  $257,099  $257,503  $ 

 

20

Table of Contents

 

  

ALC

 
  

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

 
  

(Dollars in Thousands)

 

Loans secured by real estate:

                            

Construction, land development and other land loans

 $  $  $  $  $  $  $ 

Secured by 1-4 family residential properties

  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

  490   323   1,111   1,924   32,159   34,083    

Indirect sales

  281   230   433   944   54,127   55,071    

Total

 $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 March 31,30, 2018 and December 31, 2017.2017:

 

 

Loans on Non-Accrual Status

  

Loans on Non-Accrual Status

 
 

March 31,

2018

  

December 31,

2017

  

September 30,

2018

  

December 31,

2017

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Loans secured by real estate:

                

Construction, land development and other land loans

 $  $  $73  $ 

Secured by 1-4 family residential properties

  507   501   2,492   501 

Secured by multi-family residential properties

            

Secured by non-farm, non-residential properties

  24   29   26   29 
Other 7   

Commercial and industrial loans

  11   12   25   12 
Consumer loans  955   1,173 
Consumer loans:        
Consumer  867   1,173 

Indirect sales

  540   433   292   433 

Total loans

 $2,037  $2,148  $3,782  $2,148 

As of September 30, 2018, purchased credit impaired loans comprised $2.2 million of nonaccrual loans.

 

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’sloan’s existing rate or at the fair value of collateral if repayment is expected solely from the liquidation of the collateral at the Bank. All loans of $0.5 million or more that have a credit quality risk grade of seven or above are identified for impairment analysis. 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 the 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 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.uncollectable.

 

21

Table of Contents

 

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

 

March 31, 2018
  

September 30, 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

 $73  $73  $ 

Secured by 1-4 family residential properties

  2,150   2,150    

Secured by multi-family residential properties

         

Secured by non-farm, non-residential properties

  8   8    
Other  7   7    
Commercial and industrial         

Consumer

         

Total loans with no related allowance recorded

 $2,238  $2,238  $ 
             

Impaired loans with an allowance recorded

            

Loans secured by real estate

            

Construction, land development and other land loans

 $155  $155  $31 

Secured by 1-4 family residential properties

  58   58   51 

Secured by multi-family residential properties

         

Secured by non-farm, non-residential properties

  517   517   7 
Other         
Commercial and industrial  67   67   67 

Consumer

  45   45   22 

Total loans with an allowance recorded

 $842  $842  $178 
             

Total impaired loans

            

Loans secured by real estate

            

Construction, land development and other land loans

 $228  $228  $31 

Secured by 1-4 family residential properties

  2,208   2,208   51 

Secured by multi-family residential properties

         

Secured by non-farm, non-residential properties

  525   525   7 
Other  7   7    
Commercial and industrial  67   67   67 

Consumer

  45   45   22 

Total impaired loans

 $3,080  $3,080  $178 

The above amounts include purchased credit impaired loans. As of September 30, 2018, purchased credit impaired loans comprised $2.2 million of impaired loans without a related allowance recorded.

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

 

22

Table of Contents

 

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

 

  

December 31, 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

 $  $  $ 

Secured by 1-4 family residential properties

  187   187   5 

Secured by multi-family residential properties

         

Secured by non-farm, non-residential properties

  532   532   21 

Commercial and industrial

  72   72   72 

Total loans with an allowance recorded

 $791  $791  $98 
             

Total impaired loans

            

Loans secured by real estate

            

Construction, land development and other land loans

 $  $  $ 

Secured by 1-4 family residential properties

  187   187   5 

Secured by multi-family residential properties

         

Secured by non-farm, non-residential properties

  532   532   21 

Commercial and industrial

  72   72   72 

Total impaired loans

 $791  $791  $98 

 

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

 

 

March 31, 2018

  

September 30, 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

 $  $  $  $52  $6  $6 

Secured by 1-4 family residential properties

  187   3   3   370   1   1 

Secured by multi-family residential properties

                  

Secured by non-farm, non-residential properties

  526   9   9   524   25   27 
Other 1     

Commercial and industrial

  69   1   2  68  3  4 

Consumer

  5   2   2 

Total

 $782  $13  $14  $1,020  $37  $40 

 

23

Table of Contents

 

  

December 31, 2017

 
  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Interest

Income

Received

 
  

(Dollars in Thousands)

 

Loans secured by real estate

            

Construction, land development and other land loans

 $902  $  $ 

Secured by 1-4 family residential properties

  190   13   14 

Secured by multi-family residential properties

         

Secured by non-farm, non-residential properties

  537   35   35 

Commercial and industrial

  59   7   5 

Total

 $1,688  $55  $54 

 

Loans on which the accrual of interest has been discontinued amounted to $2.0$3.8 million and $2.1$2.1 million as of MarchSeptember 30, 2018 and December 31, 2018 and December 31,2017, respectively. If interest on those loans had been accrued, there would have been $6$26 thousand and $19$19 thousand of interest accrued for the periods ended March 31,September 30, 2018 and December 31, 2017, respectively. Interest income related to these loans as of March 31,both September 30, 2018 and December 31, 2017 was $1 thousand and $3 thousand, respectively.$3 thousand.

 

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, modificationsmodifications of note structure, principal balance reductions or some combination of these concessions. There were no loans modified with concessions granted during the three-monthnine-month period ended March 31,September 30, 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 March 31,September 30, 2018 and December 31, 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 threenine months ended March 31,September 30, 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.

 

The following table provides the number of loans remaining in each loan category, as of March 31,September 30, 2018 and December 31, 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.

 

 

March 31, 2018

  

December 31, 2017

  

September 30, 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  $80   1  $107  $82   1  $107  $76   1  $107  $82 

Secured by 1-4 family residential properties

  3   318   141   3   318   165   3   318   125   3   318   165 

Secured by non-farm, non-residential properties

  1   53   36   1   53   37   1   53   34   1   53   37 

Commercial loans

  2   116   80   2   116   81   2   116   75   2   116   81 

Total

  7  $594  $337   7  $594  $365   7  $594  $310   7  $594  $365 

 

24

Table of Contents

 

As of March 31,September 30, 2018 and December 31, 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 $2 thousand as of both March 31,September 30, 2018 and December 31, 2017.

 

 

5.6.

OTHER REAL ESTATE OWNED AND REPOSSESSIONS

Other Real Estate Owned

 

Other real estate and certain other assets acquired in foreclosure are reported at the net realizable value of the property, less estimated costs to sell. The following tables summarize foreclosed property activity as of the threenine months ended March 31,September 30, 2018 and 2017:2017:

 

 

March 31, 2018

  

September 30, 2018

 
 

Bank

  

ALC

  

Total

  

Bank

  

ALC

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Beginning balance

 $3,527  $265  $3,792  $3,527  $265  $3,792 

Additions (1)

  106   25   131   191   58   249 

Sales proceeds

  (611

)

  (20

)

  (631

)

  (2,453

)

  (77

)

  (2,530

)

                        

Gross gains

  121      121   267   8   275 

Gross losses

     (23

)

  (23

)

  (46

)

  (54

)

  (100

)

Net gains (losses)

  121   (23

)

  98   221   (46

)

  175 

Impairment

  (43

)

  (4

)

  (47

)

  (167

)

  (30

)

  (197

)

Ending balance

 $3,100  $243  $3,343  $1,319  $170  $1,489 

 

 

March 31, 2017

  

September 30, 2017

 
 

Bank

  

ALC

  

Total

  

Bank

  

ALC

  

Total

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Beginning balance

 $4,353  $505  $4,858  $4,353  $505  $4,858 
Additions (1)     20   20      87   87 

Sales proceeds

  (204

)

  (84

)

  (288

)

  (649

)

  (199)  (848

)

                        

Gross gains

  13      13   14      14 

Gross losses

  (1

)

  (15

)

  (16

)

  (20

)

  (101

)

  (121

)

Net gains (losses)

  12   (15

)

  (3

)

Net losses

  (6)  (101

)

  (107

)

Impairment

           (171)     (171

)

Ending balance

 $4,161  $426  $4,587  $3,527  $292  $3,819 

 

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

 

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. Net realizable value less estimated costs to sell of foreclosed residential real estate held by the Company was $0.6 million and $0.8$0.6 million as of March 31,both September 30, 2018 and 2017, respectively.2017. In addition, the Company did not hold any consumer mortgage loans collateralized by residential real estate that were in the process of foreclosure as of March 31,September 30, 2018 and held $0.1 million$20 thousand of these loans as of March 31,September 30, 2017.

 

Repossessions

 

In addition to the other real estate and other assets acquired in foreclosure, the Bank and ALC also acquiresacquire assets through the repossession of the underlying collateral of loans in default. Total repossessed assets at ALC as of March 31,both September 30, 2018 and December 31, 2017 were $0.3$0.2 million and $0.2 million, respectively..

 

25

Table of Contents

 

 

6.7.

GOODWILL AND OTHER INTANGIBLE ASSETS

The Company recorded $7.6 million of goodwill as a result of its acquisition of TPB in 2018. Goodwill impairment was neither indicated nor recorded during the three months ended September 30, 2018.

Goodwill is tested annually, or more often if circumstances warrant, for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements. Goodwill totaled $7.6 million as of September 30, 2018.

Core deposit premiums are amortized over a seven-year period and are periodically evaluated, at least annually, as to the recoverability of their carrying value. Core deposit premiums of $2.0 were recorded during the third quarter of 2018 as part of the TPB acquisition.

