First US Bancshares 10Q 2017 Q2 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 June 30, 2017

☐	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.)

131 West Front Street

Post Office Box 249

Thomasville, AL

36784

(Address of Principal Executive Offices)

(Zip Code)

(334) 636-5424

(Registrant’s Telephone Number, Including Area Code)

N/A

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark of 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 August 8, 2017
Common Stock, $0.01 par value	6,072,948 shares

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

		PAGE

	PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

Interim Condensed Consolidated Balance Sheets at June 30, 2017 (Unaudited) and December 31, 2016		4

Interim Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)		5

Interim Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)		6

Interim Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (Unaudited)		7

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)		8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	35

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50

ITEM 4.	CONTROLS AND PROCEDURES	51

	PART II. OTHER INFORMATION	52

ITEM 1.	LEGAL PROCEEDINGS	52

ITEM 1A.	RISK FACTORS	52

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	52

ITEM 6.	EXHIBITS	52

Signature Page		53

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, First US Bancshares, Inc. (“Bancshares” and, together with its subsidiaries, the “Company”), through its senior management, from time to time makes forward-looking statements concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe,” “continues” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based on current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in Part I, Item 1A of the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016. Specifically, with respect to statements relating to loan demand, growth and earnings potential, geographic expansion and the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy generally and in the Company’s service areas, the availability of quality loans in the Company’s service areas, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and collateral values. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	June 30,			December 31,
	2017			2016
	(Unaudited)
ASSETS
Cash and due from banks	$	6,740		$	7,018
Interest-bearing deposits in banks		19,987			16,512
Total cash and cash equivalents		26,727			23,530
Investment securities available-for-sale, at fair value		172,287			181,910
Investment securities held-to-maturity, at amortized cost		28,544			25,904
Federal Home Loan Bank stock, at cost		1,396			1,581
Loans, net of allowance for loan losses of $4,905 and $4,856, respectively		330,526			322,772
Premises and equipment, net		25,694			18,340
Cash surrender value of bank-owned life insurance		14,763			14,603
Accrued interest receivable		1,820			1,987
Other real estate owned		4,351			4,858
Other assets		10,110			11,407
Total assets	$	616,218		$	606,892
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	509,245		$	497,556
Accrued interest expense		253			241
Other liabilities		7,655			7,735
Short-term borrowings		10,692			10,119
Long-term debt		10,000			15,000
Total liabilities		537,845			530,651
Commitments and contingencies
Shareholders’ equity:
Common stock, par value $0.01 per share, 10,000,000 shares authorized; 7,341,556 and 7,329,060 shares issued, respectively; 6,072,758 and 6,043,102 shares outstanding, respectively		73			73
Surplus		10,636			10,786
Accumulated other comprehensive income (loss), net of tax		151			(1,277	)
Retained earnings		88,011			87,434
Less treasury stock: 1,268,798 and 1,285,958 shares at cost, respectively		(20,486	)		(20,764	)
Noncontrolling interest		(12	)		(11	)
Total shareholders’ equity		78,373			76,241
Total liabilities and shareholders’ equity	$	616,218		$	606,892

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

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2017		2016		2017		2016
	(Unaudited)				(Unaudited)
Interest income:
Interest and fees on loans	$	6,630	$	6,366	$	13,126	$	12,419
Interest on investment securities		1,053		1,112		2,067		2,255
Total interest income		7,683		7,478		15,193		14,674

Interest expense:
Interest on deposits		568		513		1,096		1,036
Interest on borrowings		58		48		121		60
Total interest expense		626		561		1,217		1,096

Net interest income		7,057		6,917		13,976		13,578

Provision for loan losses		576		536		1,091		703

Net interest income after provision for loan losses		6,481		6,381		12,885		12,875

Non-interest income:
Service and other charges on deposit accounts		461		426		925		843
Credit insurance income		43		162		299		314
Net gain on sales and prepayments of investment securities		1		396		50		398
Other income, net		425		496		823		914
Total non-interest income		930		1,480		2,097		2,469

Non-interest expense:
Salaries and employee benefits		4,280		4,236		8,678		8,400
Net occupancy and equipment		693		782		1,470		1,551
Other real estate/foreclosure expense, net		133		129		217		246
Other expense		1,757		2,108		3,535		4,124
Total non-interest expense		6,863		7,255		13,900		14,321

