First US Bancshares (FUSB) 10-Q 2022 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

OR

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

For the transition period from _____________ to _____________

Commission File Number: 0-14549

First US Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	63-0843362
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

3291 U.S. Highway 280 Birmingham, AL	35243
(Address of Principal Executive Offices)	(Zip Code)

(205) 582-1200

(Registrant’s Telephone Number, Including Area Code)

N/A

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	FUSB	The Nasdaq Stock Market LLC

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if 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 November 7, 2022
Common Stock, $0.01 par value	5,812,258 shares

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

	PAGE
PART I. FINANCIAL INFORMATION	4
ITEM 1. FINANCIAL STATEMENTS	4
Interim Condensed Consolidated Balance Sheets at September 30, 2022 (Unaudited) and December 31, 2021	4
Interim Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	5
Interim Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	6
Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)	7
Interim Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)	9
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)	10
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	43
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	58
ITEM 4. CONTROLS AND PROCEDURES	59
PART II. OTHER INFORMATION	60
ITEM 1. LEGAL PROCEEDINGS	60
ITEM 1A. RISK FACTORS	60
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	60
ITEM 6. EXHIBITS	61
Signature Page	62

2

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, First US Bancshares, Inc. (“Bancshares” and, together with its subsidiaries, the “Company”), through its senior management, from time to time makes forward-looking statements concerning its expected future operations, 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. Certain factors that could affect the accuracy of such forward-looking statements and cause actual results to differ materially from those projected in such forward-looking statements are identified in the Company’s filings with the Securities and Exchange Commission (“SEC”), and forward-looking statements contained herein or in other public statements of the Company or its senior management should be considered in light of those factors. Such factors may include the rate of growth (or lack thereof) in the economy generally and in the Company’s service areas; the impact of the current COVID-19 pandemic on the Company’s business, the Company’s customers, the communities that the Company serves and the United States economy, including the impact of actions taken by governmental authorities to try to contain the virus and protect against it, through vaccinations and otherwise, or address the impact of the virus on the United States economy (including, without limitation, the Coronavirus Aid, Relief and Economic Security (CARES) Act and subsequent federal legislation) and the resulting effect on the Company’s operations, liquidity and capital position and on the financial condition of the Company’s borrowers and other customers; the impact of changing accounting standards and tax laws on the Company’s allowance for loan losses and financial results; the impact of national and local market conditions on the Company’s business and operations; strong competition in the banking industry; the impact of changes in interest rates and monetary policy on the Company’s performance and financial condition; the pending discontinuation of LIBOR as an interest rate benchmark; the impact of technological changes in the banking and financial service industries and potential information system failures; cybersecurity and data privacy threats; the costs of complying with extensive governmental regulation; the possibility that acquisitions may not produce anticipated results and result in unforeseen integration difficulties; and other risk factors described from time to time in the Company’s public filings, including, but not limited to, the Company’s most recent Annual Report on Form 10-K. Relative to the Company’s dividend policy, the payment of cash dividends is subject to the discretion of the Board of Directors and will be determined in light of then-current conditions, including the Company’s earnings, leverage, operations, financial conditions, capital requirements and other factors deemed relevant by the Board of Directors. In the future, the Board of Directors may change the Company’s dividend policy, including the frequency or amount of any dividend, in light of then-existing conditions.

3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	September 30,			December 31,
	2022			2021
	(Unaudited)
ASSETS
Cash and due from banks	$	11,608		$	10,843
Interest-bearing deposits in banks		25,212			50,401
Total cash and cash equivalents		36,820			61,244
Federal funds sold		120			82
Investment securities available-for-sale, at fair value		143,794			130,883
Investment securities held-to-maturity, at amortized cost		2,109			3,436
Federal Home Loan Bank stock, at cost		2,009			870
Loans, net of allowance for loan and lease losses of $9,373 and $8,320, respectively		740,898			700,030
Premises and equipment, net of accumulated depreciation of $21,338 and $21,916,    respectively		24,209			25,123
Cash surrender value of bank-owned life insurance		16,360			16,141
Accrued interest receivable		2,691			2,556
Goodwill and core deposit intangible, net		7,856			8,069
Other real estate owned		686			2,149
Other assets		11,725			7,719
Total assets	$	989,277		$	958,302
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing	$	177,778		$	174,501
Interest-bearing		668,759			663,625
Total deposits		846,537			838,126
Accrued interest expense		719			224
Other liabilities		8,104			9,189
Short-term borrowings		40,106			10,046
Long-term borrowings		10,708			10,653
Total liabilities		906,174			868,238
Shareholders’ equity:
Common stock, par value $0.01 per share, 10,000,000 shares authorized; 7,679,659 and    7,634,918 shares issued, respectively; 5,812,258 and 6,172,378 shares outstanding,    respectively		75			75
Additional paid-in capital		14,386			14,163
Accumulated other comprehensive loss, net of tax		(7,212	)		(276	)
Retained earnings		102,523			98,428
Less treasury stock: 1,867,401 and 1,462,540 shares at cost, respectively		(26,669	)		(22,326	)
Total shareholders’ equity		83,103			90,064
Total liabilities and shareholders’ equity	$	989,277		$	958,302

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

4

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(Unaudited)				(Unaudited)
Interest income:
Interest and fees on loans	$	9,750	$	9,568	$	27,339	$	28,726
Interest on investment securities		920		462		2,237		1,208
Total interest income		10,670		10,030		29,576		29,934
Interest expense:
Interest on deposits		864		652		1,964		2,100
Interest on borrowings		291		43		562		123
Total interest expense		1,155		695		2,526		2,223
Net interest income		9,515		9,335		27,050		27,711
Provision for loan and lease losses		1,165		618		2,781		1,517
Net interest income after provision for loan and lease losses		8,350		8,717		24,269		26,194
Non-interest income:
Service and other charges on deposit accounts		311		271		904		777
Net gain on sales and prepayments of investment securities		—		—		—		22
Lease income		210		208		635		619
Other income, net		567		417		1,234		1,238
Total non-interest income		1,088		896		2,773		2,656
Non-interest expense:
Salaries and employee benefits		4,007		5,045		12,389		14,951
Net occupancy and equipment		861		1,259		2,468		3,318
Computer services		417		461		1,224		1,411
Fees for professional services		263		292		811		1,003
Other expense		1,484		1,490		4,074		4,659
Total non-interest expense		7,032		8,547		20,966		25,342
Income before income taxes		2,406		1,066		6,076		3,508
Provision for income taxes		546		229		1,440		768
Net income	$	1,860	$	837	$	4,636	$	2,740
Basic net income per share	$	0.31	$	0.13	$	0.76	$	0.43
Diluted net income per share	$	0.29	$	0.13	$	0.71	$	0.41
Dividends per share	$	0.03	$	0.03	$	0.09	$	0.09

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

5

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
	(Unaudited)						(Unaudited)
Net income	$	1,860		$	837		$	4,636		$	2,740
Other comprehensive income (loss):
Unrealized holding losses on securities available-for-sale    arising during period, net of tax benefit of $350, $7,    $2,768 and $41, respectively		(1,048	)		(18	)		(8,307	)		(122	)
Reclassification adjustment for net gains on securities available-for    -sale realized in net income, net of tax of $0, $0, $0 and $6,    respectively		—			—			—			(16	)
Unrealized holding gains arising during the period on    effective cash flow hedge derivatives, net of tax expense    of $130, $25, $443 and $186, respectively		393			75			1,330			559
Reclassification adjustment for net gains on cash flow hedge derivatives realized in net income, net of tax expense of $9, $0, $14, $0, respectively		27			—			41			—
Other comprehensive income (loss)		(628	)		57			(6,936	)		421
Total comprehensive income (loss)	$	1,232		$	894		$	(2,300	)	$	3,161

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

6

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

For the three months ended September 30, 2022 and 2021 (Unaudited)

	Common Stock Shares Outstanding			Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock, at Cost			Total Shareholders’ Equity
Balance, June 30, 2021		6,214,809		$	75	$	13,981		$	312		$	96,252		$	(21,842	)	$	88,778
Net income		—			—		—			—			837			—			837
Net change in fair value of    securities available-for-sale,    net of tax		—			—		—			(18	)		—			—			(18	)
Net change in fair value of    derivative instruments, net    of tax		—			—		—			75			—			—			75
Dividends declared: $.03 per    share		—			—		—			—			(186	)		—			(186	)
Impact of stock-based    compensation plans, net		637			—		111			—			—			—			111
Reissuance of treasury stock as    compensation		2,680			—		(41	)		—			—			41			—
Balance, September 30, 2021		6,218,126		$	75	$	14,051		$	369		$	96,903		$	(21,801	)	$	89,597
Balance, June 30, 2022		5,876,258		$	75	$	14,263		$	(6,584	)	$	100,838		$	(26,016	)	$	82,576
Net income		—			—		—			—			1,860			—			1,860
Net change in fair value of    securities available-for-sale,    net of tax		—			—		—			(1,048	)		—			—			(1,048	)
Net change in fair value of    derivative instruments, net    of tax		—			—		—			420			—			—			420
Dividends declared: $.03 per    share		—			—		—			—			(175	)		—			(175	)
Impact of stock-based    compensation plans, net		—			—		123			—			—			—			123
Reissuance of treasury stock as    compensation		—			—		—			—			—			—			—
Treasury stock repurchases		(64,000	)													(653	)		(653	)
Balance, September 30, 2022		5,812,258		$	75	$	14,386		$	(7,212	)	$	102,523		$	(26,669	)	$	83,103

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

7

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

For the nine months ended September 30, 2022 and 2021 (Unaudited)

	Common Stock Shares Outstanding			Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock, at Cost			Total Shareholders’ Equity
Balance, December 31, 2020		6,176,556		$	75	$	13,786		$	(52	)	$	94,722		$	(21,853	)	$	86,678
Net income		—			—		—			—			2,740			—			2,740
Net change in fair value of    securities available-for-sale,    net of tax		—			—		—			(138	)		—			—			(138	)
Net change in fair value of    derivative instruments,    net of tax		—			—		—			559			—			—			559
Dividends declared: $.09 per    share		—			—		—			—			(559	)		—			(559	)
Impact of stock-based    compensation plans, net		37,722			—		324			—			—			—			324
Reissuance of treasury stock as    compensation		3,848			—		(59	)		—			—			59			—
Treasury stock repurchases		—			—		—			—			—			(7	)		(7	)
Balance, September 30, 2021		6,218,126		$	75	$	14,051		$	369		$	96,903		$	(21,801	)	$	89,597
Balance, December 31, 2021		6,172,378		$	75	$	14,163		$	(276	)	$	98,428		$	(22,326	)	$	90,064
Net income		—			—		—			—			4,636			—			4,636
Net change in fair value of    securities available-for-sale,    net of tax		—			—		—			(8,307	)		—			—			(8,307	)
Net change in fair value of    derivative instruments,    net of tax		—			—		—			1,371			—			—			1,371
Dividends declared: $.09 per    share		—			—		—			—			(541	)		—			(541	)
Impact of stock-based    compensation plans, net		43,096			—		361			—			—			—			361
Reissuance of treasury stock as    compensation		9,184			—		(138	)		—			—			138			—
Treasury stock repurchases		(412,400	)		—		—			—			—			(4,481	)		(4,481	)
Balance, September 30, 2022		5,812,258		$	75	$	14,386		$	(7,212	)	$	102,523		$	(26,669	)	$	83,103

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

8

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Nine Months Ended
	September 30,
	2022			2021
	(Unaudited)
Cash flows from operating activities:
Net income	$	4,636		$	2,740
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		1,201			1,300
Provision for loan and lease losses		2,781			1,517
Deferred income tax provision		(309	)		160
Net gain on sale and prepayment of investment securities		—			(22	)
Stock-based compensation expense		361			324
Net amortization of securities		169			243
Amortization of intangible assets		213			268
Net gain on premises and equipment and other real estate		(350	)		(71	)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable		(135	)		215
Decrease in other assets		750			672
Increase (decrease) in accrued interest expense		495			(109	)
Decrease in other liabilities		(310	)		(140	)
Net cash provided by operating activities		9,502			7,097
Cash flows from investing activities:
Net (increase) decrease in federal funds sold		(38	)		3
Purchases of investment securities, available-for-sale		(39,256	)		(65,535	)
Proceeds from maturities and prepayments of investment securities, available-for-sale		15,111			32,592
Proceeds from maturities and prepayments of investment securities, held-to-maturity		1,317			2,492
Net (increase) decrease in Federal Home Loan Bank stock		(1,139	)		265
Proceeds from the sale of premises and equipment and other real estate		2,892			1,630
Net increase in loans		(45,590	)		(61,135	)
Purchases of premises and equipment		(672	)		(648	)
Net cash used in investing activities		(67,375	)		(90,336	)
Cash flows from financing activities:
Net increase in deposits		8,411			64,630
Net increase in short-term borrowings		30,060			20
Net share-based compensation transactions		—			(7	)
Treasury stock repurchases		(4,481	)		—
Dividends paid		(541	)		(559	)
Net cash provided by financing activities		33,449			64,084
Net decrease in cash and cash equivalents		(24,424	)		(19,155	)
Cash and cash equivalents, beginning of period		61,244			94,415
Cash and cash equivalents, end of period	$	36,820		$	75,260
Supplemental disclosures:
Cash paid for:
Interest	$	2,031		$	2,332
Income taxes		1,804			752
Non-cash transactions:
Assets acquired in settlement of loans		656			668
Closed branch assets transferred to other real estate		390			1,978
Reissuance of treasury stock as compensation		138			59

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

9

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

GENERAL

The accompanying unaudited interim condensed consolidated financial statements include the accounts of First US Bancshares, Inc. (“Bancshares”) and its subsidiaries (collectively, the “Company”). Bancshares is the parent holding company of First US Bank (the “Bank”). The Company and the Bank are both headquartered in Birmingham, Alabama. The Bank operates a finance company subsidiary, Acceptance Loan Company, Inc. (“ALC”). Management has determined that the Bank and ALC comprise Bancshares’ two reportable operating segments. All significant intercompany transactions and accounts have been eliminated. During the third quarter of 2021, ALC ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. ALC is continuing to service its remaining portfolio of loans from its headquarters in Mobile, Alabama.

The unaudited interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair presentation of the 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, 2022. While certain information and 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-K as of and for the year ended December 31, 2021.

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-K as of and for the year ended December 31, 2021.

Reclassification

Certain amounts and disclosures in the notes to the prior period consolidated financial statements have been reclassified to conform to the 2022 presentation. These reclassifications had no effect on the Company’s results of operations, financial position or net cash flow.

Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of basic shares during the period. Basic shares include shares outstanding, as well as shares that have been accrued on behalf of non-employee directors as deferred compensation under Bancshares’ Non-employee Directors’ Deferred Compensation Plan ("director deferred shares"). Shares outstanding includes shares of restricted stock that have been granted pursuant to Bancshares' 2013 Incentive Plan (as amended, the "2013 Incentive Plan") previously approved by Bancshares' shareholders. 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 the 2013 Incentive Plan. The following tables set forth the calculation of basic and diluted net income per share for the periods presented.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Weighted average shares outstanding		5,839,658		6,217,103		6,016,770		6,207,726
Weighted average director deferred shares		111,608		114,737		114,853		113,481
Basic shares		5,951,266		6,331,840		6,131,623		6,321,207
Dilutive shares		419,650		420,250		419,650		420,250
Diluted shares		6,370,916		6,752,090		6,551,273		6,741,457

10

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(Dollars in Thousands, Except Per Share Data)
Net income	$	1,860	$	837	$	4,636	$	2,740
Basic net income per share	$	0.31	$	0.13	$	0.76	$	0.43
Diluted net income per share	$	0.29	$	0.13	$	0.71	$	0.41

Comprehensive Income

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

Accounting Policies Recently Adopted

ASU 2020-04 and ASU 2021-01, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These ASUs provide optional and temporary relief, in the form of optional expedients and exceptions, for applying GAAP to modifications of contracts, hedging relationships and other transactions affected by reference rate (e.g. LIBOR) reforms. The Company utilizes LIBOR, among other indexes, as a reference rate for underwriting certain variable rate loans and interest rate hedging instruments. Management has identified all contracts referencing LIBOR and will continue to monitor risks associated with the discontinuance of LIBOR until remediation of such contracts is complete. Reference rate reform has not had, nor does the Company expect it to have, a material effect on the Company’s consolidated balance sheet, operations or cash flows.

Pending Accounting Pronouncements

ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings ("TDRs") and Vintage Disclosures." The ASU addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the current expected credit losses model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the current expected credit losses model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. As the Company has not yet adopted the amendments in ASU 2016-13 (See discussion below), ASU 2022-02 will become effective for the Company in the first quarter of 2023. Management is assessing the impact that adoption of this standard will have on the Company’s financial condition and results of operations in conjunction with its assessment of the impact of ASU 2016-13. The Company expects to adopt the guidance for the fiscal year beginning January 1, 2023.

ASU 2022-01, "Fair Value Hedging - Portfolio Layer Method - Derivatives and Hedging (Topic 815)." In March 2022, the FASB issued ASU 2022-01. The amendments in this standard update expand the current last-of-layer method of hedge accounting that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. This standard update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted on any date on or after the issuance of this update for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period. If an entity adopts the amendments in an interim period, the effect of adopting the amendments related to basis adjustments should be reflected as of the beginning of the fiscal year of adoption. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements; however, the impact will be dependent on future hedging activity.

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. As originally issued, ASU 2017-04 was effective prospectively for annual, or any interim, goodwill

11

impairment tests in fiscal years beginning after December 15, 2019. On October 16, 2019, the FASB approved a delay in the implementation of ASU 2017-04 by three years for smaller reporting companies, including the Company. The ASU will now become effective for the Company on January 1, 2023. The adoption of this standard update is not currently expected to have a material effect on the Company’s financial statements; however, the impact will be dependent on future evaluations of goodwill impairment that will continue to be performed by management on an annual basis.

ASU 2016-13, "Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 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, the Company recognizes credit losses when it is probable that the loss has been incurred. The revised guidance removes all current recognition thresholds and requires 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. The standard also adds disclosure requirements intended to enable users of the financial statements to understand credit risk in the portfolio and how management monitors credit quality, management’s estimate of expected credit losses, and changes in the estimate of credit losses during the period. As originally issued, ASU 2016-13 was effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019, with institutions required to apply the changes through a cumulative-effect adjustment to their retained earnings balance as of the beginning of the first reporting period in which the guidance is effective. On October 16, 2019, the FASB approved a delay in the implementation of ASU 2016-13 by three years for smaller reporting companies, including the Company. The standard will now become effective for the Company on January 1, 2023. At this time, the Company expects to recognize a one-time cumulative effect adjustment to the allowance for credit losses as of the date of adoption. The magnitude of any such one-time adjustment will be dependent on circumstances as of the date of adoption, including reasonable and supportable forecasts of expected credit losses.

3.

RESTRUCTURING CHARGES

Effective September 3, 2021, ALC ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. The closure of ALC’s branches eliminated the majority of ALC’s full-time employment positions during the third quarter of 2021. ALC continues to service its remaining portfolio of loans from its headquarters in Mobile, Alabama. The cessation of new business and closure of ALC’s branch locations were undertaken by the Company as part of a long-term strategy to reduce expenses, fortify asset quality, and focus the Company’s loan growth efforts in other areas, including the Bank’s commercial lending and consumer indirect lending efforts.

Total restructuring charges incurred during the nine months ended September 30, 2022 and the year ended December 31, 2021 consisted of the following:

	Nine Months Ended		Year Ended
	September 30, 2022		December 31, 2021
	(Dollars in Thousands)
Expense Category
Severance and personnel expenses	$	108	$	263
Lease termination costs		2		224
Fixed asset valuation adjustments		—		239
Termination of technology contracts		45		85
Other expenses		—		93
Total expenses	$	155	$	904

As of September 30, 2022, the majority of restructuring charges associated with the closure of ALC's branches have been incurred.

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4.

INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity as of September 30, 2022 and December 31, 2021 were as follows:

	Available-for-Sale
	September 30, 2022
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	50,647	$	1	$	(3,801	)	$	46,847
Commercial		18,324		134		(418	)		18,040
Obligations of U.S. government-sponsored agencies		5,118		—		(778	)		4,340
Obligations of states and political subdivisions		3,789		—		(127	)		3,662
Corporate notes		19,838		2		(1,680	)		18,160
U.S. Treasury securities		56,946		—		(4,201	)		52,745
Total	$	154,662	$	137	$	(11,005	)	$	143,794

	Held-to-Maturity
	September 30, 2022
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	1,334	$	—	$	(37	)	$	1,297
Obligations of U.S. government-sponsored agencies		675		—		(46	)		629
Obligations of states and political subdivisions		100		—		(13	)		87
Total	$	2,109	$	—	$	(96	)	$	2,013

	Available-for-Sale
	December 31, 2021
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	46,020	$	450	$	(242	)	$	46,228
Commercial		24,647		371		(47	)		24,971
Obligations of U.S. government-sponsored agencies		5,207		—		(15	)		5,192
Obligations of states and political subdivisions		4,247		80		(10	)		4,317
Corporate notes		15,458		76		(52	)		15,482
U.S. Treasury securities		35,097		—		(404	)		34,693
Total	$	130,676	$	977	$	(770	)	$	130,883

	Held-to-Maturity
	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	2,115	$	29	$	—	$	2,144
Obligations of U.S. government-sponsored agencies		768		10		—		778
Obligations of states and political subdivisions		553		2		—		555
Total	$	3,436	$	41	$	—	$	3,477

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The scheduled maturities of investment securities available-for-sale and held-to-maturity as of September 30, 2022 are presented in the following table:

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Maturing within one year	$	2,518	$	2,511	$	—	$	—
Maturing after one to five years		60,412		56,550		—		—
Maturing after five to ten years		73,817		67,510		1,830		1,757
Maturing after ten years		17,915		17,223		279		256
Total	$	154,662	$	143,794	$	2,109	$	2,013

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

The following tables reflect gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2022 and December 31, 2021.

	Available-for-Sale
	September 30, 2022
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	26,903	$	(1,478	)	$	19,875	$	(2,323	)
Commercial		8,105		(364	)		535		(54	)
Obligations of U.S. government-sponsored agencies		4,223		(777	)		117		(1	)
Obligations of states and political subdivisions		3,151		(72	)		512		(55	)
Corporate notes		13,452		(1,387	)		2,707		(293	)
U.S. Treasury securities		21,323		(686	)		31,502		(3,515	)
Total	$	77,157	$	(4,764	)	$	55,248	$	(6,241	)

	Held-to-Maturity
	September 30, 2022
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	1,297	$	(37	)	$	—	$	—
Obligations of U.S. government-sponsored agencies		629		(46	)		—		—
Obligations of states and political subdivisions		87		(13	)		—		—
Total	$	2,013	$	(96	)	$	—	$	—

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	Available-for-Sale
	December 31, 2021
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	31,346	$	(240	)	$	253	$	(2	)
Commercial		2,245		(12	)		2,970		(35	)
Obligations of U.S. government-sponsored agencies		4,987		(13	)		194		(2	)
Obligations of states and political subdivisions		561		(10	)		—		—
Corporate notes		9,092		(52	)		—		—
U.S. Treasury securities		34,692		(404	)		—		—
Total	$	82,923	$	(731	)	$	3,417	$	(39	)

There were no held-to-maturity securities in an unrealized loss position as of December 31, 2021.

Due to the increasing interest rate environment during the nine months ended September 30, 2022, gross unrealized losses increased significantly, particularly within the Company’s available-for-sale portfolio. 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 basis.

As of September 30, 2022, 26 debt securities had been in a loss position for more than 12 months, and 109 debt securities had been in a loss position for less than 12 months. As of December 31, 2021, 10 debt securities had been in a loss position for more than 12 months, and 32 debt securities had been in a loss position for less than 12 months. The increase in the number of debt securities in a loss position resulted from the rising interest rate environment during the nine months ended September 30, 2022. As of both September 30, 2022 and December 31, 2021, 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 for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of September 30, 2022 or December 31, 2021.

Investment securities with a carrying value of $60.9 million and $52.2 million as of September 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes.

5.

LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Portfolio Segments

The Company has divided the loan portfolio into the following portfolio segments based on risk characteristics:

Construction, land development and other land loans – Commercial construction, land and land development loans include loans for the development of residential housing projects, loans for the development of commercial and industrial use property, loans for the purchase and improvement of raw land and loans primarily for agricultural production that are secured by farmland. 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 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.

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Commercial and industrial loans and leases – This portfolio segment includes loans and leases to commercial customers for use in the normal course of business. These credits may be loans, 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.

Direct consumer – 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.

Branch retail – This portfolio segment includes loans secured by collateral purchased by consumers at retail stores with whom ALC had an established relationship through its branch network to provide financing for the retail products sold if applicable underwriting standards were met. The collateral securing these loans generally includes personal property items such as furniture, ATVs and home appliances.

Indirect – This portfolio segment includes loans secured by collateral purchased by consumers at retail stores with whom the Company has an established relationship to provide financing for the retail products sold if applicable underwriting standards are met. The collateral securing these loans generally includes recreational vehicles, campers, boats, horse trailers and cargo trailers.

As of September 30, 2022 and December 31, 2021, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:

	September 30, 2022
	Bank		ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	36,740	$	—	$	36,740
Secured by 1-4 family residential properties		83,231		1,680		84,911
Secured by multi-family residential properties		72,446		—		72,446
Secured by non-farm, non-residential properties		200,505		—		200,505
Commercial and industrial loans and leases (1)		65,951		—		65,951
Consumer loans:
Direct consumer		5,685		6,594		12,279
Branch retail		—		16,278		16,278
Indirect		262,742		—		262,742
Total loans		727,300		24,552		751,852
Less: Unearned interest, fees and deferred cost		847		734		1,581
Allowance for loan and lease losses		8,033		1,340		9,373
Net loans	$	718,420	$	22,478	$	740,898

	December 31, 2021
	Bank			ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	67,048		$	—	$	67,048
Secured by 1-4 family residential properties		70,439			2,288		72,727
Secured by multi-family residential properties		46,000			—		46,000
Secured by non-farm, non-residential properties		197,901			—		197,901
Commercial and industrial loans and leases (1)		73,947			—		73,947
Consumer loans:
Direct consumer		5,972			15,717		21,689
Branch retail		—			25,692		25,692
Indirect		205,940			—		205,940
Total loans		667,247			43,697		710,944
Less: Unearned interest, fees and deferred cost		(324	)		2,918		2,594
Allowance for loan and lease losses		7,038			1,282		8,320
Net loans	$	660,533		$	39,497	$	700,030

(1)

Includes equipment financing leases and PPP loans. As of September 30, 2022 and December 31, 2021, equipment finance leases totaled $10.8 million and $11.0 million, respectively, and PPP loans totaled $31 thousand and $1.7 million, respectively.

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The Company makes commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 52.5% and 54.0% of the portfolio was concentrated in loans secured by real estate as of September 30, 2022 and December 31, 2021, respectively.

Loans with a carrying value of $113.5 million and $66.6 million were pledged as collateral to secure Federal Home Loan Bank (“FHLB”) borrowings as of September 30, 2022 and December 31, 2021, respectively.

Related Party Loans

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with 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 were $0.3 million as of both September 30, 2022 and December 31, 2021. During the nine months ended September 30, 2022, there were no new loans to these parties, and repayments by active related parties were $5 thousand. During the year ended December 31, 2021, there were no new loans to these parties, and repayments by active related parties were $0.1 million.