The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) as of September 30, 2018 were as follows:

  September 30, 2018 
  

(Dollars in Thousands)

 
Goodwill $7,552 

Core deposit intangible:

    
Gross carrying amount  2,048 
Accumulated amortization  (43)

Core deposit intangible, net

  2,005 

Total

 $9,557 

The Company’s estimated remaining amortization expense on intangibles as of September 30, 2018 is as follows:

  Amortization Expense 
  

(Dollars in Thousands)

 
Remainder of 2018 $128 

2019

  488 
2020  414 
2021  341 
2022  268 
2023  195 

2024

  122 

2025

  49 

Total

 $2,005 


8.

INVESTMENT IN LIMITED PARTNERSHIP

 

The Bank 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 ASC Topic 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 March 31,September 30, 2018 and December 31, 2017.2017.

 

 

7.9.

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 $10.3$0.2 million and $15.6$15.6 million as of March 31,September 30, 2018 and December 31, 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 March 31,September 30, 2018 and December 31, 2017, there were no federal funds purchased outstanding, and theoutstanding. The Bank had $18.8$46.8 million and $18.8 million in available unused lines of credit with correspondent banks and the Federal Reserve.Reserve as of September 30, 2018 and December 31, 2017, respectively.

 

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 March 31,September 30, 2018 and December 31, 2017 totaled $0.3$0.2 million and $0.6$0.6 million, respectively.

 

Short-term FHLB advances are secured borrowings available to the Bank as an alternative funding source. As of March 31,September 30, 2018, and the Bank did not have any outstanding FHLB advances with original maturities of less than one year. As of December 31, 2017, the Bank had $10.0$15.0 million and $15.0 million, respectively, in outstanding FHLB advances with original maturities of less than one year. year. 

 

 

8.10.

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 did not have any long-term FHLB advances outstanding as of September 30, 2018. The Company had long-term FHLB advances outstanding of $10.0$10.0 million as of both March 31, 2018 and December 31, 2017.2017. 

 

Assets pledged (including loans and investment securities) associated with FHLB advances totaled $23.2$29.5 million and $26.0$26.0 million as of March 31,September 30, 2018 and December 31, 2017, respectively. As of March 31,September 30, 2018 and December 31, 2017, the Bank had $167.6$231.0 million and $159.3$159.3 million, respectively, in remaining credit from the FHLB (subject to available collateral).

 

 

9.11.

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 Company’s provision for income taxes was $0.1$0.4 million for both of the three-monthnine-month periods ended March 31,September 30, 2018 and 2017. The Company’s effective tax rate was 16.4%29.8% and 24.3%23.0%, 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 investment and loan income. The reducedincreased effective tax rate infor the first quarter of nine months ended September 30, 2018 compared to the first quartersame period of 2017 resulted from the reductionincurrence of acquisition-related expenses during the third quarter of 2018, a portion of which are non-deductible under IRS regulations. This resulted in approximately $0.2 million of additional tax expense during the Company's statutory federal rate under Tax Reform.third quarter of 2018.

 

The Company had a net deferred tax asset of $5.9$5.5 million and $5.6$5.6 million as of March 31,September 30, 2018 and December 31, 2017, respectively. The increasedecrease in the net deferred tax asset resulted primarily from the impact of changes in the fair valuecore deposit intangible related to the acquisition of securities available-for-sale.TPB that occurred during the third quarter of 2018.

 

26

 

 

10.12.

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 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 March 31,September 30, 2018 and December 31, 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 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 March 31,September 30, 2018 and December 31, 2017, a total of 106,566112,567 and 103,620 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’ fees allocated to be paid in shares as equity surplus. The Company uses shares of treasury stock to satisfy these obligations when due.due.  

 

 

11.13.

STOCK AWARDS

 

In accordance with the Company’s 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 $0.1$0.2 million for both of the three-monthnine-month periods ended March 31,September 30, 2018 and 2017.

 

Stock Options

 

Stock option awards have been granted with an exercise price equal to the market price of 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 basisbasis 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 the Company’s common stock.stock.

 

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

 

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

 

 

Three Months Ended

  

Nine Months Ended

 
 

March 31, 2018

  

March 31, 2017

  

September 30, 2018

  

September 30, 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

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

Granted

  62,150   11.71   64,600   14.11   62,150   11.71   70,600   13.84 

Exercised

        16,650   8.15   500   8.12   19,316   8.15 

Expired

                        

Forfeited

  450   11.71         1,700   11.15   3,334   11.79 

Options outstanding, end of period

  379,700  $9.80   320,500  $9.41   377,950  $9.80   320,500  $9.42 

Options exercisable, end of period

  248,300  $8.71   210,633  $8.20   249,467  $8.72   208,633  $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$0.7 million and $0.7$0.8 million as of March 31,September 30, 2018 and 2017, respectively.

 

Restricted Stock

 

During the firstthreenine months of ended September 30, 2018 and 2017, respectively, 5,520Bancshares granted 10,520 shares and 7,533 shares of restricted stock were granted.under its 2013 Incentive Plan. 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

Table of Contents

 

 

12.14.

DERIVATIVE FINANCIAL INSTRUMENTS

 

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 5, 2016, Prior to the third quarter of 2018, the Bank entered into aheld two forward interest rate swap contractcontracts on a variable ratevariable-rate FHLB advance (indexed to three-month LIBOR) with a total notional amount of $10.0 million.advances. The FHLB advance will be renewed at least every 18 months and will remain outstanding until April 5, 2023. The interest rate swap wasswaps were designated as a derivative instrumentinstruments in a cash flow hedgehedges with the objective of protecting the quarterly interest rate payments on the FHLB advanceadvances from the risk of variability of those payments resulting from changes in interest rates. During the three-month LIBOR interest rate throughout the seven-year period beginning on April 5, 2016 and ending on April 5, 2023. Under the swap arrangement,third quarter of 2018, the Bank will pay a fixed interest ratevoluntarily settled both of 1.46% and receive a variable interest rate based on three-month LIBOR on the notional amount of $10.0 million, with quarterly net settlements.

On October 18, 2017, the Bank entered into athese forward interest rate swap contract on a variable rate FHLB advance (indexed to three-month LIBOR) with a total notional amount of $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 hedgecontracts with the objective of protectingcounterparty and concurrently paid down the quarterlyassociated hedged variable-rate FHLB advances. Since the intended forecasted transactions (the variable interest rate payments onassociated with the FHLB advance fromadvances) will no longer occur as previously expected, all amounts associated with the riskfair value 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 derivative assets 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 swaps designated as cash flow hedges was recognized in the consolidated statements of operations for the three months ended March 31, 2018. The accumulated net after-tax gain related to the effective cash flow hedge includedgains recorded in accumulated other comprehensive income were recognized as gains during the third quarter of 2018. The amounts recognized as gains totaled $0.7approximately $1.0 million on a pre-tax basis and $0.3$0.7 million as of March 31, 2018 and December 31, 2017, respectively.

on an after-tax basis.

 

 

13.15.

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, 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.below:

 

          

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

                  

All

         
 

Bank

  

ALC

  

Other

  

Eliminations

  

Consolidated

  

Bank

  

ALC

  

Other

  

Eliminations

  

Consolidated

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

For the three months ended March 31, 2017:

                    

As of and for the three months ended September 30, 2018:

                    

Net interest income

 $3,911  $3,005  $3  $  $6,919  $5,001  $3,322  $5  $  $8,328 

Provision (reduction in reserve) for loan losses

     515         515 

Provision for loan losses

  176   613         789 

Total non-interest income

  836   244   850   (763

)

  1,167   1,850   268   630   (636)  2,112 

Total non-interest expense

  4,401   2,377   429   (170

)

  7,037   6,508   2,384   455   (205)  9,142 

Income before income taxes

  346   357   424   (593

)

  534   167   593   180   (431)  509 

Provision for income taxes

  98   130   (98

)

     130   195   131   (57)     269 

Net income

 $248  $227  $522  $(593

)

 $404  $(28) $462  $237  $(431) $240 

Other significant items:

                                        

Total assets

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

)

 $619,827  $805,007  $105,859  $84,362  $(192,663) $802,595 

Total investment securities

  213,417      80      213,497   159,416      80      159,496 

Total loans, net

  309,425   84,761      (76,509

)

  317,677   509,695   103,106      (92,979)  519,822 
Goodwill and core deposit intangible, net 9,557        9,557 

Investment in subsidiaries

  5      76,976   (76,976

)

  5   5      77,242   (77,242)  5 

Fixed asset addition

  4,025   62         4,087 

Fixed asset additions

  195   97         292 

Depreciation and amortization expense

  201   41         242   334   40         374 

Total interest income from external customers

  3,392   4,118         7,510   4,916   4,536         9,452 

Total interest income from affiliates

  1,114      3   (1,117

)

     1,212      5   (1,217)   
                    

For the nine months ended September 30, 2018:

                    

Net interest income

 $13,362  $9,769  $13  $  $23,144 

Provision for loan losses

  215   1,934         2,149 

Total non-interest income

  3,665   796   2,167   (2,244)  4,384 

Total non-interest expense

  15,927   7,334   1,267   (593)  23,935 

Income before income taxes

  885   1,297   913   (1,651)  1,444 

Provision for income taxes

  325   283   (177)     431 

Net income

 $560  $1,014  $1,090  $(1,651) $1,013 

Other significant items:

                    

Fixed asset additions

  500   153         653 

Depreciation and amortization expense

  973   105         1,078 

Total interest income from external customers

  12,736   13,225         25,961 

Total interest income from affiliates

  3,455      13   (3,468)   

 

29

Table of Contents
          

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

)

   


 

 

1416.