Income before income taxes		548		606		1,082		1,023
Provision for income taxes		132		144		262		244
Net income	$	416	$	462	$	820	$	779
Basic net income per share	$	0.07	$	0.08	$	0.13	$	0.13
Diluted net income per share	$	0.06	$	0.07	$	0.13	$	0.12
Dividends per share	$	0.02	$	0.02	$	0.04	$	0.04

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

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
	(Unaudited)						(Unaudited)
Net income	$	416		$	462		$	820		$	779
Other comprehensive income:
Unrealized holding gains on securities available-for-sale arising during period, net of tax expense (benefit) of $429, $456, $871 and $695, respectively		736			782			1,493			1,192
Reclassification adjustment for net gains on securities available-for-sale realized in net income, net of tax of $0, $145, $18 and $145, respectively		(1	)		(250	)		(32	)		(250	)
Unrealized holding losses arising during the period on effective cash flow hedge derivatives, net of tax of $(24), $(81), $(20) and $(81), respectively		(41	)		(140	)		(33	)		(140	)
Other comprehensive income		694			392			1,428			802
Total comprehensive income	$	1,110		$	854		$	2,248		$	1,581

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

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Six Months Ended
	June 30,
	2017			2016
	(Unaudited)
Cash flows from operating activities:
Net income	$	820		$	779
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		502			479
Provision for loan losses		1,091			703
Deferred income tax provision		242			235
Net gain on sale and prepayment of investment securities		(50	)		(398	)
Stock-based compensation expense		169			155
Net amortization of securities		590			805
Net loss on premises and equipment and other real estate		224			371
Changes in assets and liabilities:
Decrease in accrued interest receivable		167			29
Decrease (increase) in other assets		(67	)		50
Increase in accrued interest expense		12			53
Decrease in other liabilities		(80	)		(155	)
Net cash provided by operating activities		3,620			3,106
Cash flows from investing activities:
Purchases of investment securities, available-for-sale		(15,254	)		(17,520	)
Purchases of investment securities, held-to-maturity		(4,696	)		(13,850	)
Proceeds from sales of investment securities, available-for-sale		—			12,341
Proceeds from maturities and prepayments of investment securities, available-for-sale		26,719			25,572
Proceeds from maturities and prepayments of investment securities, held-to-maturity		1,986			12,579
Net decrease (increase) in Federal Home Loan Bank stock		185			(343	)
Proceeds from the sale of premises and equipment and other real estate		707			1,071
Net change in loan portfolio		(9,198	)		(44,842	)
Purchases of premises and equipment		(7,850	)		(3,578	)
Net cash used in investing activities		(7,401	)		(28,570	)
Cash flows from financing activities:
Net increase in customer deposits		11,689			16,360
Net increase (decrease) in other borrowings		573			(2,002	)
Net increase (decrease) in Federal Home Loan Bank advances		(5,000	)		10,000
Net share-based compensation transactions		(41	)		—
Dividends paid		(243	)		(241	)
Net cash provided by financing activities		6,978			24,117
Net increase (decrease) in cash and cash equivalents		3,197			(1,347	)
Cash and cash equivalents, beginning of period		23,530			44,072
Cash and cash equivalents, end of period	$	26,727		$	42,725
Supplemental disclosures:
Cash paid for:
Interest	$	1,205		$	1,043
Income taxes		13			65
Non-cash transactions:
Assets acquired in settlement of loans		353			560
Reissuance of treasury stock as compensation	$	278		$	—

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

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

GENERAL

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

The unaudited interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s 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, 2017. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“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, 2016.

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, 2016.

Net Income Per Share and Comprehensive Income

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Basic shares		6,173,544		6,147,727		6,168,446		6,145,326
Dilutive shares		318,501		272,550		318,501		272,550
Diluted shares		6,492,045		6,420,277		6,486,947		6,417,876

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
	(Dollars in Thousands, Except Per Share Data)
Net income	$	416	$	462	$	820	$	779
Basic net income per share	$	0.07	$	0.08	$	0.13	$	0.13
Diluted net income per share	$	0.06	$	0.07	$	0.13	$	0.12

