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

☐	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 4~~November 8, , 2018
Common Stock, $0.01 par value	~~6,087,264~~ 6,296,712 shares

~~Table of Contents~~

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

		PAGE

	PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

Interim C~~ondensed~~Condensed Consolidated Balance Sheets at ~~March 31,~~September 30, 2018 (Unaudited) and December 31, 2017		4

Interim C~~ondensed~~Condensed Consolidated Statements of Operations for the Three and Nine Months Ended ~~March 31,~~September 30, 2018 and 2017 (Unaudited)		5

Interim C~~ondensed~~Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended ~~March 31,~~September 30, 2018 and 2017 (Unaudited)		6

Interim C~~ondensed~~Condensed Consolidated Statements of Cash Flows for the ~~Three~~Nine 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

~~Table of Contents~~

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 ~~proposed~~Company’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-related~~integration-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.

~~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.

~~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.

~~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.

~~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.

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FIRST US BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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's~~Company’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

Nine Months Ended

March 31,

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.

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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 ~~Instruments~~Instruments.”.” Issued in June 2016, ASU ~~2016~~-132016-13 removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current recognition thresholds and will require companies to recognize an allowance for lifetime expected credit losses. Credit losses will be immediately recognized through net income; 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 Update~~~~2014~~-~~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 ~~consisted~~consists of service and other charges on deposit accounts, mortgage fees from secondary market transactions at the Bank, ATM fee income and other non-interest income. Revenue generated from these sources for the ~~three~~nine 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 ~~March~~September 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.

	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 ~~Contents~~the 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

~~Table of Contents~~

The scheduled maturities of investment securities available-for-sale and held-to-maturity as of September 30~~March 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.

~~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.

~~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-~~~~four~~one-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.

~~Table of Contents~~

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 ~~March~~September 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 ~~three~~nine 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.

~~Table~~

Acquired Loans

The Company acquired loans during the quarter ended September 30, 2018. At acquisition, certain acquired loans evidenced deterioration of ~~Contents~~credit 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 ~~three~~nine 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

~~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

~~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.

~~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

~~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.

~~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, ~~201~~7.2017:

	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	$	—

~~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.

~~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~~~~, 201~~8

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~~

~~186~~

~~Secured by multi-family residential properties~~

—

~~Secured by non-farm, non-residential properties~~

~~524~~

~~Commercial and industrial~~

~~Total loans with an allowance recorded~~

~~779~~

~~Total impaired loans~~

~~Loans secured by real estate~~

~~Construction, land development and other land loans~~

—

~~Secured by 1-4 family residential properties~~

~~186~~

~~Secured by multi-family residential properties~~

—

~~Secured by non-farm, non-residential properties~~

~~524~~

~~Commercial and industrial~~

~~Total impaired loans~~

~~779~~

~~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 ~~three~~nine 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

~~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 ~~March~~September 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, ~~modification~~smodifications of note structure, principal balance reductions or some combination of these concessions. There were no loans modified with concessions granted during the ~~three~~~~-month~~nine-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 ~~three~~nine 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

~~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 ~~three~~nine 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 ~~acquires~~acquire 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.~~.

~~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 the~~outstanding. 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~~~~-month~~nine-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 ~~reduced~~increased effective tax rate infor the ~~first~~ ~~quarter of~~ nine months ended September 30, 2018 compared to the ~~first~~ ~~quarter~~same period of 2017 resulted from the ~~reduction~~incurrence 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 ~~increase~~decrease in the net deferred tax asset resulted primarily from the impact of ~~changes in~~ the ~~fair value~~core deposit intangible related to the acquisition of ~~securities available-for-sale.~~TPB that occurred during the third quarter of 2018.

~~Table of Contents~~

~~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 ~~106,566~~112,567 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~~~~-month~~nine-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~~-year~~10-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 b~~asis~~basis over the award’s vesting period. The fair value of outstanding awards was determined using the Black-Scholes option pricing model based on the assumptions noted in the table below. Expected volatilities are based on historical volatilities of 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’s~~Company'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 ~~first~~~~three~~nine months of ended September 30, 2018 and 2017, respectively, ~~5,520~~Bancshares 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.