GUARANTEES, COMMITMENTS AND CONTINGENCIES

 

The Bank’sBank’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 three-monthnine-month periods ended March 31,September 30, 2018 and 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:

 

 

March 31,

2018

  

December 31,

2017

  

September 30,

2018

  

December 31,

2017

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Standby letters of credit

 $180  $180  $916  $180 

Commitments to extend credit

 $54,250  $55,801  $72,232  $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. The Bank has recourse against the customer for any amount that it is required to pay to a third party under a standby letter of credit. Revenues are recognized over the lives of the standby letters of credit. As of March 31,September 30, 2018 and December 31, 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 March 31,September 30, 2018 and December 31, 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 CompanysCompany’s individual claim and total exposure related to self-insurance. The Company estimates the 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$0.2 million as of both March 31,September 30, 2018 and December 31, 2017. The ultimate settlement of loss contingencies and self-insurance reserves may differ significantly from amounts accrued in the Company’s consolidated financial statements.

 

LitigationDuring the third quarter of 2018, the Bank entered into an agreement with a third party to lease all unused remaining office space at the Bank’s Birmingham, Alabama location (known as “Pump House Plaza”). Under the terms of the lease, the Bank agreed to pay for a one-time build-out of the tenant space, subject to a maximum amount. The total cost to the Bank under the agreement is estimated to be approximately $2.8 million. Depreciation of the costs will commence upon the effective date of the lease, which is scheduled for the fourth quarter of 2018.

 

As of September 30, 2018, the aggregate purchase price associated with the acquisition of TPB remained subject to adjustment contingent on determination of TPB’s final net book value as of the date of closing in accordance with the transaction agreement. An accrual of approximately $1.4 million was recorded as of September 30, 2018 representing the Bank’s estimate of additional cash to be paid related to the final settlement. Subsequent to September 30, 2018, the majority of contingencies associated with the amount were resolved and an amount approximating the amount that was accrued as of September 30, 2018 was paid in cash by the Bank to the selling parties under the transaction agreement.   

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.operations.

 

30

Table of Contents

 

 

15.17.

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 threenine months ended March 31,September 30, 2018 or the year ended December 31, 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 March30, 2018 and December 31, 2018 and December 31,2017. There were no liabilities measured at fair value on a recurring basis for either period presented.

 

 

Fair Value Measurements as of March 31, 2018 Using

  

Fair Value Measurements as of September 30, 2018 Using

 
 

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)

  

Totals

At

September 30,

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

 $85,682  $  $85,682  $  $74,311  $  $74,311  $ 

Commercial

  65,994      65,994      57,716      57,716    

Obligations of states and political subdivisions

  4,886      4,886      5,151      5,151    
U.S. Treasury securities  80      80      80      80    

Other assets - derivatives

  889      889    

 

  

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’sloan’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.accordingly.

 

32

Table of Contents

 

OREO

 

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is recorded at net realizable 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 significant unobservable inputs for determining fair value.value.

Assets Held for SaleHeld-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,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 assets held for saleheld-for-sale measured at fair value on a non-recurring basis as of MarchSeptember 30, 2018 and December 31, 2018 and December 31,2017.2017:

 

 

Fair Value Measurements as of March 31, 2018 Using

  

Fair Value Measurements as of September 30, 2018 Using

 
 

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)

  

Totals

At

September 30,

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

 $691  $  $  $691  $3,080  $  $  $3,080 
OREO  3,343         3,343   1,489         1,489 

Assets held for sale

  228         228 

Assets held-for-sale

  198         198 

 

The impaired loans amounts above include purchased credit impaired loans. As of September 30, 2018, purchased credit impaired loans comprised $2.2 million of impaired loans.

 

 

Fair Value Measurements as of December 31, 2017 Using

  

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)

  

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

 $694  $  $  $694  $694  $  $  $694 
OREO  3,792         3,792   3,792         3,792 

Assets held for sale

  228         228 

Assets held-for-sale

  228         228 

 

33

Table of Contents

 

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 March 31,September 30, 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 March 31,September 30, 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.input.

 

 

Level 3 Significant Unobservable Input Assumptions

  

Level 3 Significant Unobservable Input Assumptions

 
 

Fair Value

March 31,

2018

  

Valuation Technique

 

Unobservable Input

 

Quantitative Range

of Unobservable

Inputs

(Weighted

Average)

  

Fair Value As Of

September 30,

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

 $691  

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

 

Appraisal comparability adjustment (discount)

 9%-10%(9.5%) $3,080 

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

 

Appraisal comparability adjustment (discount)

 9%-10%(9.5%) 
             
OREO $3,343  Discount to appraised value of property based on recent market activity for sales of similar properties Appraisal comparability adjustment (discount) 9%-10%(9.5%) $1,489 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%)
             

Assets held-for-sale

 $198 

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

 

Appraisal comparability adjustment (discount)

 9%-10%(9.5%) 

The impaired loans amounts above include purchased credit impaired loans. As of September 30, 2018, purchased credit impaired loans comprised $2.2 million of impaired loans.

 

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 sale 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.

 

Assets Held for SaleHeld-for-Sale

 

Assets designated as held for saleheld-for-sale that are under a binding contract are valued based on the contract price. If no sales sale 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.estimate that value. 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.

 

34

Table of Contents

 

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 March 31, 2018 and December 31,2017.the determination date.

 

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 March 31,September 30, 2018 and December 31, 2017 were as follows:

 

 

March 31, 2018

  

September 30, 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

 $34,473  $34,473  $34,473  $  $  $50,083  $50,083  $50,083  $  $ 

Investment securities available-for-sale

  156,642   156,642      156,642      137,258   137,258      137,258    

Investment securities held-to-maturity

  25,300   24,687      24,687      22,238   21,479      21,479    
Federal funds sold  8,561   8,561      8,561    

Federal Home Loan Bank stock

  1,413   1,413         1,413   703   703         703 

Loans, net of allowance for loan losses

  353,805   346,658         346,648   519,822   511,417         511,417 

Other assets – derivatives

  889   889      889    

Liabilities:

                                        

Deposits

  525,273   522,767      522,767      715,761   712,914      712,914    

Short-term borrowings

  10,298   10,298      10,298      192   192      192    

Long-term debt

  10,000   9,998      9,998    

 

 

  

December 31, 2017

 
  

Carrying

Amount

  

Estimated

Fair Value

  

Level 1

  

Level 2

  

Level 3

 
  

(Dollars in Thousands)

 

Assets:

                    

Cash and cash equivalents

 $27,124  $27,124  $27,124  $  $ 

Investment securities available-for-sale

  153,871   153,871      153,871    

Investment securities held-to-maturity

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

Federal Home Loan Bank stock

  1,609   1,609         1,609 

Loans, net of allowance for loan losses

  346,121   342,248         342,248 

Other assets – derivatives

  443   443      443    

Liabilities:

                    

Deposits

  517,079   515,645      515,645    

Short-term borrowings

  15,594   15,594      15,594    

Long-term debt

  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.

35

Table of Contents

 

 

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 officesoffices in Birmingham, Alabama. Bancshares operates one commercial banking subsidiary, First US Bank (the “Bank”). As of March 31,September 30, 2018, the Bank operated and served its customers through 1620 banking offices located in Birmingham, Bucksville, Butler, Calera, Centreville, Columbiana, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama. At the end of the first quarter of 2018, the Bank closed its loan production office in Mountain Brook, AlabamaAlabama; Knoxville and merged all of its Birmingham operations into its main office in Birmingham.Powell, Tennessee; and Rose Hill and Ewing, Virginia.

 

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 March 31,September 30, 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 nine10 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’sALC’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”). The Company recognizes that attention to detail and responsiveness to customerscustomers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 253271 full-time equivalent employees (as of March 31,September 30, 2018), to ensure customer satisfaction and convenience.

 

The preparation of the Company’sCompany’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, 2017.

 

The emphasis of this discussion is a comparison of assets, liabilities and shareholdersshareholders’ equity as of March 31,September 30, 2018 to December 31, 2017, while comparing income and expense for the three-monthnine-month periods ended March 31,September 30, 2018 and 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’sCompany’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, 2017. As used in the following discussion, the words “we,” “us,” “our” and the “Company” refer to Bancshares and its consolidated subsidiaries, unless the context indicates otherwise.

 

EXECUTIVE OVERVIEW

 

The Company earned net income of $0.06$0.2 million, or $0.03 per diluted common share, during eachthe three-months ended September 30, 2018, compared to $0.6 million, or $0.10 per diluted common share, for the three months ended September 30, 2017. For the nine months ended September 30, 2018, net income totaled $1.0 million, or $0.15 per diluted common share, compared to $1.5 million, or $0.22 per diluted common share, for the corresponding nine-month period of 2017. 

Summarized condensed consolidated statements of operations are included below for the three- and nine-month periods ended September 30, 2018 and 2017, respectively.