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

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

Accounting Standards Update (“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, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all current recognition thresholds and will require companies to recognize an allowance for lifetime expected credit losses. Credit losses will be immediately recognized through net income; the amount recognized will be based on the current estimate of contractual cash flows not expected to be collected over the financial asset’s contractual term. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities. For public business entities, ASU 2016-13 is effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. Institutions will be required to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting period in which the guidance is effective. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

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

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

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

ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of FASB ASC 825).” Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value, with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; and (iii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments of ASU 2016-01 are effective for interim and annual periods beginning after December 15, 2017. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, Revenue from Contracts with Customers, and will supersede revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition and certain cost guidance in FASB ASC Topic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. ASU 2014-09 requires an entity to recognize revenue when (or as) an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services is transferred to the customer. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year. ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for interim and annual periods beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements, as well as the most appropriate method of application. However, because this guidance does not significantly impact the treatment of revenue associated with financial instruments, including loans and securities accounted for under other U.S. GAAP, the adoption of ASU 2014-09 is not expected to have a material impact on the Company’s consolidated financial statements.

3.	INVESTMENT SECURITIES

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

	Available-for-Sale
	June 30, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	90,308	$	564	$	(304	)	$	90,568
Commercial		72,822		60		(802	)		72,080
Obligations of states and political subdivisions		7,131		426		—			7,557
Obligations of U.S. government-sponsored agencies		2,000		2		—			2,002
U.S. Treasury securities		80		—		—			80
Total	$	172,341	$	1,052	$	(1,106	)	$	172,287

	Held-to-Maturity
	June 30, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	16,950	$	28	$	(55	)	$	16,923
Obligations of U.S. government-sponsored agencies		9,594		27		(71	)		9,550
Obligations of states and political subdivisions		2,000		27		(4	)		2,023
Total	$	28,544	$	82	$	(130	)	$	28,496

	Available-for-Sale
	December 31, 2016
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	99,922	$	490	$	(2,003	)	$	98,409
Commercial		71,761		56		(1,287	)		70,530
Obligations of states and political subdivisions		9,759		390		(7	)		10,142
Obligations of U.S. government-sponsored agencies		2,000		—		(7	)		1,993
Corporate notes		756		—		—			756
U.S. Treasury securities		80		—		—			80
Total	$	184,278	$	936	$	(3,304	)	$	181,910

	Held-to-Maturity
	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	14,684	$	5	$	(148	)	$	14,541
Obligations of U.S. government-sponsored agencies		9,129		13		(222	)		8,920
Obligations of states and political subdivisions		2,091		2		(46	)		2,047
Total	$	25,904	$	20	$	(416	)	$	25,508

The scheduled maturities of investment securities available-for-sale and held-to-maturity as of June 30, 2017 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	$	381	$	385	$	—	$	—
Maturing after one to five years		8,581		8,654		2,230		2,264
Maturing after five to ten years		74,675		74,888		2,908		2,899
Maturing after ten years		88,704		88,360		23,406		23,333
Total	$	172,341	$	172,287	$	28,544	$	28,496

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

The following table reflects gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2017 and December 31, 2016.

	Available-for-Sale
	June 30, 2017
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	47,011	$	(273	)	$	2,086	$	(31	)
Commercial		32,660		(402	)		27,146		(400	)
U.S. Treasury securities		80		—			—		—
Total	$	79,751	$	(675	)	$	29,232	$	(431	)

	Held-to-Maturity
	June 30, 2017
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	7,514	$	(55	)	$	—	$	—
Obligations of U.S. government-sponsored agencies		7,570		(71	)		—		—
Obligations of states and political subdivisions		—		—			547		(4	)
Total	$	15,084	$	(126	)	$	547	$	(4	)

	Available-for-Sale
	December 31, 2016
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	85,741	$	(1,976	)	$	1,904	$	(27	)
Commercial		54,475		(946	)		10,721		(341	)
Obligations of U.S. government-sponsored agencies		1,993		(7	)		—		—
Obligations of states and political subdivisions		434		(7	)		—		—
U.S. Treasury securities		80		—			—		—
Total	$	142,723	$	(2,936	)	$	12,625	$	(368	)

	Held-to-Maturity
	December 31, 2016
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	12,776	$	(148	)	$	—	$	—
Obligations of U.S. government-sponsored agencies		7,957		(222	)		—		—
Obligations of states and political subdivisions		1,628		(46	)		—		—
Total	$	22,361	$	(416	)	$	—	$	—

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 securities, and (iv) whether it is more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases.