Allowance for Loan and Lease Losses

The following tables present changes in the allowance for loan and lease losses during the nine months ended September 30, 2022 and 2021 and the related loan balances by loan type as of September 30, 2022 and 2021:

	As of and for the Nine Months Ended September 30, 2022
	Construction, Land Development, and Other			Real Estate 1-4 Family			Real Estate Multi- Family		Non- Farm Non- Residential		Commercial and Industrial		Direct Consumer			Branch Retail			Indirect			Total
	(Dollars in Thousands)
Allowance for loan and lease losses:
Beginning balance	$	628		$	690		$	437	$	1,958	$	860	$	1,004		$	304		$	2,439		$	8,320
Charge-offs		—			(10	)		—		—		—		(1,604	)		(423	)		(238	)		(2,275	)
Recoveries		2			23			—		4		—		387			97			34			547
Provision		(246	)		89			210		30		244		1,161			445			848			2,781
Ending balance	$	384		$	792		$	647	$	1,992	$	1,104	$	948		$	423		$	3,083		$	9,373
Ending balance of allowance attributable to    loans:
Individually evaluated for impairment	$	—		$	8		$	—	$	—	$	277	$	—		$	—		$	—		$	285
Collectively evaluated for impairment		384			784			647		1,992		827		948			423			3,083			9,088
Total allowance for loan and lease losses	$	384		$	792		$	647	$	1,992	$	1,104	$	948		$	423		$	3,083		$	9,373
Ending balance of loans receivable:
Individually evaluated for impairment	$	1,048		$	600		$	—	$	1,765	$	2,603	$	18		$	—		$	—		$	6,034
Collectively evaluated for impairment		35,692			84,311			72,446		198,740		63,348		12,261			16,278			262,742			745,818
Loans acquired with deteriorated credit quality		—			—			—		—		—		—			—			—			—
Total loans receivable	$	36,740		$	84,911		$	72,446	$	200,505	$	65,951	$	12,279		$	16,278		$	262,742		$	751,852

	As of and for the Nine Months Ended September 30, 2021
	Construction, Land Development, and Other			Real Estate 1-4 Family			Real Estate Multi- Family			Non- Farm Non- Residential		Commercial and Industrial			Direct Consumer			Branch Retail			Indirect			Total
	(Dollars in Thousands)
Allowance for loan and lease losses:
Beginning balance	$	393		$	639		$	577		$	1,566	$	1,008		$	1,202		$	373		$	1,712		$	7,470
Charge-offs		(22	)		(6	)		—			—		(6	)		(848	)		(299	)		(365	)		(1,546	)
Recoveries		21			9			—			4		10			512			148			48			752
Provision		128			50			(89	)		415		(135	)		120			127			901			1,517
Ending balance	$	520		$	692		$	488		$	1,985	$	877		$	986		$	349		$	2,296		$	8,193
Ending balance of allowance attributable to    loans:
Individually evaluated for impairment	$	—		$	10		$	—		$	—	$	58		$	—		$	—		$	—		$	68
Collectively evaluated for impairment		520			682			488			1,985		819			986			349			2,296			8,125
Total allowance for loan and lease losses	$	520		$	692		$	488		$	1,985	$	877		$	986		$	349		$	2,296		$	8,193
Ending balance of loans receivable:
Individually evaluated for impairment	$	—		$	671		$	—		$	1,053	$	1,015		$	21		$	—		$	—		$	2,760
Collectively evaluated for impairment		58,175			72,430			51,420			197,692		76,664			25,824			29,764			194,154			706,123
Loans acquired with deteriorated credit quality		—			11			—			—		—			—			—			—			11
Total loans receivable	$	58,175		$	73,112		$	51,420		$	198,745	$	77,679		$	25,845		$	29,764		$	194,154		$	708,894

17

Credit Quality Indicators

The Company utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, construction, land, multi-family real estate, other commercial real estate, and commercial and industrial loans are 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): Loans in this category include obligations in which the probability of default is considered low.

•

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

•

Substandard (Risk Grade 7): 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): 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. The Company did not have any loans classified as Doubtful (Risk Grade 8) as of September 30, 2022 or December 31, 2021.

•

Loss (Risk Grade 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 Company 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 realized in the future. The Company did not have any loans classified as Loss (Risk Grade 9) as of September 30, 2022 or December 31, 2021.

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

The tables below illustrate the carrying amount of loans by credit quality indicator as of September 30, 2022:

	September 30, 2022
	Pass 1-5			Special Mention 6			Substandard 7			Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	35,692		$	—		$	1,048		$	36,740
Secured by multi-family residential properties		72,446			—			—			72,446
Secured by non-farm, non-residential properties		198,004			656			1,845			200,505
Commercial and industrial loans		63,064			—			2,887			65,951
Total	$	369,206		$	656		$	5,780		$	375,642
As a percentage of total loans		98.29	%		0.17	%		1.54	%		100.00	%

18

	September 30, 2022
	Performing			Nonperforming			Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	83,611		$	1,300		$	84,911
Consumer loans:
Direct consumer		12,112			167			12,279
Branch retail		16,130			148			16,278
Indirect		262,742			—			262,742
Total	$	374,595		$	1,615		$	376,210
As a percentage of total loans		99.57	%		0.43	%		100.00	%

The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31, 2021:

	December 31, 2021
	Pass 1-5			Special Mention 6			Substandard 7			Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	67,046		$	—		$	2		$	67,048
Secured by multi-family residential properties		43,472			2,528			—			46,000
Secured by non-farm, non-residential properties		189,425			7,442			1,034			197,901
Commercial and industrial loans		72,116			333			1,498			73,947
Total	$	372,059		$	10,303		$	2,534		$	384,896
As a percentage of total loans		96.66	%		2.68	%		0.66	%		100.00	%

	December 31, 2021
	Performing			Nonperforming			Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	71,526		$	1,201		$	72,727
Consumer loans:
Direct consumer		20,939			750			21,689
Branch retail		25,486			206			25,692
Indirect		205,940			—			205,940
Total	$	323,891		$	2,157		$	326,048
As a percentage of total loans		99.34	%		0.66	%		100.00	%

19

The following table provides an aging analysis of past due loans by class as of September 30, 2022:

	As of September 30, 2022
	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	$	—		$	—		$	—		$	—		$	36,740		$	36,740		$	—
Secured by 1-4 family residential    properties		288			15			223			526			84,385			84,911			—
Secured by multi-family residential    properties		—			—			—			—			72,446			72,446			—
Secured by non-farm, non-residential    properties		382			—			—			382			200,123			200,505			—
Commercial and industrial loans		406			—			—			406			65,545			65,951			—
Consumer loans:
Direct consumer		289			143			150			582			11,697			12,279			—
Branch retail		195			142			148			485			15,793			16,278			—
Indirect		101			—			59			160			262,583			262,742			—
Total	$	1,661		$	300		$	580		$	2,541		$	749,312		$	751,852		$	—
As a percentage of total loans		0.22	%		0.04	%		0.08	%		0.34	%		99.66	%		100.00	%

The following table provides an aging analysis of past due loans by class as of December 31, 2021:

	As of December 31, 2021
	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	$	—		$	—		$	—		$	—		$	67,048		$	67,048		$	—
Secured by 1-4 family residential    properties		349			23			20			392			72,335			72,727			—
Secured by multi-family residential    properties		—			—			—			—			46,000			46,000			—
Secured by non-farm, non-residential    properties		403			—			—			403			197,498			197,901			—
Commercial and industrial loans		54			—			234			288			73,659			73,947			—
Consumer loans:
Direct consumer		652			589			730			1,971			19,718			21,689			—
Branch retail		377			182			206			765			24,927			25,692			—
Indirect		43			14			—			57			205,883			205,940			—
Total	$	1,878		$	808		$	1,190		$	3,876		$	707,068		$	710,944		$	—
As a percentage of total loans		0.27	%		0.11	%		0.17	%		0.55	%		99.45	%		100.00	%

20

The following table provides an analysis of non-accruing loans by class as of September 30, 2022 and December 31, 2021:

	Loans on Non-Accrual Status
	September 30, 2022		December 31, 2021
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	2
Secured by 1-4 family residential properties		1,090		780
Secured by multi-family residential properties		—		—
Secured by non-farm, non-residential properties		—		—
Commercial and industrial loans		631		277
Consumer loans:
Direct consumer		149		743
Branch retail		148		206
Indirect		59		—
Total loans	$	2,077	$	2,008

21

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the related loan agreement. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the liquidation of the collateral. At the Bank, 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 loans of $50 thousand or more that are 90 days or more past due are identified for impairment analysis. As of both September 30, 2022 and December 31, 2021, there were $0.1 million of impaired loans with no related allowance recorded at ALC. Impaired loans, or portions thereof, are charged off when deemed uncollectable.

As of September 30, 2022, the carrying amount of the Company’s impaired loans consisted of the following:

	September 30, 2022
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	1,048	$	1,048	$	—
Secured by 1-4 family residential properties		585		585		—
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		1,765		1,765		—
Commercial and industrial		2,249		2,249		—
Direct consumer		18		18		—
Total loans with no related allowance recorded	$	5,665	$	5,665	$	—
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		15		15		8
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		—		—		—
Commercial and industrial		354		354		277
Direct consumer		—		—		—
Total loans with an allowance recorded	$	369	$	369	$	285
Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	1,048	$	1,048	$	—
Secured by 1-4 family residential properties		600		600		8
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		1,765		1,765		—
Commercial and industrial		2,603		2,603		277
Direct consumer		18		18		—
Total impaired loans	$	6,034	$	6,034	$	285

22

As of December 31, 2021, the carrying amount of the Company’s impaired loans consisted of the following:

	December 31, 2021
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		630		630		—
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		1,051		1,051		—
Commercial and industrial		823		823		—
Direct consumer		21		21		—
Total loans with no related allowance recorded	$	2,525	$	2,525	$	—
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		16		16		10
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		—		—		—
Commercial and industrial		57		57		57
Direct consumer		—		—		—
Total loans with an allowance recorded	$	73	$	73	$	67
Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		646		646		10
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		1,051		1,051		—
Commercial and industrial		880		880		57
Direct consumer		21		21		—
Total impaired loans	$	2,598	$	2,598	$	67

The average net investment in impaired loans and interest income recognized and received on impaired loans during the nine months ended September 30, 2022 and the year ended December 31, 2021 were as follows:

	Nine Months Ended September 30, 2022
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	116	$	2	$	—
Secured by 1-4 family residential properties		624		4		4
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		1,116		38		35
Commercial and industrial		872		7		4
Direct consumer		19		1		1
Total	$	2,747	$	52	$	44

23

	Year Ended December 31, 2021
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		773		31		31
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		2,377		140		108
Commercial and industrial		637		61		40
Direct consumer		22		9		2
Total	$	3,809	$	241	$	181

Loans on which the accrual of interest has been discontinued amounted to $2.1 million and $2.0 million as of September 30, 2022 and December 31, 2021, respectively. If interest on those loans had been accrued, there would have been $17 thousand and $52 thousand of interest accrued for the periods ended September 30, 2022 and December 31, 2021, respectively. Interest income related to these loans for the nine months ended September 30, 2022 and the year ended December 31, 2021 was $27 thousand and $30 thousand, respectively.

Troubled Debt Restructurings

Troubled debt restructurings include loans with respect to which concessions have been granted to borrowers that generally would not have otherwise been considered had the borrowers not been experiencing financial difficulty. The concessions granted may include payment schedule modifications, interest rate reductions, maturity date extensions, modifications of note structure, principal balance reductions or some combination of these concessions. There were no loans modified with concessions granted during the nine months ended September 30, 2022 and two loans with balances totaling $0.6 million modified with concessions granted during the year ended December 31, 2021. 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. The Company did not have any non-accruing loans that were previously restructured and that remained on non-accrual status as of both September 30, 2022 and December 31, 2021. For both the nine months ended September 30, 2022 and the year ended December 31, 2021, the Company had no loans that were restored to accrual status based on a sustained period of repayment performance.

The following table provides, as of September 30, 2022 and December 31, 2021, the number of loans remaining in each loan category that the Company had previously modified in a troubled debt restructuring, as well as the pre- and post-modification principal balance as of each date.

	September 30, 2022						December 31, 2021
	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)
Loans secured by real estate:
Construction, land development and other land    loans		1	$	107	$	—		1	$	107	$	—
Secured by 1-4 family residential properties		2		59		12		2		59		12
Secured by non-farm, non-residential properties		2		621		613		2		621		617
Commercial loans		2		116		24		2		116		31
Total		7	$	903	$	649		7	$	903	$	660

As of September 30, 2022 and December 31, 2021, no loans that previously had been modified in a troubled debt restructuring had defaulted subsequent to modification.

24

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 and lease losses resulting from the modifications.

All loans with a principal balance of $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 and lease losses. This evaluation resulted in an allowance for loan and lease losses attributable to such restructured loans of $7 thousand as of both September 30, 2022 and December 31, 2021.

6.

OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS

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 table summarizes foreclosed property activity as of the nine months ended September 30, 2022 and 2021:

	September 30, 2022			September 30, 2021
	(Dollars in Thousands)
Beginning balance	$	2,149		$	949
Additions		411			1,981
Sales proceeds		(2,215	)		(891	)
Gross gains		369			401
Gross losses		(27	)		—
Net gains		342			401
Impairment		(1	)		(67	)
Ending balance	$	686		$	2,373

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 zero as of both September 30, 2022 and 2021. In addition, the Company held $19 thousand and zero in consumer mortgage loans collateralized by residential real estate that were in the process of foreclosure as of September 30, 2022 and 2021, respectively.

Repossessed Assets

In addition to the other real estate and other assets acquired in foreclosure, the Company also acquires assets through the repossession of the underlying collateral of loans in default. The following table summarizes repossessed asset activity as of the nine months ended September 30, 2022 and 2021:

	September 30, 2022			September 30, 2021
	(Dollars in Thousands)
Beginning balance	$	154		$	245
Transfers from loans		635			665
Sales proceeds		(331	)		(683	)
Gross gains		—			—
Gross losses		(292	)		(76	)
Net losses		(292	)		(76	)
Impairment		—			—
Ending balance	$	166		$	151

Repossessed assets are included in Other Assets in the Company’s condensed consolidated balance sheet.

25

7.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is tested for impairment annually, or more often if circumstances warrant. If, as a result of impairment testing, it is determined that the implied fair value of goodwill is lower than its carrying amount, impairment is indicated, and goodwill must be written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements. Goodwill, originally recorded as a result of the Company's acquisition of The Peoples Bank ("TPB") in 2018, totaled $7.4 million as of both September 30, 2022 and December 31, 2021. Goodwill impairment was neither indicated nor recorded during the nine months ended September 30, 2022 or the year ended December 31, 2021.

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 million were recorded during 2018 as part of the TPB acquisition.

The Company’s goodwill and other intangible assets (carrying basis and accumulated amortization) as of September 30, 2022 were as follows:

	September 30, 2022			December 31, 2021
	(Dollars in Thousands)
Goodwill	$	7,435		$	7,435
Core deposit intangible:
Gross carrying amount		2,048			2,048
Accumulated amortization		(1,627	)		(1,414	)
Core deposit intangible, net		421			634
Total	$	7,856		$	8,069

The Company’s estimated remaining amortization expense on intangible assets as of September 30, 2022 was as follows:

	Amortization Expense
	(Dollars in Thousands)
2022	$	55
2023		195
2024		122
2025		49
2026 and thereafter		—
Total	$	421

The net carrying amount of the Company’s core deposit premiums is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from use and eventual disposition. That assessment is based on the carrying amount of the intangible assets subject to amortization at the date on which it is tested for recoverability. Intangible assets subject to amortization are tested by the Company for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

8.

BORROWINGS

Short-Term Borrowings

Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, and short-term FHLB advances with original maturities of one year or less.