  

Three Months Ended

  Nine Months Ended 
  

September 30,

  

September 30,

  September 30,  September 30, 
  

2018

  

2017

  2018  2017 
  

(Dollars in Thousands)

 

Interest income

 $9,452  $7,820  $25,961  $23,013 

Interest expense

  1,124   685   2,817   1,902 

Net interest income

  8,328   7,135   23,144   21,111 

Provision for loan and lease losses

  789   373   2,149   1,464 

Net interest income after provision for loan and lease losses

  7,539   6,762   20,995   19,647 

Non-interest income

  2,112   1,236   4,384   3,333 

Non-interest expense

  9,142   7,190   23,935   21,090 

Income before income taxes

  509   808   1,444   1,890 

Provision for income taxes

  269   173   431   435 

Net income

 $240  $635  $1,013  $1,455 


Acquisition and Merger of The Peoples Bank

Both third quarter and year-to-date 2018 earnings were significantly impacted by the Company’s acquisition of The Peoples Bank (“TPB”) and merger of TPB into the Bank which was completed on August 31, 2018. As of the three-month periodsacquisition date, TPB’s assets totaled $166.5 million, consisting primarily of pre-discounted gross loans totaling $156.8 million. Total deposits assumed in the transaction were $140.0 million.  In accordance with the acquisition method of accounting, preliminary purchase accounting entries were recorded as of the acquisition date to adjust the assets and liabilities to estimated fair value, resulting in goodwill of approximately $7.6 million. 

During the three- and nine-months ended March 31,September 30, 2018, approximately $1.5 million in non-recurring acquisition-related expenses were recorded by the Company. These expenses included approximately $0.7 million associated with the early termination of TPB’s contractual obligations with its core processing provider.  Other acquisition-related expenses included legal, professional, employee benefit and March 31, 2017. However,other data processing expenses.    

Other Significant Impacts on Earnings

The following discussion summarizes the composition of earnings was significantly different comparingmost significant activity that drove changes in the two periods. AsCompany’s net income during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. 

Net Interest Income

Net interest income increased by $2.0 million, or 9.6% (annualized), primarily due to increases in average loans outstanding. Average loans increased by $49.7 million. Organic loan growth (independent of growth resulting from the TPB acquisition) totaled $18.6 million, or 7.2% (annualized). Net interest income attributable to loans acquired from TPB during the period totaled $0.7 million, including accretion of the fair value discount on purchased loans and premium on time deposits which totaled $0.1 million during the period. Net yield on interest earning assets improved to 5.27% for the nine months ended September 30, 2018, compared to 5.08% during the corresponding period of 2017.

Provision for Loan and Lease Losses

The provision for loan and lease losses increased by $0.7 million, or 6.2% (annualized), a significant portion of which was associated with ALC’s indirect point-of-sales consumer lending portfolio. In general, ALC’s consumer loans require higher levels of loss provisioning than the Bank’s commercial loans. However, point-of-sale indirect lending has resulted in loans that are generally of higher credit quality than ALC’s traditional direct consumer lending portfolio. Accordingly, losses in this portfolio have historically been lower than the direct consumer portfolio.

Non-interest Income

Non-interest income increased by $1.1 million due primarily to the settlement during the third quarter of 2018 of two forward interest rate swap contracts that netted a pre-tax gain of approximately $1.0 million. In addition, the Bank earned fees from secondary mortgage activities that were $0.2 million higher than fees earned during the nine months ended September 30, 2017, the first year of operation of the Bank’s mortgage division. These increases were partially offset by a reduction in gains on sales and prepayments of investment securities totaling $0.1 million.

Non-interest Expense

Non-interest expense increased by $2.8 million due in part to expenses associated with the acquisition of TPB totaling $1.5 million during the nine months ended September 30, 2018. In addition, salaries and employee benefits expenses increased by $0.7 million and net building and occupancy expense increased by $0.5 million. The increase in salaries and benefits resulted from merit and cost of living salary increases for the Company’s employees during the nine months ended September 30, 2018, combined with additional expenses subsequent to the acquisition of TPB related to the assumption of salaries and benefits for employees of TPB. The increase in building and occupancy expense was associated with the Bank’s Pump House Plaza office complex in Birmingham, Alabama, which became operational during the third quarter of 2017 and now serves as the headquarters of both the Company and the Bank. During the third quarter of 2018, results were positively impacted by increased net interest income,the Bank entered into an agreement to lease all unused remaining leasable space in Pump House Plaza. The lease, which resulted primarily from growthis scheduled to commence during the fourth quarter of 2018, is expected to generate in net loans.excess of $0.7 million of lease revenue annually and is expected to offset the Bank’s building and occupancy-related expenses associated with the facility. Under the terms of the lease, the Bank agreed to pay for a one-time build-out of the tenant-occupied space, subject to a maximum amount. The growth in net interest income was offset by increased provisionBank’s total capital expenditure under the agreement is estimated to be approximately $2.8 million.

Provision for loan losses and non-interest expense compared to the same period in 2017. In addition, theIncome Taxes

The Company’s effective tax rate decreasedincreased to 16.4% for29.8% during the quarternine months ended March 31,September 30, 2018, compared to 24.3% for23.0% during the first quartercorresponding period of 2017. The reducedincreased effective tax rate resulted from the reduction inincurrence of acquisition-related expenses during the nine months ended September 30, 2018, a portion of which are not expected to be deductible on the Company’s statutory federal income2018 tax ratereturn under IRS regulations. This resulted in approximately $0.2 million of additional estimated tax expense during the Tax Cuts and Jobs Act of 2017 (“Tax Reform”).nine months ended September 30, 2018.


Balance Sheet Management

 

As of March 31,September 30, 2018, the Company’s net loansassets totaled $353.8$802.6 million, compared to $625.6 million as of December 31, 2017, an increase of $7.7 million, or 8.9% on an annualized basis, compared28.3%. The increase resulted primarily from the acquisition of TPB. The discussion below summarizes significant balance sheet components comparing September 30, 2018 to December 31, 2017. Growth in net

Loans and Credit Quality

Net loans for the first quarterincreased to $519.8 million as of September 30, 2018, totaled $4.6compared to $346.1 million at the Bank and $3.1 million at ALC. Consistent with previous periods, theas of December 31, 2017. The majority of the Bank’sincrease was due to the acquisition of TPB, supplemented by annualized organic loan growth was focused on commercial lending inof 7.2%, as mentioned previously. As a result of the Bank’s larger metropolitan service territories of Birmingham and Tuscaloosa, Alabama. ALC’s loan growth, was attributable to continued expansion of indirect lending through point-of-sale retail opportunities.     

Loan growth has been the primary driver of the increase in the Company’s ratio of net interest income over the past five quarters. Pre-provision net interest income totaled $7.3 million for the first quarterloans to deposits was 72.6% as of September 30, 2018, compared to $6.9 million for the first quarter66.9% as of 2017. AverageDecember 31, 2017, while net loans to assets totaled $353.3 million64.8% and $325.1 million during the three months ended March 31,55.3% as of September 30, 2018 and December 31, 2017, respectively. Management remains focused on quality loan growth and believes that these levels continue to provide ample opportunity to expand the loan portfolio.

 

Deposits also increased duringAs of September 30, 2018, the first quarterallowance for loan and lease losses totaled $5.1 million, or 0.97% of gross loans outstanding, representing a decrease from 1.36% as of December 31, 2017. In accordance with generally accepted accounting principles for acquisition accounting, the loans acquired through the acquisition of TPB were recorded at fair value. Accordingly, there was no allowance for loan or lease losses associated with the acquired loan portfolio at the acquisition date. Management continues to evaluate the need for an allowance on the acquired portfolio, factoring in the remaining net discount on the loans, which totaled $2.3 million, or 1.51% of gross purchased loans, as of September 30, 2018. Management believes that the allowance for loan and lease losses as of September 30, 2018 totaling $525.3is sufficient to provide for losses in the existing portfolio.

Non-performing assets, including loans in non-accrual status and other real estate owned (OREO), totaled $5.3 million, or 0.66% of total assets, as of September 30, 2018, compared to $5.9 million, or 0.95% of total assets, as of December 31, 2017. The decrease was largely driven by continued resolution of OREO properties. OREO decreased to $1.5 million as of MarchSeptember 30, 2018, compared to $3.8 million as of December 31, 2017. The reduction in OREO was partially offset by an increase in non-accrual loans resulting from the acquisition of TPB. Non-accrual loans totaled $3.8 million as of September 30, 2018, compared to $2.1 million as of December 31, 2017.

Investment Securities

The investment securities portfolio continues to provide the Company with additional liquidity and allows management to fund a portion of loan growth from the maturity and payoff of securities within the portfolio. During the first nine months of 2018, in preparation for the acquisition of TPB, as well as to support the funding or organic loan growth, management generally re-deployed maturing securities into other interest-earning assets, including cash utilized in the acquisition of TPB. As of September 30, 2018, the investment securities portfolio totaled $159.5 million, compared to $180.1 million as of December 31, 2017. Management monitors its liquidity position, including forecasted expectations related to loan growth, when making determinations about whether to re-invest in the securities portfolio. 

Deposits and Borrowings

Deposits totaled $715.8 million as of September 30, 2018, compared to $517.1 million as of December 31, 2017. Average2017, an increase of $198.7 million. Of this amount, $140.0 million was attributable to deposits totaled $516.3acquired from TPB as part of the acquisition. In addition, deposits at TPB increased by approximately $10.0 million subsequent to the acquisition in connection with amounts deposited by the transaction sellers.  Independent of deposits at TPB, deposits at the Bank increased by approximately $27.6 million during the first quarternine months ended September 30, 2018. The majority of 2018, compared to $498.9 million during the first quarter of 2017. Thethis growth in deposits compared to the first quarter of 2017 was largely attributable to deposits generatedoccurred at the Bank’s new officePump House Plaza branch which opened in the Birmingham area that opened duringin the third quarter of 2017.