~~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 a~~held two forward interest rate swap ~~contract~~contracts on ~~a variable rate~~variable-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 was~~swaps were designated as a derivative ~~instrument~~instruments in a cash flow ~~hedge~~hedges with the objective of protecting the quarterly interest rate payments on the FHLB ~~advance~~advances 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 rate~~voluntarily 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 a~~these 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 hedge~~contracts with the ~~objective of protecting~~counterparty and concurrently paid down the ~~quarterly~~associated hedged variable-rate FHLB advances. Since the intended forecasted transactions (the variable interest rate payments onassociated with the FHLB ~~advance from~~advances) will no longer occur as previously expected, all amounts associated with the ~~risk~~fair 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 included~~gains recorded in accumulated other comprehensive income were recognized as gains during the third quarter of 2018. The amounts recognized as gains totaled ~~$0.7~~approximately $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 ) —

~~Table of Contents~~

					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	)		—

~~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~~~~-month~~nine-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~~~~-party~~third-party insurers to limit the ~~Company~~’sCompany’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.

~~Litigation~~During 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.

~~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~~~~-party~~third-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 ~~three~~nine 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~~~~-party~~third-party financial institutions. This information is periodically evaluated by the Company and, as necessary, corroborated against other ~~third~~~~-party~~third-party valuations. The Company classifies these derivative assets within Level 2 of the valuation hierarchy.

~~Table of Contents~~

The following table presents assets measured at fair value on a recurring basis as of September ~~March~~30, 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.

~~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~~~~-party~~third-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 Sale~~Held-for-Sale

Included within other assets are certain assets that were formerly included as premises and equipment but have been removed from service, and as of the balance sheet date, were designated as assets to be disposed of by sale. These include assets associated with branches of the Bank that have been closed. When an asset is designated as ~~held for sale,~~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~~~~-party~~third-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 sale~~held-for-sale measured at fair value on a non-recurring basis as of ~~March~~September 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

~~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 Sale~~Held-for-Sale

Assets designated as ~~held for sale~~held-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~~~~-party~~third-party financial institution. This information is periodically evaluated by the Company and, as necessary, corroborated against other ~~third~~~~-party~~third-party information.

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

~~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.~~

~~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 ~~office~~soffices 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, Alabama~~Alabama; 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 ~~nine~~10 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 ~~customers~~’customers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its ~~253~~271 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 ~~shareholders~~’shareholders’ equity as of ~~March 31,~~September 30, 2018 to December 31, 2017, while comparing income and expense for the ~~three-month~~nine-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 ~~each~~the 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 periods~~acquisition 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 comparing~~most significant activity that drove changes in the ~~two periods. As~~Company’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 growth~~is 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 provision~~Bank’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, the~~Income Taxes

The Company’s effective tax rate ~~decreased~~increased to ~~16.4% for~~29.8% during the ~~quarter~~nine months ended ~~March 31,~~September 30, 2018, compared to ~~24.3% for~~23.0% during the ~~first quarter~~corresponding period of 2017. The ~~reduced~~increased effective tax rate resulted from the ~~reduction in~~incurrence 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 income~~2018 tax ~~rate~~return 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 loans~~assets 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, compared~~28.3%. 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 quarter~~increased to $519.8 million as of September 30, 2018, ~~totaled $4.6~~compared to $346.1 million ~~at the Bank and $3.1 million at ALC. Consistent with previous periods, the~~as of December 31, 2017. The majority of the ~~Bank’s~~increase was due to the acquisition of TPB, supplemented by annualized organic loan growth ~~was focused on commercial lending in~~of 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 quarter~~loans to deposits was 72.6% as of September 30, 2018, compared to ~~$6.9 million for the first quarter~~66.9% as of ~~2017. Average~~December 31, 2017, while net loans to assets totaled ~~$353.3 million~~64.8% 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 during~~As of September 30, 2018, the ~~first quarter~~allowance 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 $525.3~~is 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 ~~March~~September 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. Average~~2017, an increase of $198.7 million. Of this amount, $140.0 million was attributable to deposits ~~totaled $516.3~~acquired 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 quarter~~nine months ended September 30, 2018. The majority of ~~2018, compared to $498.9 million during the first quarter of 2017. The~~this growth ~~in deposits compared to the first quarter of 2017 was largely attributable to deposits generated~~occurred at the Bank’s ~~new office~~Pump House Plaza branch which opened in ~~the~~ Birmingham ~~area that opened during~~in the third quarter of 2017.

~~Table~~ In addition, the Bank increased its holdings of ~~Contents~~

~~The rising interest rate environment has generally led to higher yields on earning assets at the Bank; however, these increases have been partially offset~~wholesale 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 losses~~nine months ended September 30, 2018, primarily as a ~~percentage~~replacement 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~~

~~Subsequent~~As 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 into~~Bank’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.