•

Federal funds purchased, which represent unsecured lines of credit that generally mature within one to four days, are available to the Bank through arrangements with correspondent banks and the Federal Reserve. As of both September 30, 2022 and December 31, 2021, there were no federal funds purchased outstanding.

•

Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The Bank monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements as of September 30, 2022 and December 31, 2021 totaled $106 thousand and $46 thousand, respectively.

•

Short-term FHLB advances are secured borrowings available to the Bank as an alternative funding source. As of September 30, 2022 and December 31, 2021, the Bank had $40.0 million and $10.0 million, respectively, in outstanding FHLB advances with original maturities of less than one year.

26

Long-Term Borrowings

FHLB Advances

The Company may use FHLB advances with original maturities of more than one year 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. As of both September 30, 2022 and December 31, 2021, the Company did not have any long-term FHLB advances outstanding.

Subordinated Debt

On October 1, 2021, the Company completed a private placement of $11.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that will mature on October 1, 2031 (the “Notes”). The Notes bear interest at a rate of 3.50% per annum for the first five years, after which the interest rate will be reset quarterly to a benchmark interest rate per annum which, subject to certain conditions provided in the Notes, will be equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”) plus 275 basis points. The Company used the net proceeds for general corporate purposes, including repurchasing of the Company’s common stock, and supporting organic growth plans, including the maintenance of capital ratios. As of both September 30, 2022 and December 31, 2021, the Notes were recorded as long-term borrowings totaling $10.7 million, net of unamortized debt issuance costs. The table below provides additional information related to the Notes as of and for the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively.

	September 30,			December 31,
	2022			2021
	(Dollars in Thousands)
Balance at period-end	$	10,708		$	10,653
Average balance during the period	$	10,702		$	2,682
Maximum month-end balance during the year	$	10,708		$	10,653
Average rate paid during the year, including amortization of debt issuance costs		4.16	%		4.20
Weighted average remaining maturity (in years)		9.00			9.75

Available Credit

As an additional funding source, the Company has available unused lines of credit with correspondent banks, the Federal Reserve and the FHLB. Certain of these funding sources are subject to underlying collateral. As of September 30, 2022 and December 31, 2021, the Company’s available unused lines of credit consisted of the following:

Available Unused Lines of Credit	Collateral Requirements	September 30, 2022	December 31, 2021
Correspondent banks	None	$45.0 million	$45.0 million
Federal Reserve (discount window)	Subject to collateral	$1.2 million	$1.0 million
FHLB advances (1)	Subject to collateral	$206.6 million	$237.0 million

(1)

These amounts represent the total remaining credit the Company has from the FHLB, but this credit can only be utilized to the extent that underlying collateral exists. The total lendable collateral value of assets pledged (including loans and investment securities) associated with FHLB advances and letters of credit totaled $78.3 million and $66.6 million as of September 30, 2022 and December 31, 2021, respectively. The Company’s collateral exposure with the FHLB in the form of advances and letters of credit was $70.0 million and $40.0 million as of September 30, 2022 and December 31, 2021, respectively, leaving an excess of collateral of $8.3 million and $26.6 million, respectively, available to utilize for additional credit as of the respective dates. The Company also has the ability to pledge additional assets to increase the availability of borrowings.

27

9.

INCOME TAXES

The provision for income taxes was $1.4 million and $0.8 million for the nine months ended September 30, 2022 and 2021, respectively. The Company’s effective tax rate was 23.7% and 21.9%, 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 Company had a net deferred tax asset of $5.1 million and $2.5 million as of September 30, 2022 and December 31, 2021, respectively. The net deferred tax asset, which is included on the balance sheet in other assets, is impacted by changes in the fair value of securities available-for-sale and cash flow hedges, changes in net operating loss carryforwards and other book-to-tax temporary differences.

10.

DEFERRED COMPENSATION PLANS

The Company has entered into supplemental retirement compensation benefits agreements with certain directors and former executive officers. The measurement of the liability under these agreements includes estimates involving life expectancy, length of time before retirement and the expected returns on the bank-owned life insurance policies used to fund those agreements. Should these estimates prove to be materially wrong, the cost of these agreements could change accordingly. The related deferred compensation obligation to these directors and executive officers included in other liabilities was $3.2 million as of both September 30, 2022 and December 31, 2021.

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 September 30, 2022 and December 31, 2021, a total of 112,782 and 117,825 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 additional paid-in capital. The Company may use issued shares or shares of treasury stock to satisfy these obligations when due.

11.

STOCK AWARDS

In accordance with the Company’s 2013 Incentive Plan, stock awards, including stock options and restricted stock, have been granted to certain employees and non-employee directors. Shares of common stock available for distribution to satisfy the grants may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares reacquired by the Company in any manner. Stock-based compensation expense related to stock awards totaled $0.3 million for both the nine months ended September 30, 2022 and 2021, respectively.

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 contractual terms.

The Company recognizes the cost of services received in exchange for stock option awards based on the grant date fair value of the award, with compensation expense recognized on a straight-line basis over the award’s vesting period. The fair value of outstanding awards was determined using the Black-Scholes option pricing model. The Company did not grant any stock option awards during the nine months ended September 30, 2022 or 2021.

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

	Nine Months Ended
	September 30, 2022				September 30, 2021
	Number of Shares		Average Exercise Price		Number of Shares		Average Exercise Price
Options:
Outstanding, beginning of period		420,250	$	9.79		421,000	$	9.79
Granted		—		—		—		—
Exercised		—		—		750		8.23
Expired		—		—		—		—
Forfeited		600		10.86		—		—
Options outstanding, end of period		419,650	$	9.79		420,250	$	9.79
Options exercisable, end of period		416,249	$	9.77		395,678	$	9.74

28

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 zero and $0.6 million as of September 30, 2022 and 2021, respectively.

Restricted Stock

During the nine months ended September 30, 2022 and 2021, 45,938 shares and 38,430 shares, respectively, of restricted stock were granted. The Company recognizes the cost of services received in exchange for restricted stock awards based on the grant date closing price of the stock, with compensation expense recognized on a straight-line basis over the award’s vesting period.

12.

LEASES

The Bank and ALC are involved in a number of operating leases, primarily for branch locations. Branch leases have remaining lease terms ranging from two years to seven years, some of which include options to extend the leases for up to five years, and some of which include an option to terminate the lease within one year. The Bank leases certain office facilities to third parties and classifies these leases as operating leases.

The following table provides a summary of the components of lease expense, as well as the reporting location in the Condensed Consolidated Statements of Operations, for the three and nine months ended September 30, 2022 and 2021:

	Location in the Condensed	Three Months Ended				Nine Months Ended
	Consolidated Statements of Operations	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
		(Dollars in Thousands)				(Dollars in Thousands)
Operating lease expense (1)	Net occupancy and equipment	$	108	$	209	$	326	$	627
Operating lease income (2)	Lease income	$	210	$	208	$	635	$	619

(1)

Includes short-term lease costs. For the three and nine months ended September 30, 2022 and 2021, short-term lease costs were nominal in amount.

(2)

Operating lease income includes rental income from owned properties.

The following table provides supplemental lease information for operating leases on the Condensed Consolidated Balance Sheet as of September 30, 2022:

	Location in the Condensed
	Consolidated Balance Sheet	September 30, 2022
		(Dollars in Thousands)
Operating lease right-of-use assets	Other assets	$	1,974
Operating lease liabilities	Other liabilities	$	2,051
Weighted-average remaining lease term (in years)			5.28
Weighted-average discount rate			3.30	%

The following table provides supplemental lease information for the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021:

	Nine Months Ended
	September 30, 2022		September 30, 2021
	(Dollars in Thousands)
Cash paid for amounts included in the measurement of    lease liabilities:
Operating cash flows from operating leases	$	320	$	523

29

The following table is a schedule of remaining future minimum lease payments for operating leases that had an initial or remaining non-cancellable lease term in excess of one year as of September 30, 2022:

	Minimum Rental Payments
	(Dollars in Thousands)
2022	$	107
2023		432
2024		438
2025		339
2026		346
2027 and thereafter		591
Total future minimum lease payments	$	2,253
Less: Imputed interest		202
Total operating lease liabilities	$	2,051

13.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company 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 hedge relationship. The Company’s hedging strategies involving interest rate derivatives are classified as either cash flow hedges or fair value hedges, depending upon the rate characteristic of the hedged item.

Cash Flow Hedges

The Bank has entered into forward interest rate swap contracts on certain variable-rate money market deposit accounts (indexed to the Federal Funds effective rate’s daily weighted average). The money market account balances are expected to exceed the notional amount for the duration of the hedges and the rates on these deposits are anticipated to move closely with changes in one-month LIBOR, or a comparable benchmark interest rate. These interest rate swaps were designated as derivative instruments in cash flow hedges with the objective of converting the floating interest payments to a fixed rate. Under the swap arrangements, the Bank pays a fixed interest rate and receives a variable interest rate based on one-month LIBOR, or a comparable benchmark interest rate, on the notional amount, with monthly net settlements.

Terminated Cash Flow Hedge

During the second quarter of 2022, the Bank terminated a forward interest rate swap contract on a variable FHLB advance that was previously designated as a cash flow hedge. The termination of the swap resulted in a net gain of $0.3 million which will remain in accumulated other comprehensive income and be reclassified into earnings over the original term of the interest rate swap contract. During the nine-month period ended September 30, 2022, a gain of $41 thousand, net of income taxes, was reclassified from other comprehensive income (loss) related to the terminated contract. There were no gains or losses reclassified from other comprehensive income (loss) related to cash flow hedges for the nine months ended September 30, 2021.

Fair Value Hedges

The Bank has entered into forward interest rate swap contracts on fixed rate commercial real estate loans. The interest rate swaps were designated as derivative instruments in fair value hedges with the objective of effectively converting pools of fixed rate assets to variable rate throughout the hedge durations. Under the swap arrangements, the Bank pays a fixed interest rate and receives a variable interest rate based on one-month LIBOR, or a comparable benchmark interest rate, on the notional amount, with monthly net settlements. The Bank recognized no gains or losses on the fair value hedges for the three and nine months ended September 30, 2022 and 2021.

Presentation

The Company has elected to offset derivative fair value amounts under master netting agreements, given that all of the Company’s hedges are with the same counterparty.

30

The following table reflects the notional amount and fair value of derivative instruments included on the Company’s Consolidated Balance Sheets on a net basis.

	As of September 30, 2022				As of December 31, 2021
	Notional		Estimated Fair Value		Notional		Estimated Fair Value
	Amount		Gain (Loss) (1)		Amount		Gain (Loss) (1)
	(Dollars in Thousands)
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate swaps related to fixed rate commercial real estate loans	$	20,000	$	1,087	$	20,000	$	(198	)
Total fair value hedges				1,087				(198	)
Cash flow hedges:
Interest rate swaps related to variable-rate money market deposit accounts		20,000		1,251		20,000		(472	)
Interest rate swaps related to FHLB advances		—		—		10,000		(104	)
Total cash flow hedges				1,251				(576	)
Total hedges designated as hedging instruments, net			$	2,338			$	(774	)

(1)

Derivatives in a gain position are recorded as other assets and derivatives in a loss position are recorded as other liabilities in the consolidated balance sheets.

The Company has elected the last-of-layer method with respect to both of its fair value hedges. This approach allows the Company to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and other factors affecting the timing and amount of cash flows. Relative to the identified pools of loans, this represents the last dollar amount of the designated commercial loans, which is equivalent to the notional amounts of the derivative instruments.

The following amounts were recorded on the condensed consolidated balance sheet related to cumulative basis adjustments for fair value hedges:

Location in the Condensed Consolidated Balance Sheet in Which the Hedged	Carrying Amount of the Hedged Assets		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
Item is Included	September 30, 2022
	(Dollars in Thousands)
Loans and leases, net of allowance for loan and    lease losses (1)	$	32,353	$	1,087

(1)

These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. As of September 30, 2022, the amortized cost basis of the closed portfolios used in these hedging relationships was $33.4 million, the cumulative basis adjustments associated with these hedging relationships were $1.1 million, and the amounts of the designated hedged items were $20.0 million.

The following table presents the effect of hedging derivative instruments on the Company’s Consolidated Statements of Operations. The effects are presented as either an increase or decrease to income before income taxes.

31

	Location in the Condensed	Three Months Ended					Nine Months Ended
	Consolidated Statements of Operations	September 30, 2022		September 30, 2021			September 30, 2022			September 30, 2021
		(Dollars in Thousands)					(Dollars in Thousands)
Interest income	Interest and fees on loans	$	45	$	(64	)	$	(42	)	$	(188	)
Interest expense	Interest on deposits		36		(32	)		20			(95	)
Interest expense	Interest on short-term borrowings		24		(85	)		(103	)		(249	)
	Net increase (decrease) to income before income taxes	$	105	$	(181	)	$	(125	)	$	(532	)

32

14.

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-K as of and for the year ended December 31, 2021. The segment results include certain overhead allocations and intercompany transactions that were recorded at current market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results for the two reportable segments of the Company are included in the tables below.