The rising interest rate environment has generally led to higher yields on earning assets at the Bank; however, these increases have been partially offsetwholesale brokered deposits 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 $5.1approximately $21.1 million during the first quarter of 2017. The Company’s allowance for loan lossesnine months ended September 30, 2018, primarily as a percentagereplacement 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$20 million in FHLB borrowings that were paid off during the allowance for loan losses as a percentage of net loans resulted from continued favorable charge-off experience at the Bank, coupled with the mix-shift in lending at ALC that has led to reduced losses in ALC’s portfolio.period. 

 

Non-interest income totaled $1.1 million for the first quarter of 2018, compared to $1.2 million for the first quarter of 2017. The decrease in non-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 saleLiquidity 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 Bank. The Bank’s mortgage division became operational during the second quarter of 2017 and is expected to enhance the Company’s non-interest income over time through fees earned on the closing of mortgage loans with third-party secondary market financial institutions.

Non-interest expense totaled $7.3 million for the first quarter 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 The Peoples Bank, as discussed below.

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, respectively.   

Capital

The Company continues to maintain excess funding capacity to provide adequate liquidity for loan growth, capital expenditures and ongoing operations. The Company benefits from a strong deposit base, a liquid investment securities portfolio and access to funding from a variety of sources, including federal funds lines, Federal Home Loan Bank (“FHLB”)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

SubsequentAs a result of the acquisition of TPB, the Company has leveraged its equity capital to March 31,levels that management believes will facilitate the achievement of stronger returns on equity in the future. As of September 30, 2018, the Company entered intoBank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 12.28%. Its total capital ratio was 13.20% and Tier 1 leverage ratio was 8.78%.  Although these ratios are lower than those reported in previous quarters, they continue to be at higher levels than the ratios required to be considered 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.

“well-capitalized” bank under applicable banking regulations.

 

 

RESULTS OF OPERATIONS

  

Three Months Ended

 
  

March 31,

  

March 31,

 
  

2018

  

2017

 
  

(Dollars in Thousands)

 

Interest income

 $8,119  $7,510 

Interest expense

  805   591 

Net interest income

  7,314   6,919 

Provision for loan losses

  658   515

 

Net interest income after provision for loan losses

  6,656   6,404 

Non-interest income

  1,140   1,167 

Non-interest expense

  7,301   7,037 

Income before income taxes

  495   534 

Provision for income taxes

  81   130 

Net income

 $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 consist 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 consist of interest-bearing demand deposits and savings and time deposits, as well as short-term borrowings and long-term debt.

 

The following table showstables show the average balances of each principal category of assets, liabilities and shareholders’ equity for the three monthsthree- and nine-month periods ended March 31,September 30, 2018 and 2017. Additionally, the table providestables provide 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

 

 

March 31, 2018

 

 

March 31, 2017

 

 

September 30, 2018

  

September 30, 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)

 

$

259,243

 

$

2,808

 

4.39

%

 

$

237,706

 

$

2,377

 

4.06

%

 $315,278  $3,859   4.86

%

 $240,006  $2,578   4.26

%

Loans – ALC (Note A)

 

 

94,025

 

 

4,281

 

18.47

%

 

 

87,408

 

 

4,119

 

19.11

%

  104,447   4,536   17.23

%

  91,193   4,224   18.38

%

Taxable investment securities

 

 

178,913

 

 

865

 

1.96

%

 

 

200,772

 

 

884

 

1.79

%

  161,560   814   2.00

%

  187,670   857   1.81

%

Non-taxable investment securities

 

 

6,113

 

 

56

 

3.72

%

 

 

10,094

 

 

90

 

3.62

%

  2,217   16   2.86

%

  8,225   75   3.62

%

Federal funds sold  10,278  43 1.70%  

  

 

%  15,102   79   2.08%        %
Interest-bearing deposits in banks  17,167  66  1.56%  19,735  40  0.82%  30,236   148   1.94%  27,249   86   1.25%

Total interest-earning assets

 

 

565,739

 

 

8,119

 

 

5.82

%

 

 

555,715

 

 

7,510

 

 

5.48

%

  628,840   9,452   5.96

%

  554,343   7,820   5.60

%

Non-interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

Other assets

 

 

58,565

 

 

 

 

 

 

 

 

53,668

 

 

 

 

 

 

  61,923           58,786         

Total

 

$

624,304

 

 

 

 

 

 

 

$

609,383

 

 

 

 

 

 

 $690,763          $613,129         

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

Demand deposits

 

$

166,963

 

$

170

 

0.41

%

 

$

160,030

 

$

145

 

0.37

%

 $156,142  $181   0.46

%

 $164,852  $161   0.39

%

Savings deposits

 

 

84,684

 

 

71

 

0.34

%

 

 

77,379

 

 

36

 

0.19

%

  134,673   277   0.82

%

  82,201   53   0.26

%

Time deposits

 

 

180,267

 

 

460

 

1.03

%

 

 

184,359

 

 

347

 

 

0.76

%

  217,288   662   1.21

%

  182,405   403   0.88

%

Borrowings

 

 

24,675

 

 

104

 

 

1.71

%

 

 

25,599

 

 

63

 

 

1.00

%

  5,888   4   0.27

%

  20,099   68   1.34

%

Total interest-bearing liabilities

 

 

456,589

 

 

805

 

 

0.72

%

 

 

447,367

 

 

591

 

 

0.54

%

  513,991   1,124   0.87

%

  449,557   685   0.60

%

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

Demand deposits

 

 

84,435

 

 

 

 

 

 

 

 

77,159

 

 

 

 

 

 

  92,841           77,723         

Other liabilities

 

 

7,456

 

 

 

 

 

 

 

 

7,676

 

 

 

 

 

 

  7,628           7,282         

Shareholders’ equity

 

 

75,824

 

 

 

 

 

 

 

 

77,181

 

 

 

 

 

 

  76,303           78,567         

Total

 

$

624,304

 

 

 

 

 

 

 

$

609,383

 

 

 

 

 

 

 $690,763          $613,129         

Net interest income (Note B)

 

 

 

 

$

7,314

 

 

 

 

 

 

 

$

6,919

 

 

 

     $8,328          $7,135     

Net yield on interest-earning assets

 

 

 

 

 

 

 

 

5.24

%

 

 

 

 

 

 

 

 

5.05

%

          5.25

%

          5.11

%

 

 

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 $0.4$1.1 million and $0.6$0.3 million for the three months ended March 31,September 30, 2018 and 2017, respectively. At ALC, these loans averaged $1.7$1.2 million and $1.6 million for the three months ended March 31, 2018 and 2017, respectively.respective periods presented.

   

Note B

Loan fees are included in the interest amounts presented. At the Bank, loan fees totaled $0.1 million for eachboth of the three-month periods ended March 31,September 30, 2018 and 2017. At ALC, loan fees totaled $0.4 million and $0.5 million for eachthe respective periods presented.


  

Nine Months Ended

  

Nine Months Ended

 
  

September 30, 2018

  

September 30, 2017

 
  

Average

Balance

  

Interest

  

Annualized

Yield/

Rate %

  

Average

Balance

  

Interest

  

Annualized

Yield/

Rate %

 
  

(Dollars in Thousands)

 

ASSETS

 

Interest-earning assets:

                        

Loans – Bank (Note A)

 $277,839  $9,590   4.61

%

 $238,428  $7,408   4.15

%

Loans – ALC (Note A)

  99,222   13,225   17.82

%

  88,918   12,520   18.83

%

Taxable investment securities

  170,671   2,548   2.00

%

  196,200   2,659   1.81

%

Non-taxable investment securities

  4,426   116   3.50

%

  8,989   245   3.64

%

Federal funds sold  9,838   144   1.96%        %

Interest-bearing deposits in banks

  25,074   338   1.80

%

  22,705   181   1.07

%

Total interest-earning assets

  587,070   25,961   5.91

%

  555,240   23,013   5.54

%

Non-interest-earning assets:

                        

Other assets

  59,550           56,012         

Total

 $646,620          $611,252         

LIABILITIES AND SHAREHOLDERS’ EQUITY

                        

Interest-bearing liabilities:

                        

Demand deposits

 $160,094  $520   0.43

%

 $162,920  $465   0.38

%

Savings deposits

  107,444   488   0.61

%

  80,364   132   0.22

%

Time deposits

  192,750   1,611   1.12

%

  183,242   1,116   0.81

%

Borrowings

  16,895   198   1.57

%

  21,596   189   1.17

%

Total interest-bearing liabilities

  477,183   2,817   0.79

%

  448,122   1,902   0.57

%

Non-interest-bearing liabilities:

                        

Demand deposits

  86,490           77,976         

Other liabilities

  7,088           7,223         

Shareholders’ equity

  75,859           77,931         

Total

 $646,620          $611,252         

Net interest income (Note B)

     $23,144          $21,111     

Net yield on interest-earning assets

          5.27

%

          5.08

%

Note A

For the purpose of these computations, non-accruing loans are included in the three-monthaverage loan amounts outstanding. At the Bank, these loans averaged $0.6 million and $0.5 million for the nine months ended September 30, 2018 and 2017, respectively. At ALC, these loans averaged $1.5 million and $1.6 million for the respective periods presented.

Note B

Loan fees are included in the interest amounts presented. At the Bank, loan fees totaled $0.4 million and $0.3 million for the nine-month periods ended March 31,September 30, 2018 and 2017.2017, respectively. At ALC, loan fees totaled $1.4 million and $1.6 million for the respective periods presented.