~~Table of Contents~~

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 c~~alculated~~calculated as the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company’s earning assets consist of loans 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.

~~Table of Contents~~

The following ~~table shows~~tables show the average balances of each principal category of assets, liabilities and shareholders’ equity for the ~~three months~~three- and nine-month periods ended ~~March 31,~~September 30, 2018 and 2017. Additionally, the ~~table provides~~tables 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 ~~each~~both 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 ~~each~~the 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-month~~average 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 ~~comparing~~in both the ~~three months~~three- 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 ~~comparing~~in both the ~~three months~~three- and nine-month periods ended ~~March 31,~~September 30, 2018 ~~and~~compared 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 future~~deposit funding ~~costs.~~

opportunities.

~~Table of Contents~~

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 months~~three- 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 ~~comparing~~during the ~~three months ended March 31,~~third quarter of 2018 ~~and 2017~~ was due to substantial loan growth inat the ~~first quarter of 2018~~Bank that was not experienced in the ~~first~~third 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 ~~and~~to 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 ~~ALC~~’sALC’s auto club membership program. The ~~decrease~~increase in non-interest income for both the ~~three months~~three- and nine-month periods ended ~~March 31,~~September 30, 2018 compared to the same ~~period~~periods in 2017 resulted primarily from ~~reductions~~the 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 commissions~~three- 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.

~~Table of Contents~~

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 ~~period~~periods in 2017 resulted primarily from ~~increases in~~expenses 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 ~~occupancy~~benefits 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 ~~partially~~increased 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-interest~~significant 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 ~~Company~~’sCompany’s effective tax rate was ~~16.4% and 24.3%~~52.8% for the ~~same periods. The reduced~~third 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 ~~reduction~~incurrence 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 ~~Company~~’~~s statutory federal income tax rate under~~quarter.

Under the Tax Cuts and Jobs Act of 2017 (“Tax Reform”)~~. Under Tax Reform,~~, beginning January 1, 2018, the ~~Company~~’sCompany’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 ~~Company~~’sCompany’s overall strategy. The ~~Company~~’sCompany’s effective tax rate is expected to fluctuate commensurate with the level of these investments as compared to total pre-tax ~~income.~~income.

~~Table of Contents~~

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

~~Table of Contents~~

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	%

~~Table of Contents~~

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	%

~~Table of Contents~~

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 ~~first~~third quarter of 2018, these borrowings represented ~~5.4%~~1.1% of average interest-bearing liabilities, compared to ~~5.7%~~4.5% in the ~~first~~third quarter of ~~2017.~~2017.

Shareholders’ Equity

The Company has historically placed ~~great~~significant 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 ~~decrease~~increase in shareholders’ equity during the ~~period~~nine 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 of~~nine months ended September 30, 2018 are not necessarily indicative of future performance of the portfolio.

~~Bancshares~~’Bancshares’ Board of Directors evaluates dividend payments based on the Company’s level of earnings and ~~our~~the 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 ~~treasury~~treasury 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 in~~during the nine months ended September 30, 2018 or in 2017.

As of ~~March 31,~~September 30, 2018 and December 31, 2017, a total of ~~106,566~~112,567 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 five~~3.2 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, in~~did 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.~~

~~Table of Contents~~

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 cover~~satisfy 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 ~~Bank~~’sBank’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 as~~As of ~~March 31,~~September 30, 2018, ~~did not indicate any significant increase~~management 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 ~~Bancshares~~’Bancshares’ reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to Bancshares’ management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

~~Bancshares~~’Bancshares’ management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Bancshares’ disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of ~~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 ~~Bancshares~~’Bancshares’ 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.

~~Table of Contents~~

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in ~~Bancshares~~’Bancshares’ 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 ~~Bancshares~~’Bancshares’ common stock during the ~~first~~third 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 – ~~January~~July 31		—	$	—		—		242,303
August 1 – August 31		—	$	—		—		242,303
September 1 – September 30		—	$	—		—		242,303
~~February 1~~ ~~– February 28~~Total		—	$	—		—		~~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 ~~first~~third 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.

~~Table of Contents~~

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 13~~May 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)

~~Table of Contents~~

INDEX TO EXHIBITS

Exhibit No.		Description

~~2.1~~		Stock 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.

	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

	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

	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	)%