					All
	Bank		ALC		Other			Eliminations			Consolidated
	(Dollars in Thousands)
As of and for the three months ended September 30, 2022
Total interest income	$	9,875	$	1,026	$	1		$	(232	)	$	10,670
Total interest expense		1,041		231		115			(232	)		1,155
Net interest income		8,834		795		(114	)		—			9,515
Provision for loan and lease losses		840		325		—			—			1,165
Total non-interest income		1,102		43		2,145			(2,202	)		1,088
Total non-interest expense		6,421		397		255			(41	)		7,032
Income before income taxes		2,675		116		1,776			(2,161	)		2,406
Provision for income taxes		600		28		(82	)		—			546
Net income	$	2,075	$	88	$	1,858		$	(2,161	)	$	1,860
Other significant items:
Total assets	$	993,194	$	23,544	$	98,769		$	(126,230	)	$	989,277
Total investment securities		145,902		—		1			—			145,903
Total loans, net		740,418		22,478		—			(21,998	)		740,898
Goodwill and core deposit intangible, net		7,856		—		—			—			7,856
Investment in subsidiaries		—		—		91,575			(91,575	)		—
Fixed asset additions		331		—		—			—			331
Depreciation and amortization expense		413		9		—			—			422
Total interest income from external customers		9,645		1,025		—			—			10,670
Total interest income from affiliates		231		—		1			(232	)		—
For the nine months ended September 30, 2022
Total interest income		26,503		3,911		3			(841	)		29,576
Total interest expense		2,185		838		344			(841	)		2,526
Net interest income		24,318		3,073		(341	)		0			27,050
Provision for loan and lease losses		1,185		1,596		—			—			2,781
Total non-interest income		2,833		173		5,511			(5,744	)		2,773
Total non-interest expense		18,899		1,379		854			(166	)		20,966
Income before income taxes		7,067		271		4,316			(5,578	)		6,076
Provision for income taxes		1,646		65		(271	)		—			1,440
Net income	$	5,421	$	206	$	4,587		$	(5,578	)	$	4,636
Other significant items:
Fixed asset additions	$	672	$	—	$	—		$	—		$	672
Depreciation and amortization expense		1,173		28		—			—			1,201
Total interest income from external customers		25,666		3,910		—			—			29,576
Total interest income from affiliates		838		—		3			(841	)		—

33

						All
	Bank		ALC			Other			Eliminations			Consolidated
	(Dollars in Thousands)
As of and for the three months ended September 30, 2021
Total interest income	$	8,134	$	2,302		$	1		$	(407	)	$	10,030
Total interest expense		696		406			—			(407	)		695
Net interest income		7,438		1,896			1			—			9,335
Provision for loan and lease losses		460		158			—			—			618
Total non-interest income		776		176			1,111			(1,167	)		896
Total non-interest expense		6,211		2,100			354			(118	)		8,547
Income before income taxes		1,543		(186	)		758			(1,049	)		1,066
Provision for income taxes		336		(47	)		(60	)		—			229
Net income	$	1,207	$	(139	)	$	818		$	(1,049	)	$	837
Other significant items:
Total assets	$	959,978	$	48,693		$	94,718		$	(146,655	)	$	956,734
Total investment securities		121,386		—			81			—			121,467
Total loans, net		691,106		46,645			—			(40,779	)		696,972
Goodwill and core deposit intangible, net		8,142		—			—			—			8,142
Investment in subsidiaries		—		—			89,088			(89,088	)		—
Fixed asset additions		107		2			—			—			109
Depreciation and amortization expense		401		21			—			—			422
Total interest income from external customers		7,728		2,302			—			—			10,030
Total interest income from affiliates		406		—			1			(407	)		—
For the nine months ended September 30, 2021
Total interest income		24,138		7,045			5			(1,254	)		29,934
Total interest expense		2,228		1,249			—			(1,254	)		2,223
Net interest income		21,910		5,796			5			—			27,711
Provision for loan and lease losses		1,280		237			—			—			1,517
Total non-interest income		2,389		480			3,608			(3,821	)		2,656
Total non-interest expense		18,853		5,749			1,102			(362	)		25,342
Income before income taxes		4,166		290			2,511			(3,459	)		3,508
Provision for income taxes		895		72			(199	)		—			768
Net income	$	3,271	$	218		$	2,710		$	(3,459	)	$	2,740
Other significant items:
Fixed asset additions	$	642	$	6		$	—		$	—		$	648
Depreciation and amortization expense		1,231		69			—			—			1,300
Total interest income from external customers		22,889		7,045			—			—			29,934
Total interest income from affiliates		1,249		—			5			(1,254	)		—

34

15.

OTHER OPERATING INCOME AND EXPENSE

Other Operating Income

Other operating income for the three and nine months ended September 30, 2022 and 2021 consisted of the following:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2022			2021		2022			2021
	(Dollars in Thousands, Except Per Share Data)
Bank-owned life insurance	$	112		$	110	$	335		$	327
Credit insurance commissions and fees		(15	)		63		(66	)		150
ATM fee income		125			141		403			432
Mortgage fees from secondary market		7			—		11			23
Wire transfer fees		12			18		39			49
Gain on sales of premises and equipment and other assets		278			17		301			17
Other income		48			68		211			240
Total	$	567		$	417	$	1,234		$	1,238

Other Operating Expense

Other operating expense for the three and nine months ended September 30, 2022 and 2021 consisted of the following:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
	(Dollars in Thousands, Except Per Share Data)
Postage, stationery and supplies	$	164		$	206		$	469		$	618
Telephone/data communication		159			283			518			742
Advertising and marketing		47			33			145			115
Travel and business development		71			42			176			109
Collection and recoveries		57			32			176			142
Other services		68			129			208			272
Insurance expense		145			149			465			464
FDIC insurance and state assessments		166			191			506			521
Loss on sales of premises and equipment and other assets		27			76			55			130
Core deposit intangible amortization		67			85			213			268
Other real estate/foreclosure expense, net		(5	)		(273	)		(320	)		(286	)
Other expense		518			537			1,463			1,564
Total	$	1,484		$	1,490		$	4,074		$	4,659

35

16.

GUARANTEES, COMMITMENTS AND CONTINGENCIES

Credit

The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments.

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:

	September 30, 2022		December 31, 2021
	(Dollars in Thousands)
Standby letters of credit	$	—	$	—
Standby performance letters of credit	$	541	$	582
Commitments to extend credit	$	212,606	$	164,247

Standby letters of credit and standby performance 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 or standby performance letter of credit. Revenues are recognized over the lives of the standby letters of credit and standby performance letters of credit. As of September 30, 2022 and December 31, 2021, the potential amounts of future payments that the Bank could be required to make under its standby letters of credit and standby performance letters of credit, which represent the Bank’s total credit risk in these categories, are 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.

Self-Insurance

The Company is self-insured for a significant portion of employee health benefits. However, the Company maintains stop-loss coverage with third-party insurers to limit the Company’s individual claim and total exposure related to self-insurance. The Company estimates accrued liability for the ultimate costs to settle 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 evaluation of factors related to the frequency and severity of claims, the Company’s claims development history and the Company’s claims settlement practices. The assessment of loss contingencies and self-insurance reserves is a highly subjective process that requires judgments about future events. Contingencies are reviewed at least quarterly to determine the adequacy of self-insurance accruals. Self-insurance accruals totaled $0.2 million as of both September 30, 2022 and December 31, 2021. The ultimate settlement of loss contingencies and self-insurance reserves may differ significantly from amounts accrued in the Company’s consolidated financial statements.

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.

36

17.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The assumptions used in the Company’s estimation of the fair value of the Company’s financial instruments are detailed below. The following disclosures should not be considered a representation 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 value. 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 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 nine months ended September 30, 2022 or the year ended December 31, 2021.

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

37

The following table presents assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021.

	Fair Value Measurements as of September 30, 2022 Using
	Totals At September 30, 2022		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	$	46,847	$	—	$	46,847	$	—
Commercial		18,040		—		18,040		—
Obligations of U.S. government-sponsored agencies		4,340		—		4,340		—
Obligations of states and political subdivisions		3,662		—		3,662		—
Corporate notes		18,160		—		18,160		—
U.S. Treasury securities		52,745		—		52,745		—
Other assets - derivatives		2,338		—		2,338		—

	Fair Value Measurements as of December 31, 2021 Using
	Totals At December 31, 2021		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	$	46,228	$	—	$	46,228	$	—
Commercial		24,971		—		24,971		—
Obligations of U.S. government-sponsored agencies		5,192				5,192
Obligations of states and political subdivisions		4,317		—		4,317		—
Corporate notes		15,482		—		15,482		—
U.S. Treasury securities		34,693		—		34,693		—
Other liabilities - derivatives		774		—		774		—

38

Fair Value Measurements on a Non-recurring Basis

Impaired Loans

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

OREO and Other Assets Held-for-Sale

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 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.

As of September 30, 2022 and December 31, 2021, included within OREO were 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 and ALC that have been closed. When an asset is designated as held-for-sale, the Company ceases depreciation of the asset, and the asset is recorded at the lower of its carrying amount or fair value less estimated cost to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically unobservable inputs for determining fair value.

The following table presents the balances of impaired loans, OREO and other assets held-for-sale measured at fair value on a non-recurring basis as of September 30, 2022 and December 31, 2021:

	Fair Value Measurements as of September 30, 2022 Using
	Totals At September 30, 2022		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Impaired loans	$	84	$	—	$	—	$	84
OREO and other assets held-for-sale		686		—		—		686

	Fair Value Measurements as of December 31, 2021 Using
	Totals At December 31, 2021		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Impaired loans	$	6	$	—	$	—	$	6
OREO and other assets held-for-sale		2,149		—		—		2,149

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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) as of September 30, 2022. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input and the weighted average within the range utilized as of September 30, 2022 are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.

	Level 3 Significant Unobservable Input Assumptions
	Fair Value September 30, 2022		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs (Weighted Average)
	(Dollars in Thousands)
Non-recurring fair value measurements:
Impaired loans	$	84	Multiple data points, including discount to appraised value of collateral based on recent market activity	Appraisal comparability adjustment (discount)	9%-10%	(9.5%)
OREO and other assets held-for-sale	$	686	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal comparability adjustment (discount)	9%-10%	(9.5%)

Impaired Loans

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

OREO

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

Other Assets Held-for-Sale

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

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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. 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 financial institution. This information is periodically evaluated by the Company and, as necessary, corroborated against other third-party information.

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

Loans, net: The fair value of loans is estimated on an exit price basis incorporating contractual cash flow, prepayment discount spreads, credit loss and liquidity premiums.

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 offered by the Company on comparable deposits as to amount and term.

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

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

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

The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of September 30, 2022 and December 31, 2021 were as follows:

	September 30, 2022
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	36,820	$	36,820	$	36,820	$	—	$	—
Investment securities available-for-sale		143,794		143,794		—		143,794		—
Investment securities held-to-maturity		2,109		2,013		—		2,013		—
Federal funds sold		120		120		—		120		—
Federal Home Loan Bank stock		2,009		2,009		—		—		2,009
Loans, net of allowance for loan and lease losses		740,898		703,047		—		—		703,047
Other assets - derivatives		2,338		2,338		—		2,338		—
Liabilities:
Deposits		846,537		836,020		—		836,020		—
Short-term borrowings		40,106		40,106		—		40,106		—
Long-term borrowings		10,708		9,906				9,906

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	December 31, 2021
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	61,244	$	61,244	$	61,244	$	—	$	—
Investment securities available-for-sale		130,883		130,883		—		130,883		—
Investment securities held-to-maturity		3,436		3,477		—		3,477		—
Federal funds sold		82		82		—		82		—
Federal Home Loan Bank stock		870		870		—		—		870
Loans, net of allowance for loan and lease losses		700,030		694,744		—		—		694,744
Liabilities:
Deposits		838,126		837,439		—		837,439		—
Short-term borrowings		10,046		10,046		—		10,046		—
Long-term borrowings		10,653		10,804				10,804
Other liabilities - derivatives		774		774		—		774		—

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DESCRIPTION OF THE BUSINESS

First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its subsidiaries, the “Company”), is a bank holding company with its principal offices in Birmingham, Alabama. Bancshares operates one commercial banking subsidiary, First US Bank (the “Bank”). As of September 30, 2022, the Bank operated and served its customers through 15 banking offices located in Birmingham, Butler, Calera, Centreville, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama; Knoxville and Powell, Tennessee; and Rose Hill, Virginia. In addition, the Bank operates loan production offices in Mobile, Alabama and the Chattanooga, Tennessee area. The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals. The Bank also performs indirect lending through third-party retailers and currently conducts this lending in 12 states, including Alabama, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.

The Bank owns all of the stock of Acceptance Loan Company, Inc., an Alabama corporation (“ALC”). ALC is a finance company headquartered in Mobile, Alabama. During the third quarter of 2021, ALC ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. ALC continues to service its remaining portfolio of loans from its headquarters in Mobile, Alabama.

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 primary third-party insurer retains the remaining risk. A third-party administrator is also responsible for performing most of the administrative functions of FUSB Reinsurance on a contract basis.

Delivery of the best possible financial services to customers remains an overall operational focus of the Company. The Company recognizes that attention to detail and responsiveness to customers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 155 full-time equivalent employees (as of September 30, 2022), to ensure customer satisfaction and convenience.

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general banking practices. These estimates include accounting for the allowance for loan and lease losses, the right-of-use asset and lease liability, the value of other real estate owned and certain collateral-dependent loans, consideration related to goodwill impairment testing and deferred tax asset valuation. A description of these estimates, which significantly affect the determination of the Company’s consolidated financial position, results of operations and cash flows, is set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2021.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of September 30, 2022 to December 31, 2021, while comparing income and expense for the nine months ended September 30, 2022 and 2021.

All yields and ratios presented and discussed herein are recorded and presented on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated.

This information should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2021. 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.

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RECENT MARKET CONDITIONS

During the nine months ended September 30, 2022, general economic conditions benefited from declining COVID-19 cases and the related lifting of COVID-19 restrictions throughout the United States. However, economic uncertainty remains with respect to the long-term effectiveness of efforts to reduce the impact of COVID-19 both globally and domestically. In addition, economic uncertainty emerged from geopolitical developments surrounding the invasion of Ukraine by Russia and further COVID-19 lockdowns in China. Furthermore, inflation has reached a 40-year high during 2022, and market rates of interest have risen after a prolonged period at historical lows. In March 2022, the Federal Reserve Board (FRB) raised the target federal funds rate for the first time in three years, with additional increases in May, June, July and September 2022. Further increases are expected during the remainder of 2022 as the FRB attempts to reduce inflation.

As interest rates increase, competitive pressures on both loan and deposit pricing are also expected to increase. The pace and magnitude of changes in interest rates, or the impact that such changes will have on the Company’s operating results, cannot be fully predicted. During this still-ongoing and still-volatile transition period, the yield curve has flattened and, at times, become inverted. Unusual yield curve effects, including inversion, may continue. Further, as the rate of inflation accelerates, the Company’s operations could be impacted by, among other things, accelerating cost of goods and services, including the cost of salaries and benefits. Additionally, the Company’s borrowers could be negatively impacted by rising expense levels, leading to deterioration of credit quality and/or reductions in the Company’s lending activity. The higher interest rate environment has also led to unrealized losses in the Company's investment portfolio, which consists primarily of fixed rate instruments.

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EXECUTIVE OVERVIEW

Update on Strategic Initiatives

Beginning in 2021, the Company originated certain strategic initiatives designed to improve the Company’s operating efficiency, focus the Company’s loan growth activities, and fortify asset quality. The discussion below provides an update regarding the Company’s ongoing strategic initiatives.