 

Interest income earned on loans for both the Bank and ALC increased comparingin both the three monthsthree- and nine-month periods ended March 31,September 30, 2018 compared to the three months ended March 31, 2017,corresponding periods of the previous year, primarily as a result of growth in average loan volume.volume, as well as increased yield in most earning asset categories. The loan volume increases were partially offset by decreases in the average balances of taxable and non-taxable investments and interest-bearing deposits in banks.investments. 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. Aggregate yield on earning assets increased in both the three- and nine-month periods presented compared to the corresponding periods of 2017. Yield increased in all categories of earning assets, except loans at ALC. The decrease in yield on loans at ALC is consistent with the focus on indirect lending at ALC which generally provides lower yielding loans, but with corresponding higher credit quality and lower losses.

 

Interest expense increased comparingin both the three monthsthree- and nine-month periods ended March 31,September 30, 2018 andcompared to the corresponding periods of 2017 due to increases in the volume of interest-bearing liabilities, as well as increases in rates commensurate with the interest rate environment experienced during the twelve months between March 31,September 30, 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 futuredeposit funding costs.

opportunities.

 

 

Provision for Loan and Lease Losses

 

The provision for loan and lease losses is an expense used to establish the allowance for loan and lease losses. Actual loan and lease losses, net of recoveries, are charged directly to the allowance for loan and lease losses. The expense recorded for each reporting period is a reflection of actual net losses experienced during the period and management’smanagement’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 for loan and lease losses for the Bank and ALC for the three and nine months ended March 31,September 30, 2018 and 2017.2017:

 

 

Three Months Ended

 
 

March 31,

  

March 31,

  

Three Months Ended

  Nine Months Ended 
 

2018

  

2017

  

September 30,

  

September 30,

  September 30,  September 30, 
  (Dollars in Thousands)  

2018

  

2017

  2018  2017 

Bank

 $39

 

 $

 

 $176  $(130) $215  $(130)

ALC

  619   515   613   503   1,934   1,594 

Total

 $658

 

 $515

 

 $789  $373  $2,149  $1,464 

 

At the Bank, during both the three monthsthree- and nine-month periods ended March 31,September 30, 2018, recoveries of previously charged-off loans exceeded current period charge-offs. The increase in provision expense comparingduring the three months ended March 31,third quarter of 2018 and 2017 was due to substantial loan growth inat the first quarter of 2018Bank that was not experienced in the firstthird quarter of 2017. The Bank’s allowance for loan and lease losses as a percentage of loans totaled 0.96%0.65% as of March 31,September 30, 2018, compared to 0.95% as of December 31, 2017 and 1.07%0.96% as of March 31,September 30, 2017. The decrease in the allowance for loan and lease losses as a percentage of loans was due to the acquisition of TPB that occurred during the third quarter of 2018. In accordance with generally accepted accounting principles for acquisition accounting, the loans acquired through the acquisition of TPB were recorded at fair value; accordingly, there was no allowance for loan and lease losses associated with the acquired loan portfolio at the acquisition date. Management continues to evaluate the need for an allowance on the acquired portfolio, factoring in the remaining net discount on the loans which totaled $2.3 million, or 1.51% of gross purchased loans, as of September 30, 2018.

 

At ALC, the provision for loan and lease losses increased comparing both the three months ended March 31,three- and nine-month periods ended September 30, 2018 andto the corresponding periods of 2017 based primarily on growth in ALC’s loan balances. ALC’s allowance for loan and lease losses as a percentage of loans totaled 2.40%2.28% as of March 31,September 30, 2018, compared to 2.48% as of December 31, 2017 and 2.71%2.60% as of March 31,September 30, 2017. The decrease in the allowance for loan and lease 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 and lease losses as a percentage of loans totaled 1.35%0.97% as of March 31,September 30, 2018, compared to 1.36% as of December 31, 2017 and 1.51%1.40% as of March 31,September 30, 2017. As discussed above, the decrease in the allowance for loan and lease losses as a percentage of loans was due to the acquisition of TPB that occurred during the third quarter of 2018. Based on our evaluation of the loan portfolio, we believe that the allowance for loan and lease losses at both the Bank and ALC is adequate to absorb losses inherent in the loan portfolio as of March 31,September 30, 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 and lease losses, as well as the resulting provision for loan and lease losses. In general, we expect the provision for loan and lease 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.ALC.

 

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.income:

 

  

Three Months Ended

March 31,

         
  

2018

  

2017

  

$

Change

  

%

Change

 
  

(Dollars in Thousands)   

    

Service charges and other fees on deposit accounts

 $467  $464  $3   0.6

%

Credit insurance commissions and fees

  218   256   (38)  (14.8

)%

Bank-owned life insurance

  105   106   (1)  (0.9

)%

Net gain on sale and prepayment of investment securities   

3

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

Other income

  230   292   (62)  (21.2

)%

Total non-interest income

 $1,140  $1,167  $(27)  (2.3

)%

  

Three Months Ended

September 30,

          

Nine Months Ended

September 30,

         
  

2018

  

2017

  

$

Change

  

%

Change

  2018  2017  

$

Change

  

%

Change

 
  

(Dollars in Thousands)

      (Dollars in Thousands)     

Service charges and other fees on deposit accounts

 $489  $481  $8   1.7

%

 $1,400  $1,406  $(6)  (0.4)%

Credit insurance commissions and fees

  198   160   38   23.8

%

  516   459   57   12.4%

Bank-owned life insurance

  107   106   1   0.9

%

  319   318   1   0.3%
Net gain on sale and prepayment of investment securities     178   (178)  (100.0)%  105   228   (123)  (53.9)%
Net gain on settlement of derivative contracts  981      981   100.0%  981      981   100.0%
Mortgage fees from secondary market  128   89   39   43.8%  389   147   242   164.6%

Other income

  209   222   (13)  (5.9

)%

  674   775   (101)  (13.0)%

Total non-interest income

 $2,112  $1,236  $876   70.9

%

 $4,384  $3,333  $1,051   31.5%

 

Non-interest income at the Bank consists of service charges and other fees on deposit accounts; bank-owned life insurance; net gains on the sale and prepayment of investment securities; net gains on the settlement of derivative contracts; mortgage fees from the secondary market; and other non-interest income, which includes fee income generated by the Bank,, such as ATM fees and real estate rental income. Non-interest income at ALC consists of credit insurance commissions and fees and other non-interest income generated for ancillary services, such as ALCsALC’s auto club membership program. The decreaseincrease in non-interest income for both the three monthsthree- and nine-month periods ended March 31,September 30, 2018 compared to the same periodperiods in 2017 resulted primarily from reductionsthe settlement of two forward interest rate swap contracts with the counterparty that netted a pre-tax gain of $1.0 million. The increase is also attributable to fees earned from secondary market mortgage closings at the Bank. These increases were partially offset by a decrease in gains on the sale and prepayment of investment securities atin both the Bank, as well as reductions in credit insurance commissionsthree- and fees at ALC, and was partially offset by an increase in mortgage fees from secondary market transactions at the Bank. nine-month periods ended September 30, 2018. The Bank’s mortgage division, which began operating in the second quarter of 2017, generates non-interest income by closing loans in the secondary market. Given the nature of the types of revenues categorized as non-interest income, there is uncertainty as to the level of revenue that will be derived from these sources in the future.

 

 

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.indicated:

 

  

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

  

Three Months Ended

September 30,

          

Nine Months Ended

September 30,

         
  

2018

  

2017

  

$

Change

  

%

Change

  2018  2017  

$

Change

  

%

Change

 
  

(Dollars in Thousands)

      (Dollars in Thousands)     

Salaries and employee benefits

 $4,643  $4,370  $273   6.2% $13,743  $13,048  $695   5.3%

Net occupancy and equipment expense

  983   806   177   22.0%  2,745   2,276   469   20.6%
Computer services  328   337   (9)  (2.7)%  937   1,036   (99)  (9.6)%
Insurance expense and assessments  206   161   45   28.0%  583   479   104   21.7%
Fees for professional services  242   187   55   29.4%  781   650   131   20.2%
Postage, stationery and supplies  207   174   33   19.0%  609   479   130   27.1%
Telephone/data communications  207   206   1   0.5%  595   628   (33)  (5.3)%
Acquisition expenses  1,492      1,492   100.0%  1,492      1,492   100.0%

Other real estate/foreclosure expense:

                                

Write-downs, net of gain or loss on sale

  (79)  196   (275)  (140.3)%  22   277   (255)  (92.1)%

Carrying costs

  32   48   (16)  (33.3

)%

  107   184   (77)  (41.8)%

Total other real estate/foreclosure expense

  (47)  244   (291)  (119.3)%  129   461   (332)  (72.0)%

Other

  881   705   176   25.0%  2,321   2,033   288   14.2%

Total non-interest expense

 $9,142  $7,190  $1,952   27.1% $23,935  $21,090  $2,845   13.5%

 

Non-interest expense consists of the items noted above. The increase in non-interest expense for the three and nine months ended March 31,September 30, 2018 compared to the same periodperiods in 2017 resulted primarily from increases inexpenses associated with the TPB acquisition that totaled approximately $1.5 million during the third quarter of 2018. In addition, salaries and benefits increased as a result of merit and cost of living salary increases for the Bank’s employees, combined with additional expense during the third quarter of 2018 related to the assumption by the Company of salaries and occupancybenefits for employees of TPB post-acquisition. The increase also resulted from increased expenses associated with the Bank’s Pump House Plaza office complex in Birmingham, Alabama, which became operational during the third quarter of 2017. Occupancy and equipment expense partiallyincreased as a result of depreciation and operating expenses associated with the location, which now serves as the headquarters of both the Bank and the Company. During the third quarter of 2018, the Bank entered into an agreement with a third party to lease all unused remaining leasable space in Pump House Plaza. The lease, which is scheduled to commence during the fourth quarter of 2018, is expected to generate in excess of $0.7 million of lease revenue annually and is expected to offset by a decrease in computer services expense. Non-interestsignificant portion of expense associated with the location. In general, non-interest expense is expected to increase over time due to inflationary 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 $0.1$0.3 million and $0.2 million for both of the three-month periods ended March 31,September 30, 2018 and 2017.2017, respectively. The CompanysCompany’s effective tax rate was 16.4% and 24.3%52.8% for the same periods. The reducedthird quarter of 2018, compared to 21.4% for the third quarter of 2017. For both of the nine month periods ended September 30, 2018 and 2017, the provision for income taxes was $0.4 million, and the effective tax rate for the respective periods was 29.8% and 23.0%. The increased tax provisioning during the third quarter of 2018 resulted from the reductionincurrence of acquisition-related expenses during the quarter, a portion of which are non-deductible under IRS regulations. This resulted in approximately $0.2 million of additional tax expense during the Companys statutory federal income tax rate underquarter.