Cessation of Business at ALC

On September 3, 2021, ALC ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. As of September 30, 2022, ALC employed eight full-time equivalent employees that continued to collect payments on loans through ALC’s Mobile, Alabama headquarters office. The objectives of this initiative included the simplification of the Company’s business processes, reduction of non-interest expense, and the improvement of the Company’s asset quality. The timing of the Company’s ability to achieve each of these objectives will be different with some objectives being achieved relatively quickly after execution of the initiative, while others will take more time as ALC’s loan portfolio continues to pay down. For example, a significant reduction of non-interest expense was achieved beginning in the fourth quarter of 2021 and has continued in 2022 due to the reduction of personnel, termination of branch leases, and reduction of technology and other overhead expenses. During the nine months ended September 30, 2022, non-interest expense at ALC totaled $1.4 million, compared to $5.7 million during the same period of 2021.

Though the initiative resulted in non-interest expense reductions relatively early in its execution, it has also resulted in increased expense related to loan loss provisioning. As a result of branch closures, charge-offs associated with ALC loans have increased since the inception of the initiative compared to prior periods. Net charge-offs at ALC totaled $1.5 million during the nine months ended September 30, 2022, compared to $0.5 million during the nine months ended September 30, 2021. In addition, in management’s view, the economic uncertainties that have emerged in 2022, including elevated inflation levels, have increased overall credit risk related to ALC’s loan portfolio. Accordingly, qualitative economic factors associated with ALC’s loan loss reserves have worsened, resulting in additional loan loss provisions. For the nine months ended September 30, 2022, loan loss provisions specific to ALC’s loans totaled $1.6 million, compared to $0.2 million for the corresponding period of 2021. Over time, the reduction of loans at ALC is expected to improve the Company’s asset quality. ALC’s loans and, in particular, its direct consumer portfolio have historically had the Company’s highest level of losses. Approximately 89.0% and 61.0% of the Company’s total net charge-offs were associated with ALC’s loan portfolio during the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, ALC's remaining loans net of unearned interest and fees totaled $23.8 million, compared to $40.8 million as of December 31, 2021.

While this strategy is expected to provide ongoing expense reductions, interest income earned on ALC’s loans will also continue to decline in future periods as the loans pay down. For the nine months ended September 30, 2022, interest income earned on ALC’s loans totaled $3.9 million, compared to $7.0 million for the nine months ended September 30, 2021. Accordingly, the Company’s focus remains on continued loan growth in other areas of the Bank’s portfolio, as well as efforts to continue to simplify the Company’s ongoing operations and reduce expenses further.

Organizational Efforts

In January 2022, management reorganized the Bank’s retail banking, technology and deposit operations functions under a single organizational structure. Under this structure, management expects to further improve the efficiency of its retail banking operation, while also improving the promotion and deployment of the Bank’s digital products and services.

In addition, the Company continues to evaluate opportunities throughout the organization to improve its processes and simplify business models.

Financial Highlights

The Company earned net income of $1.9 million, or $0.29 per diluted common share, during the three months ended September 30, 2022, compared to $0.8 million, or $0.13 per diluted common share, for the three months ended September 30, 2021. For the nine months ended September 30, 2022, net income totaled $4.6 million, or $0.71 per diluted common share, compared to $2.7 million, or $0.41 per diluted common share, for the nine months ended September 30, 2021.

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Earnings improvement, comparing both the three and nine months ended September 30, 2022 to the corresponding periods in 2021, was driven primarily by reductions in non-interest expense resulting from the strategic initiatives that were initiated by the Company beginning in 2021, and in particular the ALC cessation of business initiative. Non-interest expense was reduced by $1.5 million, or 17.7%, comparing the three months ended September 30, 2022 to the three months ended September 30, 2021, and by $4.4 million, or 17.3%, comparing the nine months ended September 30, 2022, to the corresponding period of 2021.

Summarized condensed consolidated statements of operations are included below for the three and nine months ended September 30, 2022 and 2021.

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
	(Dollars in Thousands)
Interest income	$	10,670	$	10,030	$	29,576	$	29,934
Interest expense		1,155		695		2,526		2,223
Net interest income		9,515		9,335		27,050		27,711
Provision for loan and lease losses		1,165		618		2,781		1,517
Net interest income after provision for loan and lease losses		8,350		8,717		24,269		26,194
Non-interest income		1,088		896		2,773		2,656
Non-interest expense		7,032		8,547		20,966		25,342
Income before income taxes		2,406		1,066		6,076		3,508
Provision for income taxes		546		229		1,440		768
Net income	$	1,860	$	837	$	4,636	$	2,740
Basic net income per share	$	0.31	$	0.13	$	0.76	$	0.43
Diluted net income per share	$	0.29	$	0.13	$	0.71	$	0.41
Dividends per share	$	0.03	$	0.03	$	0.09	$	0.09

The following discussion summarizes the most significant activity that drove changes in the Company’s net income during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.

Net Interest Income and Margin

Net interest income decreased by $0.7 million comparing the nine months ended September 30, 2022 to the nine months ended September 30, 2021. The most significant driver of the decrease in net interest income was the reduction of interest and fees on ALC loans in connection with the ALC business cessation strategy. Interest and fees on ALC loans decreased by $3.1 million during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. This reduction was partially offset by increased interest income in the Bank’s other loan portfolios, as well as an increase in investment security interest income. As ALC’s loan portfolio continues to pay down, there will be continued reduction in interest and fees attributable to ALC’s loans. These reductions are expected to continue to put downward pressure on total loan yield and net interest margin. As a result of the changing mix of loans, the Company’s net interest margin was reduced to 4.00% during the nine months ended September 30, 2022, compared to 4.29% during the nine months ended September 30, 2021. Historically, ALC’s loan portfolio has represented both the Company’s highest yielding loans, as well as the portfolio with the highest level of credit losses. Accordingly, while interest earned on these loans is expected to decrease over time, loan loss provision expense is also expected to decrease after the portfolio pays down.

As the pay down of ALC’s loans continues, management remains focused on efforts to grow earning assets in the Bank’s other loan and investment categories, while at the same time maintaining pricing discipline on deposit costs. As part of its overall interest rate risk management program, the Company has entered into forward interest rate swap contracts on certain variable rate deposit products and fixed rate commercial real estate loans. During the nine months ended September 30, 2022, the Company terminated one interest rate swap associated with a Federal Home Loan Bank borrowing and recorded a deferred gain associated with the termination of $0.3 million. The gain will be recognized over the remaining 24-month term of the original swap agreement.

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Provision for Loan and Lease Losses

The provision for loan and lease losses was $2.8 million during the nine months ended September 30, 2022, compared to $1.5 million during the nine months ended September 30, 2021. The increase in provision expense during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021 reflected both an increase in charge-offs associated with ALC’s loan portfolio, as well as qualitative adjustments applied to the portfolio in response to heightened inflationary trends and other economic uncertainties that emerged during the period. In management’s view, the combination of the ALC business cessation strategy, coupled with deteriorating economic conditions, including elevated inflation levels, increased overall credit risk in ALC’s loan portfolio as of September 30, 2022, compared to December 31, 2021.

Non-interest Income

Non-interest income increased by $0.1 million comparing the nine months ended September 30, 2022 to the nine months ended September 30, 2021. The increase resulted primarily from increased service and other charges on deposit accounts comparing the two periods.

Non-interest Expense

Non-interest expense decreased by $4.4 million comparing the nine months ended September 30, 2022 to the nine months ended September 30, 2021. The decrease in 2022 resulted primarily from implementation of the ALC business cessation strategy, as well as other efficiency efforts conducted at the Bank. As a result of these efforts, significant expense reductions were realized associated with salaries and employee benefits, occupancy and equipment, as well as other expenses associated with technology and professional services. Non-interest expense during both the nine-month periods ended September 30, 2022 and 2021 was reduced by $0.3 million and $0.4 million in net gains on the sale of other real estate owned (OREO), respectively.

Balance Sheet Levels

As of September 30, 2022, the Company’s assets totaled $989.3 million, compared to $958.3 million as of December 31, 2021, an increase of 3.2%. Compared to September 30, 2021, the Company’s total assets increased by $33.9 million, or 3.5%.

Loans

Total loans increased by $40.9 million, or 5.8% as of September 30, 2022, compared to December 31, 2021. Loan volume increases included growth in the Bank’s indirect, residential (secured by multi-family and 1-4 family residential properties) and commercial real estate (secured by nonfarm, nonresidential properties). Growth in these categories was consistent with continued robust commercial economic activity and resiliency in consumer demand during the period.

Asset Quality

The Company’s nonperforming assets, including loans in non-accrual status and OREO, totaled $2.8 million as of September 30, 2022, compared to $4.2 million as of December 31, 2021. The reduction in nonperforming assets during the nine months ended September 30, 2022 resulted from the sale of OREO properties during the period. Reductions in OREO totaled $1.5 million and included the sale of banking centers that were closed by the Company in 2021. As a percentage of total assets, nonperforming assets totaled 0.28% as of September 30, 2022 compared to 0.43% as of December 31, 2021.

Deposit Growth and Deployment of Funds

Deposits increased by $8.4 million, or 1.0%, as of September 30, 2022, compared to December 31, 2021. During the first nine months of 2022, management continued to focus on minimizing deposit expense and deploying excess cash balances into earning assets that meet the Company’s established credit standards, while maintaining appropriate levels of liquidity in accordance with projected funding needs. Total average funding costs, including both interest- and noninterest-bearing liabilities and borrowings, were 0.39% for the nine months ended September 30, 2022, compared to 0.36% for the nine months ended September 30, 2021. Given the increasing interest rate environment during the first nine months of 2022, management continued to deploy a portion of excess funds into the investment securities portfolio. Investment securities, including both the available-for-sale and held-to-maturity portfolios totaled $145.9 million as of September 30, 2022, compared to $134.3 million as of December 31, 2021. The expected average life of securities in the investment portfolio as of September 30, 2022 was 3.6 years, compared to 3.7 years as of December 31, 2021. Management maintains the portfolio with average durations that are expected to provide monthly cash flows that can be utilized to reinvest in earning assets at current market rates.

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Shareholders’ Equity

Shareholders’ equity decreased by $7.0 million, or 7.7%, as of September 30, 2022, compared to December 31, 2021. The decrease in shareholders’ equity resulted primarily from increases in accumulated other comprehensive loss due to declines in the market value of the Company’s available-for-sale investment portfolio. The market value declines were the direct result of the increasing interest rate environment during the nine months ended September 30, 2022. No other-than-temporary impairment was recognized in the investment portfolio during the nine months ended September 30, 2022, and the Company has both the intent and ability to retain the investments for a period of time sufficient to allow for the full recovery of all market value decreases. The market value decrease in available-for-sale securities was partially offset by an increase in the market value of cash flow derivative instruments that hedge certain deposits and borrowings on the Company’s balance sheet.

Regulatory Capital

During the nine months ended September 30, 2022, the Bank continued to maintain capital ratios at higher levels than required to be considered a “well-capitalized” institution under applicable banking regulations. As of September 30, 2022, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 11.09%. Its total capital ratio was 12.23%, and its Tier 1 leverage ratio was 9.23%.

Liquidity

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

Cash Dividend

The Company declared cash dividends totaling $0.09 per share on its common stock during both nine-month periods ended September 30, 2022 and September 30, 2021.

Share Repurchases

During the nine months ended September 30, 2022, the Company completed share repurchases totaling 412,400 shares of its common stock at a weighted average price of $10.87 per share. The repurchases were completed under the Company’s existing share repurchase program, which was amended in April 2021 to allow for the repurchase of additional shares through December 31, 2022. As of September 30, 2022, a total of 596,813 shares remained available for repurchase under the program.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is calculated as the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company’s earning assets consist of loans, taxable and tax-exempt investments, Federal Home Loan Bank stock, federal funds sold by the Bank and interest-bearing deposits in banks. Interest-bearing liabilities consist of interest-bearing demand deposits and savings and time deposits, as well as short- and long-term borrowings.

The following tables show the average balances of each principal category of assets, liabilities and shareholders’ equity for the three and nine months ended September 30, 2022 and 2021. Additionally, the tables provide an analysis of interest revenue or expense associated with each category, along with the accompanying yield or rate percentage. Net interest margin is calculated for each period presented as net interest income divided by average total interest-earning assets.

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	Three Months Ended							Three Months Ended
	September 30, 2022							September 30, 2021
	Average Balance		Interest		Annualized Yield/ Rate %			Average Balance		Interest		Annualized Yield/ Rate %
ASSETS
Interest-earning assets:
Total loans (Note A)	$	743,145	$	9,750		5.21	%	$	691,435	$	9,568		5.49	%
Taxable investment securities		148,964		748		1.99	%		119,943		409		1.35	%
Tax-exempt investment securities		2,322		8		1.37	%		3,367		15		1.77	%
Federal Home Loan Bank stock		1,808		17		3.73	%		870		8		3.65	%
Federal funds sold		1,984		11		2.20	%		86		—		—
Interest-bearing deposits in banks		23,166		136		2.33	%		73,490		30		0.16	%
Total interest-earning assets		921,389		10,670		4.59	%		889,191		10,030		4.48	%
Noninterest-earning assets		64,593							67,067
Total	$	985,982						$	956,258
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits:
Demand deposits	$	243,131	$	182		0.30	%	$	239,188	$	141		0.23	%
Savings deposits		211,724		342		0.64	%		208,187		160		0.30	%
Time deposits		209,361		340		0.64	%		223,988		351		0.62	%
Total interest-bearing deposits		664,216		864		0.52	%		671,363		652		0.39	%
Noninterest-bearing demand deposits		183,612		—		—			176,102		—		—
Total deposits		847,828		864		0.40	%		847,465		652		0.31	%
Borrowings		45,427		291		2.54	%		10,032		43		1.70	%
Total funding costs		893,255		1,155		0.51	%		857,497		695		0.32	%
Other noninterest-bearing liabilities		8,642							9,158
Shareholders’ equity		84,085							89,603
Total	$	985,982						$	956,258
Net interest income (Note B)			$	9,515						$	9,335
Net interest margin						4.10	%						4.17	%

Note A	—	For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. These loans averaged $1.7 million and $1.1 million for the three months ended September 30, 2022 and 2021, respectively.
Note B	—	Loan fees are included in interest amounts presented. Loan fees totaled $0.1 million and $0.4 million for the three months ended September 30, 2022 and 2021, respectively.

49

	Nine Months Ended							Nine Months Ended
	September 30, 2022							September 30, 2021
	Average Balance		Interest		Annualized Yield/ Rate %			Average Balance		Interest		Annualized Yield/ Rate %
ASSETS
Interest-earning assets:
Total loans (Note A)	$	713,015	$	27,339		5.13	%	$	672,807	$	28,726		5.71	%
Taxable investment securities		142,425		1,896		1.78	%		100,245		1,059		1.41	%
Tax-exempt investment securities		2,543		31		1.63	%		3,464		47		1.81	%
Federal Home Loan Bank stock		1,165		33		3.79	%		948		25		3.53	%
Federal funds sold		853		12		1.88	%		84		—		—
Interest-bearing deposits in banks		45,133		265		0.79	%		86,632		77		0.12	%
Total interest-earning assets		905,134		29,576		4.37	%		864,180		29,934		4.63	%
Noninterest-earning assets		65,379							68,041
Total	$	970,513						$	932,221
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits:
Demand deposits	$	249,183	$	438		0.24	%	$	233,329	$	425		0.24	%
Savings deposits		206,294		693		0.45	%		190,296		453		0.32	%
Time deposits		208,621		833		0.53	%		230,986		1,222		0.71	%
Total interest-bearing deposits		664,098		1,964		0.40	%		654,611		2,100		0.43	%
Noninterest-bearing demand deposits		182,862		—		—			169,780		—		—
Total deposits		846,960		1,964		0.31	%		824,391		2,100		0.34	%
Borrowings		27,994		562		2.68	%		10,022		123		1.64	%
Total funding costs		874,954		2,526		0.39	%		834,413		2,223		0.36	%
Other noninterest-bearing liabilities		8,833							9,288
Shareholders’ equity		86,726							88,520
Total	$	970,513						$	932,221
Net interest income (Note B)			$	27,050						$	27,711
Net interest margin						4.00	%						4.29	%

Note A	—	For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. These loans averaged $1.8 million and $1.9 million for the nine months ended September 30, 2022 and 2021, respectively.
Note B	—	Loan fees are included in interest amounts presented. Loan fees totaled $0.4 million and $1.3 million for the nine months ended September 30, 2022 and 2021, respectively.

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The following tables summarize the impact of variances in volume and rate of interest-earning assets and interest-bearing liabilities on components of net interest income.

	Three Months Ended September 30, 2022									Nine Months Ended September 30, 2022
	Compared to									Compared to
	Three Months Ended September 30, 2021									Nine Months Ended September 30, 2021
	Increase (Decrease)									Increase (Decrease)
	Due to Change In:									Due to Change In:
	Volume			Average Rate			Net			Volume			Average Rate			Net
	(Dollars in Thousands)
Interest earned on:
Total loans	$	716		$	(534	)	$	182		$	1,717		$	(3,104	)	$	(1,387	)
Taxable investment securities		99			240			339			446			391			837
Tax-exempt investment securities		(5	)		(2	)		(7	)		(12	)		(4	)		(16	)
Federal Home Loan Bank stock		9			—			9			6			2			8
Federal funds sold		—			11			11			—			12			12
Interest-bearing deposits in banks		(21	)		127			106			(37	)		225			188
Total interest-earning assets		798			(158	)		640			2,120			(2,478	)		(358	)
Interest expense on:
Demand deposits		2			39			41			29			(16	)		13
Savings deposits		3			179			182			38			202			240
Time deposits		(23	)		12			(11	)		(118	)		(271	)		(389	)
Borrowings		152			96			248			221			218			439
Total interest-bearing liabilities		134			326			460			170			133			303
Increase (decrease) in net interest income	$	664		$	(484	)	$	180		$	1,950		$	(2,611	)	$	(661	)

Net interest income totaled $9.5 million for the three months ended September 30, 2022, compared to $9.3 million for the three months ended September 30, 2021. The increase resulted primarily from loan growth and, to a lesser extent, increased yield on the investment portfolio and interest-bearing deposits in banks. For the nine months ended September 30, 2022, net interest income totaled $27.1 million, compared to $27.7 million for the nine months ended September 30, 2021. The decrease was primarily attributable to reductions in interest and fees on ALC loans in connection with the ALC cessation of business strategy. Interest and fees on ALC loans decreased by $3.1 million comparing the nine months ended September 30, 2022 to the corresponding period of 2021. The decrease related to ALC loans was partially offset by interest income in the Bank’s other earning asset categories, which increased by $2.7 million on a net basis, comparing the nine months ended September 30, 2022 to the nine months ended September 30, 2021. As ALC’s loan portfolio continues to pay down, there will be continued reduction in interest and fees attributable to ALC’s loans. These reductions are expected to continue to put downward pressure on total loan yield and net interest margin. As a result of the changing mix of earning assets, the Company’s net interest margin was reduced to 4.10% during the three months ended September 30, 2022, compared to 4.17% during the three months ended September 30, 2021. For the nine months ended September 30, 2022, net interest margin was 4.00%, compared to 4.29% for the nine months ended September 30, 2021. Though net interest income and margin are expected to continue to decrease as a result of the cessation of business strategy at ALC, significant non-interest expense savings have developed, or are expected to develop, as a result of the strategy. Historically, ALC’s loan portfolio has represented both the Company’s highest yielding loans, as well as the portfolio with the highest level of credit losses. Accordingly, while interest earned on these loans is expected to decrease over time, loan loss provision expense is also expected to decrease after the portfolio pays down. As the pay down continues, management is continuing efforts to grow earning assets in the Bank’s other loan and investment categories, while at the same time maintaining pricing discipline on deposit costs and earning asset yields consistent with the current interest rate environment.

Beginning in March of 2022 and through its November 2022 meeting, the Federal Open Market Committee has raised the federal funds rate by 375 basis points. Statements by the Federal Reserve chair have indicated that further interest rate increases may be expected in 2022 and into 2023 to address inflationary pressures. Although, as described above, the Company’s interest margin generally will benefit from rising interest rates, rates may rise in an uneven manner causing unpredictable effects, and higher rates could negatively affect the economy, loan demand and borrowers’ financial position, and could cause additional declines in the market value of the Company’s investment securities.

Provision for Loan and Lease Losses

The provision for loan and lease losses was $2.8 million during the nine months ended September 30, 2022, compared to $1.5 million during the nine months ended September 30, 2021. The increase in the provision, comparing the two periods, resulted from both an increase in charge-offs associated with ALC’s runoff loan portfolio, as well as qualitative adjustments applied to the portfolio in response to heightened inflationary trends and other economic uncertainties that emerged during the nine months ended September 30, 2022. In management’s view, the combination of the ALC business cessation strategy, coupled with deteriorating economic conditions, including elevated inflation levels,

51

increased overall credit risk, particularly in ALC’s loan portfolio, as of September 30, 2022, compared to December 31, 2021. The loan loss provision recorded by the Company during the nine months ended September 30, 2022 included $1.6 million associated with ALC’s portfolio and $1.2 million associated with the Bank’s portfolio. The Company’s net charge-offs totaled $2.3 million during the nine months ended September 30, 2022, compared to $1.5 million during the nine months ended September 30, 2021. The majority of the Company’s charge-offs in both 2022 and 2021 were associated with loans in ALC’s portfolio.

Management believes that the allowance for loan and lease losses as of September 30, 2022, which was calculated under an incurred loss model, was sufficient to absorb losses in the Company’s loan portfolio based on circumstances existing as of the balance sheet date. Management will continue to closely monitor the impact of changing economic circumstances on the Company’s loan portfolio and will adjust the allowance accordingly. In accordance with relevant accounting guidance for smaller reporting companies, the Company has not yet adopted the Current Expected Credit Loss (CECL) accounting model for the calculation of credit losses and is currently evaluating the impact that adopting CECL will have on the Company’s financial statements. Due to its classification as a smaller reporting company by the Securities and Exchange Commission, the Company is not required to implement the CECL model until January 1, 2023.

Non-Interest Income

Non-interest income represents fees and income derived from sources other than interest-earning assets. The following table presents the major components of non-interest income for the periods indicated:

	Three Months Ended September 30,									Nine Months Ended September 30,
	2022		2021		$ Change		% Change			2022		2021		$ Change			% Change
	(Dollars in Thousands)									(Dollars in Thousands)
Service charges and other fees on deposit accounts	$	311	$	271	$	40		14.8	%	$	904	$	777	$	127			16.3	%
Bank-owned life insurance		112		110		2		1.8	%		335		327		8			2.4	%
Lease income		210		208		2		1.0	%		635		619		16			2.6	%
Other income		455		307		148		48.2	%		899		933		(34	)		(3.6	)%
Total non-interest income	$	1,088	$	896	$	192		21.4	%	$	2,773	$	2,656	$	117			4.4	%

Non-interest income increased in both the three- and nine-month periods ended September 30, 2022, compared to the corresponding periods of 2021. For the three months ended September 30, 2022, the increase resulted primarily from nonrecurring gains on sale of premises and equipment and other assets that exceeded the three months ended September 30, 2021 by $0.2 million. For the nine months ended September 30, 2022, the increase was due primarily to increases in service charges and other fees on deposit accounts that were volume driven. Non-interest revenues earned from service charges and other fees on deposit accounts have generally declined during recent years based on changes in depositor preferences for liquidity, particularly during the pandemic. Management continues to evaluate opportunities to add new non-interest revenue streams or to grow existing streams; however, significant growth in non-interest income is not expected in the near term.

Non-Interest Expense

Non-interest expense represents expenses incurred from sources other than interest-bearing liabilities. The following table presents the major components of non-interest expense for the periods indicated:

	Three Months Ended September 30,												Nine Months Ended September 30,
	2022			2021			$ Change			% Change			2022			2021			$ Change			% Change
	(Dollars in Thousands)												(Dollars in Thousands)
Salaries and employee benefits	$	4,007		$	5,045		$	(1,038	)		(20.6	)%	$	12,389		$	14,951		$	(2,562	)		(17.1	)%
Net occupancy and equipment expense		861			1,259			(398	)		(31.6	)%		2,468			3,318			(850	)		(25.6	)%
Computer services		417			461			(44	)		(9.5	)%		1,224			1,411			(187	)		(13.3	)%
Insurance expense and assessments		310			340			(30	)		(8.8	)%		970			985			(15	)		(1.5	)%
Fees for professional services		263			292			(29	)		(9.9	)%		811			1,003			(192	)		(19.1	)%
Postage, stationery and supplies		164			206			(42	)		(20.4	)%		469			618			(149	)		(24.1	)%
Telephone/data communications		159			283			(124	)		(43.8	)%		518			742			(224	)		(30.2	)%
Other real estate/foreclosure (income) expense, net		(5	)		(273	)		268		NM				(320	)		(286	)		(34	)	NM
Other expense		856			934			(78	)		(8.4	)%		2,437			2,600			(163	)		(6.3	)%
Total non-interest expense	$	7,032		$	8,547		$	(1,515	)		(17.7	)%	$	20,966		$	25,342		$	(4,376	)		(17.3	)%

NM: Not meaningful

Non-interest expenses were reduced in both the three- and nine-month periods ended September 30, 2022 compared to the corresponding periods of 2021 due primarily to the strategic initiatives executed by the Company beginning in the third quarter of 2021. The initiatives, which included the ALC cessation of business strategy, Bank branch closures and other operational efficiency efforts at the Bank, led to significant reductions in the Company’s personnel levels, reduced levels of occupancy and equipment expense, and decreases in various other expense categories.

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Salaries and employee benefits expense reductions have been achieved through the reduction of employee levels, the most notable of which was realized during the third quarter of 2021 following implementation of the ALC business cessation strategy. Further reductions of employee levels have been achieved through the Company’s ongoing efficiency efforts. As of September 30, 2022, the Company employed 155 full-time equivalent employees (including 147 at the Bank and eight at ALC), compared to 175 as of December 31, 2021, 187 as of September 30, 2021, and 259 as of June 30, 2021 (the quarter-end date immediately prior to execution of the strategic initiatives).

The reduction in occupancy and equipment expense resulted primarily from the termination of the majority of ALC’s lease contracts following cessation of business at its branches, as well as the closure of four bank branches in the third quarter of 2021. As of September 30, 2022, all previously existing ALC leases had been terminated except for the ongoing lease of ALC’s headquarters office that continues to house the remaining ALC staff. During the nine months ended September 30, 2022, non-interest expense was also reduced by one-time net gains on the sale of OREO that totaled $0.3 million. The gains were primarily generated by the sale of the Bank’s closed branch assets.

Due to the strategic initiatives, additional expense reductions were also realized related to telephone/data communications, computer services, professional services, postage and supplies and various other expense categories, comparing both the three- and nine-month periods ended September 30, 2022 to the corresponding periods of 2021.

Both nine-month periods presented included certain one-time restructuring charges associated with the ALC cessation of business strategy. These charges included expenses associated with employee severances, termination of leases and technology contracts fixed asset valuation adjustments, and miscellaneous other expenses. The restructuring charges totaled $0.2 million during the nine months ended September 30, 2022, compared to $0.5 million during the nine months ended September 30, 2021. No restructuring charges were incurred during the three months ended September 30, 2022, while $0.5 million in restructuring charges were incurred during the three months ended September 30, 2021. As of September 30, 2022, the majority of estimated restructuring charges associated with the ALC strategy have been incurred. The strategic initiatives are expected to continue to reduce the Company’s expense structure in the near term, although the reductions may be offset by inflationary pressures affecting the Company’s ongoing operations. One of management’s primary focuses continues to be business simplification and process improvements in an effort to continue improving the Company’s overall efficiency levels.

Provision for Income Taxes

The provision for income taxes was $1.4 million and $0.8 million for the nine months ended September 30, 2022 and 2021, respectively, and the Company’s effective tax rate was 23.7% and 21.9%, respectively, for the same periods.

The effective tax rate is impacted by recurring items, such as changes in tax-exempt interest income earned from bank-qualified municipal bonds and loans and the cash surrender value of bank-owned life insurance. Management makes decisions about whether to invest in tax-exempt instruments on a case-by-case basis after considering a number of factors, including investment return, credit quality and the consistency of such investments with the Company’s overall strategy. The Company’s effective tax rate is expected to fluctuate commensurate with the level of these investments as compared to total pre-tax income.

BALANCE SHEET ANALYSIS

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 3.6 years and 3.7 years as of September 30, 2022 and December 31, 2021, respectively.

Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income, a separate component of shareholders’ equity. As of September 30, 2022, available-for-sale securities totaled $143.8 million, or 98.6% of the total investment portfolio, compared to $130.9 million, or 97.4% of the total investment portfolio, as of December 31, 2021. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, corporate bonds, obligations of U.S. government-sponsored agencies, 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 September 30, 2022, held-to-maturity securities totaled $2.1 million, or 1.4% of the total investment portfolio, compared to $3.4 million, or 2.6% of the total investment portfolio, as of December 31, 2021. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies, and obligations of state and political subdivisions.