Under the Tax Cuts and Jobs Act of 2017 (“Tax Reform”). Under Tax Reform,, beginning January 1, 2018, the CompanysCompany’s federal statutory income tax rate was set at 21%, reduced from the 34% statutory income tax rate previously applied. Aside from the impact of Tax Reform and in the normal course of business, 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 CompanysCompany’s overall strategy. The CompanysCompany’s effective tax rate is expected to fluctuate commensurate with the level of these investments as compared to total pre-tax income.income.

 


BALANCE SHEET ANALYSIS

 

Investment Securities

 

The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering the duration, composition and/or balance of the portfolio. The expected average life of securities in the investment portfolio was 3.2 years and 2.8 years as of both March 31,September 30, 2018 and December 31, 2017.2017, respectively.

 

Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income, a separate component of shareholders’ equity. As of March 31,September 30, 2018, available-for-sale securities totaled $156.6$137.3 million, or 86.1% of the total investment portfolio, compared to $153.9 million, or 85.4% of the total investment portfolio, as of December 31, 2017. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities and obligations of state and political subdivisions.

 

Held-to-maturity securities are recorded at amortized cost and represent securities that the Company both intends and has the ability to hold to maturity. As of March 31,September 30, 2018, held-to-maturity securities totaled $25.3$22.2 million, or 13.9% of the total investment portfolio, compared to $26.3 million, or 14.6% of the total investment portfolio, as of December 31, 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 and Lease 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 March 31, 2018.September 30, 2018:

 

 

Bank

  

Bank

 
 

2018

  

2017

  

2018

  

2017

 
 

March

31,

  

December

31,

  

September

30,

  

June

30,

  

March

31,

  

September

30,

  

June

30,

  

March

31,

  

December

31,

  

September

30,

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Real estate loans:

                                        

Construction, land development and other land loans

 $25,965  $26,143  $20,213  $12,424  $25,853  $43,501  $22,878  $25,965  $26,143  $20,213 

Secured by 1-4 family residential properties

  36,618   34,272   35,125   32,227   32,535   111,555   38,968   36,618   34,272   35,125 

Secured by multi-family residential properties

  16,396   16,579   16,498   16,702   16,464   22,915   18,374   16,396   16,579   16,498 

Secured by non-farm, non-residential properties

  111,546   105,133   107,679   113,037   97,294   150,523   112,461   111,546   105,133   107,679 

Other

  188   190   223   226   230   1,100   187   188   190   223 

Commercial and industrial loans

  65,996   69,969   66,320   65,087   57,253   83,087   59,320   65,996   69,969   66,320 

Consumer loans

  5,416   5,217   5,431   5,671   6,057   7,075   5,420   5,416   5,217   5,431 

Total loans

 $262,125  $257,503  $251,489  $245,374  $235,686  $419,756  $257,608  $262,125  $257,503  $251,489 

Less unearned interest, fees and deferred cost

  349   374   367   371   249   331   351   349   374   367 

Allowance for loan losses

  2,500   2,447   2,422   2,526   2,521   2,709   2,520   2,500   2,447   2,422 

Net loans

 $259,276  $254,682  $248,700  $242,477  $232,916  $416,716  $254,737  $259,276  $254,682  $248,700 

 

 

ALC

  

ALC

 
 

2018

  

2017

  

2018

  

2017

 
 

March

31,

  

December

31,

  

September

30,

  

June

30,

  

March

31,

  

September

30,

  

June

30,

  

March

31,

  

December

31,

  

September

30,

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Real estate loans:

                                        

Construction, land development and other land loans

 $  $  $  $  $  $  $  $  $  $ 

Secured by 1-4 family residential properties

  9,963   10,801   11,490   12,229   12,993   8,472   9,176   9,963   10,801   11,490 

Secured by multi-family residential properties

                              

Secured by non-farm, non-residential properties

                              

Other

                              

Commercial and industrial loans

                              
Consumer loans:                                   

Consumer

  32,758   34,083   35,650   31,920   32,892   31,965   32,902   32,758   34,083   35,650 

Indirect sales

  60,157   55,071   50,553   52,134   47,196   71,005   67,429   60,157   55,071   50,553 

Total loans

 $102,878  $99,955  $97,693  $96,283  $93,081  $111,442  $109,507  $102,878  $99,955  $97,693 

Less unearned interest, fees and deferred cost

  6,020   6,189   5,981   5,855   5,962   5,929   6,283   6,020   6,189   5,981 

Allowance for loan losses

  2,329   2,327   2,386   2,379   2,358   2,407   2,432   2,329   2,327   2,386 

Net loans

 $94,529  $91,439  $89,326  $88,049  $84,761  $103,106  $100,792  $94,529  $91,439  $89,326 

 

 

 

 

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

 

 

Bank

  

Bank

 
 

2018

  

2017

  

2018

  

2017

 
 

First

Quarter

  

Fourth

Quarter

  

Third

Quarter

  

Second

Quarter

  

First

Quarter

  

Third

Quarter

  

Second

Quarter

  

First

Quarter

  

Fourth

Quarter

  

Third

Quarter

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Balance at beginning of period

 $2,447  $2,422  $2,526  $2,521  $2,409  $2,520  $2,500  $2,447  $2,422  $2,526 

Charge-offs:

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

Commercial and industrial

           (16)        (2)         

Consumer loans

  

 

  

 

  (1

)

  (60

)

  (2

)

  (3)           (1)

Other loans

  

 

  

 

  

 

  

 

  

 

               

Total charge-offs

  (8

)

  

 

  (1

)

  (76

)

  (2

)

  (3

)

  (3

)

  (8)  

 

  (1

)

Recoveries

  22   25   27   81   114   16   23   22   25   27 

Net recoveries (charge-offs)

  14

 

  25

 

  26

 

  5

 

  112

 

  13   20   14   25   26 

Provision (reduction in reserve) for loan losses

  39

 

  

 

  (130

)

  

 

  

 

  176      39   

 

  (130)

Ending balance

 $2,500  $2,447  $2,422  $2,526  $2,521  $2,709  $2,520  $2,500  $2,447  $2,422 

as a % of loans

  0.96

%

  0.95

%

  0.96

%

  1.03

%

  1.07

%

  0.65

%

  0.98

%

  0.96

%

  0.95

%

  0.96

%

 

  

ALC

 
  

2018

  

2017

 
  

First

Quarter

  

Fourth

Quarter

  

Third

Quarter

  

Second

Quarter

  

First

Quarter

 
  

(Dollars in Thousands)

 

Balance at beginning of period

 $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  (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 

  (604)  (576)  (494)  (569)  (658)

Indirect sales

  (147

)

  (142

)

  (150

)

  (160

)

  (135

)

Other loans

  

 

  

 

  

 

  

 

  

 

Total charge-offs

  (765

)

  (719

)

  (654

)

  (733

)

  (806

)

Recoveries

  148   137   158   178   202 

Net recoveries (charge-offs)

  (617

)

  (582

)

  (496

)

  (555

)

  (604

)

Provision (reduction in reserve) for loan losses

  619   523   503   576   515 

Ending balance

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

as a % of loans

  2.40

%

  2.48

%

  2.60

%

  2.63

%

  2.71

%

  

ALC

 
  

2018

  

2017

 
  

Third

Quarter

  

Second

Quarter

  

First

Quarter

  

Fourth

Quarter

  

Third

Quarter

 
  

(Dollars in Thousands)

 

Balance at beginning of period

 $2,432  $2,329  $2,327  $2,386  $2,379 

Charge-offs:

                    
Real estate loans:                    
Construction, land development and other land loans               
Secured by 1-4 family residential properties  (41)  (18)  (14)  (1)  (10)
Secured by multi-family residential properties               
Secured by non-farm, non-residential properties               
Other               

Commercial and industrial

               

Consumer loans:

                    

Consumer

  (628

)

  (609

)

  (604

)

  (576

)

  (494

)

Indirect sales  (144)  (131)  (147)  (142)  (150)

Other loans

               

Total charge-offs

  (813

)

  (758

)

  (765

)

  (719

)

  (654

)

Recoveries

  176   159   148   137   158 

Net recoveries (charge-offs)

  (637

)

  (599

)

  (617

)

  (582

)

  (496

)

Provision (reduction in reserve) for loan losses

  612   702   619   523   503 

Ending balance

 $2,407  $2,432  $2,329  $2,327  $2,386 

as a % of loans

  2.28

%

  2.36

%

  2.40

%

  2.48

%

  2.60

%

 

 

Nonperforming Assets

 

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

 

 

Consolidated

  

Consolidated

 
 2018  

2017

  

2018

  

2017

 
 

March

31,

  

December

31,

  

September

30,

  

June

30,

  

March

31,

  

September

30,

  

June

30,

  

March

31,

  

December

31,

  

September

30,

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Non-accrual loans

 $2,037  $2,148  $1,956  $1,847  $2,205  $3,782  $1,713  $2,037  $2,148  $1,956 

Other real estate owned

  3,343   3,792   3,819   4,351   4,587   1,489   2,181 �� 3,343   3,792   3,819 

Total

 $5,380  $5,940  $5,775  $6,198  $6,792  $5,271  $3,894  $5,380  $5,940  $5,775 

Nonperforming assets as a percentage of loans and other real estate

  1.49

%

  1.67

%

  1.67

%

  1.82

%

  2.08

%

  1.00

%

  1.07

%

  1.49

%

  1.67

%

  1.67

%

Nonperforming assets as a percentage of total assets

  0.86

%

  0.95

%

  0.94

%

  1.01

%

  1.10

%

  0.66

%

  0.61

%

  0.86

%

  0.95

%

  0.94

%

 

 

Bank

  

Bank

 
 

2018

  

2017

  

2018

  

2017

 
 

March

31,

  

December

31,

  

September

30,

  

June

30,

  

March

31,

  

September

30,

  

June

30,

  

March

31,

  

December

31,

  

September

30,

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Non-accrual loans

 $369  $315  $332  $343  $609  $2,581  $360  $369  $315  $332 

Other real estate owned

  3,100   3,527   3,527   3,951   4,161   1,319   2,002   3,100   3,527   3,527 

Total

 $3,469  $3,842  $3,859  $4,294  $4,770  $3,900  $2,362  $3,469  $3,842  $3,859 

Nonperforming assets as a percentage of loans and other real estate

  1.31

%

  1.47

%

  1.52

%

  1.72

%

  1.99

%

  0.93

%

  0.91

%

  1.31

%

  1.47

%

  1.52

%

Nonperforming assets as a percentage of total assets

  0.55

%

  0.61

%

  0.63

%

  0.69

%

  0.77

%

  0.48

%

  0.37

%

  0.55

%

  0.61

%

  0.63

%

 

 

ALC

  

ALC

 
 

2018

  

2017

  

2018

  

2017

 
 

March

31,

  

December

31,

  

September

30,

  

June

30,

  

March

31,

  

September

30,

  

June

30,

  

March

31,

  

December

31,

  

September

30,

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 

Non-accrual loans

 $1,668  $1,833  $1,624  $1,504  $1,596  $1,201  $1,353  $1,668  $1,833  $1,624 

Other real estate owned

  243   265   292   400   426   170   179   243   265   292 

Total

 $1,911  $2,098  $1,916  $1,904  $2,022  $1,371  $1,532  $1,911  $2,098  $1,916 

Nonperforming assets as a percentage of loans and other real estate

  1.97

%

  2.23

%

  2.08

%

  2.10

%

  2.31

%

  1.30

%

  1.48

%

  1.97

%

  2.23

%

  2.08

%

Nonperforming assets as a percentage of total assets

  1.96

%

  2.22

%

  2.06

%

  2.08

%

  2.29

%

  1.30

%

  1.48

%

  1.96

%

  2.22

%

  2.06

%

 

 

 

 

Deposits

 

Total deposits increased by 1.6%38.4% to $525.3$715.8 million as of March 31,September 30, 2018, from $517.1 million as of December 31, 2017. Total deposits acquired from TPB during the third quarter of 2018 attributed to $140.0 million of this growth. 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 $502.2$635.5 million, or 95.6%88.8% of total deposits, as of March 31,September 30, 2018, compared to $489.0 million, or 94.6% of total deposits, as of December 31, 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.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 firstthird quarter of 2018, these borrowings represented 5.4%1.1% of average interest-bearing liabilities, compared to 5.7%4.5% in the firstthird quarter of 2017.2017.

 

Shareholders’ Equity

 

The Company has historically placed greatsignificant emphasis on maintaining its strong capital base. As of March 31,September 30, 2018, shareholders’ equity totaled $75.5$77.5 million, or 12.0%9.7% of total assets, compared to $76.2 million, or 12.2% of total assets, as of December 31, 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 decreaseincrease in shareholders’ equity during the periodnine months ended March 31,September 30, 2018 resulted primarily from an increase in surplus associated with the TPB acquisition and growth in retained earnings, which were partially offset by an increase in accumulated other comprehensive loss associated with unrealized losses in the fair value of available-for-sale securities during the first quarter of 2018, which was partially offset by growth in retained earnings.nine-month period ended September 30, 2018. The fair value of the available-for-sale portfolio fluctuates based primarily on changes in interest rates. Accordingly, the net unrealized losses during the first quarter ofnine months ended September 30, 2018 are not necessarily indicative of future performance of the portfolio.

 

BancsharesBancshares’ Board of Directors evaluates dividend payments based on the Company’s level of earnings and ourthe 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 March 31,September 30, 2018 and 2017, Bancshares declared a dividend of $0.02 per common share, or approximately $0.1 million in aggregate amount.

 

As of both March 31,September 30, 2018 and December 31, 2017, the Company retained approximately $20.4 million in treasurytreasury 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 Bancshares’ 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, 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 induring the nine months ended September 30, 2018 or in 2017.

 

As of March 31,September 30, 2018 and December 31, 2017, a total of 106,566112,567 and 103,620 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’ 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.due.


 

LIQUIDITY AND CAPITAL RESOURCES

 

The asset 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 $111.1$156.5 million as of March 31,September 30, 2018 and $117.3 million as of December 31, 2017. Investment securities forecasted to mature or reprice in one year or less were estimated to be $10.2$8.3 million of the investment portfolio as of March 31,September 30, 2018.

 

Although some securities in the investment portfolio have legal final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. As of March 31,September 30, 2018, the investment securities portfolio had an estimated average life of 2.8 years, and approximately 86.7% of the portfolio (including both available-for-sale and held-to-maturity investments) was expected to be repaid within five3.2 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.

The Bank entered into an agreement to lease space in Pump House Plaza and agreed to pay approximately $2.8 million for the build-out of the tenant space. The Bank expects to fund the build-out using available cash.

 

As of March 31,September 30, 2018, and December 31, 2017, the Company had $20.0 million and $25.0 million, respectively, indid not have any outstanding borrowings under FHLB advances.advances, and had $25.0 million in outstanding borrowings as of December 31, 2017. The Company had up to $167.6$231.0 million and $159.3 million in remaining unused credit from the FHLB (subject to available collateral) as of March 31,September 30, 2018 and December 31, 2017, respectively. In addition, the Company had $46.8 million and $18.8 million in unused established federal funds lines as of both March 31,September 30, 2018 and December 31, 2017.

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.2017, respectively.

 

Management believes that the Company has adequate sources of liquidity to more than coversatisfy 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.Company.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The primary purpose of 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 BanksBank’s board of directors to measure interest rate exposure. Using a wide range of scenarios, management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. In these simulations, assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of the Company’sCompany’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.rates.

 


Measuring Interest Rate Sensitivity

 

Interest rate sensitivity is a function of the repricing characteristics of all of the Company’sCompany’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’sCompany’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 and Qualitative Disclosures About Market Risk,” of Bancshares'Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2017 for additional disclosures related to market risk. Management’s evaluation asAs of March 31,September 30, 2018, did not indicate any significant increasemanagement is evaluating changes in the Company’s exposure to market risk from those disclosed as a result of December 31, 2017.the acquisition that occurred during the third quarter of 2018. Accordingly, it is possible that information could come to management’s attention through the evaluation process that indicates higher exposure to market risk than currently understood by management.

 

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 BancsharesBancshares’ 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.

 

BancsharesBancshares’ management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Bancshares’ disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of March 31,September 30, 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 March 31,September 30, 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 BancsharesBancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31,September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

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 BancsharesBancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2017 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.results.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sale of Equity Securities

In connection with the acquisition of TPB, the Company issued 204,355 shares of FUSB common stock, which were valued at $11.25 per share. See Note 3 to the Interim Condensed Consolidated Financial Statements (Unaudited) included in this Form 10-Q, and the Company’s Form 8-K filed with the SEC on September 4, 2018, for additional information. The shares were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. The Company relied on this exemption from registration based in part on representations made by the purchasers of the shares in connection with the transaction.

 

As noted in the table below, 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 BancsharesBancshares’ common stock during the firstthird quarter of 2018.2018.

 

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)

 

JJuly anuary 1 – JanuaryJuly 31

$

242,303

August 1 – August 31

$242,303

September 1 – September 30

  

  $

      242,303 

February 1 – February 28Total

  

$

242,303

March 1 – March 31

$242,303

Total

  $      242,303 

 

(1)

On December 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 common stock before December 31, 2018, of which 242,303 shares remain available.available.

(2)

No shares were purchased in open-market transactions by an independent trustee for Bancshares’ 401(k) Plan during the firstthird quarter of 2018.2018.

 

ITEM 6.

EXHIBITS

 

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

 

 

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 13May 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)

 

 

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 by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q (File No. 000-14549), 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 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 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 March 31,30, 2018.