53

Due to the increasing interest rate environment, during the nine months ended September 30, 2022, gross unrealized losses increased significantly, particularly within the Company’s available-for-sale portfolio. Gross unrealized losses in the available-for-sale portfolio totaled $11.0 million as of September 30, 2022, compared to $0.8 million as of December 31, 2021. Management evaluated unrealized losses as of September 30, 2022, and determined that no losses within the portfolio were other-than-temporary. Unrealized losses within the available-for-sale portfolio were recognized, net of tax, in accumulated other comprehensive income.

Loans and Allowance for Loan and Lease Losses

The Company’s total loan portfolio increased by $40.9 million, or 5.8%, as of September 30, 2022, compared to December 31, 2021. The tables below summarize loan balances by portfolio category at the end of each of the most recent five quarters as of September 30, 2022:

	Quarter Ended
	2022						2021
	September 30,		June 30,		March 31,		December 31,		September 30,
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	36,740	$	40,625	$	52,817	$	67,048	$	58,175
Secured by 1-4 family residential properties		84,911		69,098		69,760		72,727		73,112
Secured by multi-family residential properties		72,446		66,848		50,796		46,000		51,420
Secured by non-farm, non-residential properties		200,505		187,041		177,752		197,901		198,745
Commercial and industrial loans, including PPP loans		65,951		65,908		68,098		73,947		77,679
Consumer loans:
Direct consumer		12,279		15,419		18,023		21,689		25,845
Branch retail		16,278		18,634		21,891		25,692		29,764
Indirect		262,742		252,206		220,931		205,940		194,154
Total loans	$	751,852	$	715,779	$	680,068	$	710,944	$	708,894
Less unearned interest, fees and deferred cost		1,581		1,142		1,738		2,594		3,729
Allowance for loan and lease losses		9,373		8,751		8,484		8,320		8,193
Net loans	$	740,898	$	705,886	$	669,846	$	700,030	$	696,972

The tables below summarize changes in the allowance for loan and lease losses for each of the most recent five quarters as of September 30, 2022:

	Quarter Ended
	2022									2021
	September 30,			June 30,			March 31,			December 31,			September 30,
	(Dollars in Thousands)
Balance at beginning of period	$	8,751		$	8,484		$	8,320		$	8,193		$	7,726
Charge-offs:
Real estate loans:
Construction, land development and other land loans		—			—			—			(1	)		—
Secured by 1-4 family residential properties		(3	)		(5	)		(2	)		(6	)		(1	)
Secured by multi-family residential properties		—			—			—			—			—
Secured by non-farm, non-residential properties		—			—			—			—			—
Commercial and industrial loans, including PPP loans		—			—			—			—			(6	)
Consumer loans:
Direct consumer		(417	)		(532	)		(557	)		(437	)		(222	)
Branch retail		(200	)		(177	)		(145	)		(23	)		(77	)
Indirect		(136	)		(77	)		(25	)		(118	)		(55	)
Total charge-offs		(756	)		(791	)		(729	)		(585	)		(361	)
Recoveries		213			163			172			219			210
Net charge-offs		(543	)		(628	)		(557	)		(366	)		(151	)
Provision for loan and lease losses		1,165			895			721			493			618
Ending balance	$	9,373		$	8,751		$	8,484		$	8,320		$	8,193
Ending balance as a percentage of loans		1.25	%		1.22	%		1.25	%		1.17	%		1.16	%
Net charge-offs as a percentage of average loans		0.29	%		0.36	%		0.32	%		0.20	%		0.09	%

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Charge-offs increased during the nine months ended September 30, 2022 primarily in the direct consumer and branch retail categories due to charge-offs associated with ALC’s loan portfolio. In management’s view, the combination of the ALC business cessation strategy, coupled with deteriorating economic conditions, including elevated inflation levels, increased overall credit risk in ALC’s loan portfolio as of September 30, 2022, compared to December 31, 2021. The increase in provision expense in the nine months ended September 30, 2022 primarily reflected the impact of these changing circumstances on ALC’s portfolio and the overall changing economic conditions discussed above.

Nonperforming Assets

Nonperforming assets at the end of the five most recent quarters as of September 30, 2022 were as follows:

	Quarter Ended
	2022										2021
	September 30,			June 30,			March 31,			December 31,			September 30,
	(Dollars in Thousands)
Non-accrual loans	$	2,077		$	1,455		$	2,228		$	2,008		$	969
Other real estate owned		686			276			874			2,149			2,373
Total	$	2,763		$	1,731		$	3,102		$	4,157		$	3,342
Nonperforming assets as a percentage of total assets		0.28	%		0.18	%		0.32	%		0.43	%		0.35	%

The decrease in OREO as of September 30, 2022, compared to December 31, 2021, resulted primarily from the sale of banking centers that were closed in 2021. The increase in non-accrual loans during the three-months ended September 30, 2022 resulted primarily from one commercial loan that moved to non-accrual status.

Allocation of Allowance for Loan and Lease Losses

While no portion of the allowance for loan and lease losses is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, the following table shows an allocation of the allowance for loan and lease losses as of September 30, 2022 and December 31, 2021:

	September 30, 2022								December 31, 2021
	Allocation Allowance		Percent of Allowance in Each Category to Total Allowance			Percent of Loans in Each Category to Total Loans			Allocation Allowance		Percent of Allowance in Each Category to Total Allowance			Percent of Loans in Each Category to Total Loans
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	384		4.1	%		5.7	%	$	628		7.5	%		9.4	%
Secured by 1-4 family residential properties		792		8.4	%		9.7	%		690		8.3	%		10.2	%
Secured by multi-family residential properties		647		6.9	%		9.3	%		437		5.3	%		6.5	%
Secured by non-farm, non-residential properties		1,992		21.3	%		26.1	%		1,958		23.5	%		27.8	%
Commercial and industrial loans, including PPP loans		1,104		11.8	%		9.2	%		860		10.3	%		10.4	%
Consumer loans:
Direct consumer		948		10.1	%		2.2	%		1,004		12.1	%		3.1	%
Branch retail		423		4.5	%		2.6	%		304		3.7	%		3.6	%
Indirect		3,083		32.9	%		35.2	%		2,439		29.3	%		29.0	%
Total allowance for loan and lease losses	$	9,373		100.0	%		100.0	%	$	8,320		100.0	%		100.0	%

Deposits

Total deposits increased to $846.5 million as of September 30, 2022, from $838.1 million as of December 31, 2021, an increase of 1.0%. Core deposits, which exclude time deposits of $250 thousand or more, provide a relatively stable funding source that supports earning assets. Core deposits increased to $791.4 million, or 93.5% of total deposits, as of September 30, 2022, compared to $775.1 million, or 92.5% of total deposits, as of December 31, 2021.

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Core deposits, have historically been the Company’s primary source of funding and have enabled the Company to successfully meet both short-term and long-term liquidity needs. Management anticipates that core deposits will continue to be the Company’s primary source of funding in the future. Management will continue to monitor deposit levels closely to help ensure an adequate level of funding for the Company’s activities. However, various economic and competitive factors could affect this funding source in the future, including increased competition from other financial institutions in deposit gathering, national and local economic conditions and interest rate policies adopted by the Federal Reserve and other central banks.

Other Interest-Bearing Liabilities

Other interest-bearing liabilities consist of federal funds purchased, securities sold under agreements to repurchase, FHLB advances, and subordinated debt that are used by the Company as an alternative source of funds. During the third quarter of 2022, other interest-bearing liabilities represented 6.4% of average interest-bearing liabilities, compared to 1.5% in the third quarter of 2021.

Shareholders’ Equity

As of September 30, 2022, shareholders’ equity totaled $83.1 million, or 8.4% of total assets, compared to $90.1 million, or 9.4% of total assets, as of December 31, 2021. The decrease in shareholders’ equity as of September 30, 2022, compared to December 31, 2021, was due primarily to an increase in accumulated other comprehensive loss associated with unrealized losses on available-for-sale investment securities and a Company share repurchase program completed during the nine months ended September 30, 2022. The increase in unrealized losses within the securities portfolio resulted from significant increases in interest rates during the nine months ended September 30, 2022 which reduced security valuations. The reductions in security valuations were partially offset by increases in the fair value of cash flow hedges during the quarter. Changes in both the fair value of the available-for-sales investment securities portfolio and changes in the fair value of cash flow hedges are recorded, net of tax, in accumulated other comprehensive income. During the nine months ended September 30, 2022 the Company completed repurchases of 412,400 shares of its common stock at a weighted average price of $10.87 per share, or $4.5 million in aggregate. The shares were repurchased under the Company’s existing share repurchase program that was amended by the Board of Directors in April 2021 and will expire on December 31, 2022. Share repurchases under the program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate, subject to applicable regulatory requirements. The repurchase program does not obligate the Company to acquire any particular number of shares and may be suspended at any time at the Company’s discretion. As of September 30, 2022, 596,813 shares remained available for repurchase under the program.

During both the nine months ended September 30, 2022 and 2021, the Company declared dividends totaling $0.09 per common share, or approximately $0.5 million in aggregate amount. Bancshares’ Board of Directors evaluates dividend payments based on the Company’s level of earnings and the desire to maintain a strong capital base, as well as regulatory requirements relating to the payment of dividends.

LIQUIDITY AND CAPITAL RESOURCES

The asset portion of the balance sheet provides liquidity primarily from the following sources: (1) excess cash and interest-bearing deposits in banks, (2) federal funds sold, (3) principal payments and maturities of loans and (4) principal payments and maturities from the investment portfolio. Loans maturing or repricing in one year or less amounted to $183.4 million as of September 30, 2022 and $102.4 million as of December 31, 2021. Investment securities forecasted to mature or reprice in one year or less were estimated to be $10.0 million and $9.5 million of the investment portfolio as of September 30, 2022 and December 31, 2021, respectively.

Although some securities in the investment portfolio have legal final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. The investment securities portfolio had an estimated average life of 3.6 years and 3.7 years as of September 30, 2022 and December 31, 2021, respectively. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

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

The Company had $40.0 million and $10.0 million of outstanding borrowings under FHLB advances as of September 30, 2022 and December 31, 2021, respectively. In addition, on October 1, 2021, the Company completed a private placement of $11.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that will mature on October 1, 2031. Net of unamortized debt issuance costs, the subordinated notes were recorded as long-term borrowings totaling $10.7 million as of both September 30, 2022 and December 31, 2021.

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The Company had up to $206.6 million and $237.0 million in remaining unused credit from the FHLB (subject to available collateral, which may include eligible investment securities and loans) as of September 30, 2022 and December 31, 2021, respectively. In addition, the Company had $46.2 million and $46.0 million in unused established federal funds lines as of September 30, 2022 and December 31, 2021, respectively.

Management believes that the Company has adequate sources of liquidity to cover its contractual obligations and commitments over the next twelve months.

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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 the Company’s 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 timeframe, 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’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’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 paid on deposits and charged on loans.

Assessing Short-Term Interest Rate Risk – Net Interest Margin Simulation

On a periodic basis, management simulates how changes in short- and long-term interest rates will impact future profitability, as reflected by changes in the Bank’s net interest margin and net interest income. The tables below depict how, as of September 30, 2022, pre-tax net interest margin and net interest income are forecasted to change over timeframes of six months, one year, two years and five years under the four listed interest rate scenarios. The interest rate scenarios contemplate immediate and parallel shifts in short- and long-term interest rates.

Average Change in Net Interest Margin from Level Interest Rate Forecast (basis points, pre-tax):

	6 Months			1 Year			2 Years			5 Years
+1%		1			2			5			14
+2%		(5	)		(3	)		3			22
+3%		(21	)		(20	)		(11	)		19
+4%		(34	)		(32	)		(21	)		19
-1%		(7	)		(8	)		(11	)		(20	)
-2%		(17	)		(21	)		(28	)		(46	)
-3%		(30	)		(35	)		(46	)		(73	)

Cumulative Change in Net Interest Income from Level Interest Rate Forecast (dollars in thousands, pre-tax):

	6 Months			1 Year			2 Years			5 Years
+1%	$	46		$	163		$	932		$	7,207
+2%		(238	)		(349	)		505			11,221
+3%		(1,066	)		(1,965	)		(2,207	)		9,517
+4%		(1,696	)		(3,183	)		(4,098	)		9,716
-1%		(342	)		(805	)		(2,214	)		(9,940	)
-2%		(864	)		(2,062	)		(5,579	)		(23,205	)
-3%		(1,506	)		(3,533	)		(9,262	)		(36,240	)

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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’ 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’ management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Bancshares’ disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of September 30, 2022, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based on that evaluation, Bancshares’ management concluded, as of September 30, 2022, that Bancshares’ disclosure controls and procedures were effective at the reasonable assurance level 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 in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a party to certain ordinary course litigation, 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

A list of factors that could materially affect the Company’s business, financial condition and/or operating results is included in Part I, Item 1A, “Risk Factors” in Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2021. There have been no material changes to such risk factors. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth purchases made by or on behalf of Bancshares or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of Bancshares’ common stock during the third quarter of 2022:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (2)		Maximum Number of Shares that May Yet Be Purchased Under the Programs (2)
July 1 – July 31		—	$	—		37,000		623,813
August 1 – August 31		—	$	—		8,400		615,413
September 1 – September 30		—	$	—		18,600		596,813
Total		—	$	—		64,000		596,813

(1)

No shares were purchased in open-market transactions by an independent trustee for Bancshares’ 401(k) Plan during the third quarter of 2022.

(2)

On December 16, 2020, the Board of Directors extended the share repurchase program initially approved by the Board on January 19, 2006, which authorized the repurchase of up to 642,785 shares of common stock. On April 28, 2021, the Board of Directors approved the repurchase of an additional 1,000,000 shares of common stock under the share repurchase program, bringing the number of shares authorized for repurchase as of September 30, 2022, to 596,813 shares. The Board also approved on April 28, 2021, the extension of the expiration date of the repurchase program from December 31, 2021, to December 31, 2022.

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ITEM 6. EXHIBITS

Exhibit No.	Description
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	The following financial statements from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) Interim Condensed Consolidated Balance Sheets, (ii) Interim Condensed Consolidated Statements of Comprehensive Income, (iii) Interim Condensed Consolidated Statements of Operations, (iv) Interim Condensed Consolidated Statements of Changes in Shareholders' Equity, (v) Interim Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Interim Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104	The cover page from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL.

________________

*Filed herewith

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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 9, 2022

By:	/s/ Thomas S. Elley
	Thomas S. Elley
	Its Senior Executive Vice President, Treasurer and Assistant Secretary, Chief Financial Officer and Principal Accounting Officer
	(Duly Authorized Officer and Principal Financial Officer)

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