As of June 30, 2017, 22 debt securities had been in a loss position for more than 12 months, and 88 debt securities had been in a loss position for less than 12 months. As of December 31, 2016, 13 debt securities had been in a loss position for more than 12 months, and 130 debt securities had been in a loss position for less than 12 months. As of both June 30, 2017 and December 31, 2016, the losses for all securities were considered to be a direct result of the effect that the prevailing interest rate environment had on the value of debt securities and were not related to the creditworthiness of the issuers. Further, the Company has the current intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of June 30, 2017 and December 31, 2016.

Investment securities available-for-sale with a carrying value of $88.1 million and $87.7 million as of June 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes.

No investment securities were sold during the six months ended June 30, 2017; however, certain securities were paid prior to contractual maturity, and the Company realized gains on the prepayment of the securities. Gains realized on prepayment of investment securities were approximately $50 thousand for the six months ended June 30, 2017. Gains realized on sales of securities available-for-sale and prepayments of investment securities were approximately $0.6 million for the year ended December 31, 2016. There were no losses on sales of securities during the six months ended June 30, 2017 or the year ended December 31, 2016.

4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Portfolio Segments

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

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

Secured by 1-4 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 homes.

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

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

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

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

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

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

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

	June 30, 2017
	Bank		ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	12,424	$	—	$	12,424
Secured by 1-4 family residential properties		32,227		12,229		44,456
Secured by multi-family residential properties		16,702		—		16,702
Secured by non-farm, non-residential properties		113,037		—		113,037
Other		226		—		226
Commercial and industrial loans		65,087		—		65,087
Consumer loans:
Consumer		5,671		31,920		37,591
Indirect sales		—		52,134		52,134
Total loans		245,374		96,283		341,657
Less: Unearned interest, fees and deferred cost		371		5,855		6,226
Allowance for loan losses		2,526		2,379		4,905
Net loans	$	242,477	$	88,049	$	330,526

	December 31, 2016
	Bank		ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	23,772	$	—	$	23,772
Secured by 1-4 family residential properties		32,955		13,724		46,679
Secured by multi-family residential properties		16,627		—		16,627
Secured by non-farm, non-residential properties		102,112		—		102,112
Other		234		—		234
Commercial and industrial loans		57,963		—		57,963
Consumer loans:
Consumer		6,206		36,413		42,619
Indirect sales		—		44,775		44,775
Total loans		239,869		94,912		334,781
Less: Unearned interest, fees and deferred cost		218		6,935		7,153
Allowance for loan losses		2,409		2,447		4,856
Net loans	$	237,242	$	85,530	$	322,772

The Company makes commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 54.7% and 56.6% of the portfolio was concentrated in loans secured by real estate located primarily within a single geographic region of the United States as of June 30, 2017 and December 31, 2016, respectively.

Related Party Loans

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with non-related parties. Management believes that such loans do not represent more than a normal risk of collectability, nor do they present other unfavorable features. The aggregate balances of such related party loans and commitments as of June 30, 2017 and December 31, 2016 were $0.5 million and $2.7 million, respectively. During the six months ended June 30, 2017, there were no new loans to these parties, and repayments by active related parties were $5 thousand. In addition, during the six months ended June 30, 2017, approximately $2.2 million in related party loans were reclassified as unrelated party loans due to the retirement of certain members of the Company’s Board of Directors. During the year ended December 31, 2016, there was one new loan to a related party, and repayments by active related parties totaled $0.1 million.

Allowance for Loan Losses

The following tables present changes in the allowance for loan losses and the related loan balances by loan portfolio segment and loan type as of June 30, 2017 and December 31, 2016:

	Bank
	Six Months Ended June 30, 2017
	Construction, Land			1-4 Family			Real Estate Multi- Family			Non-Farm Non-Residential			Other		Commercial		Consumer			Indirect Sales		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	535		$	304		$	88	$	903		$	2	$	527		$	50		$	—	$	2,409
Charge-offs		—			—			—		—			—		(16	)		(62	)		—		(78	)
Recoveries		—			71			—		68			—		12			44			—		195
Provision		(58	)		(133	)		29		(82	)		—		207			37			—		—
Ending balance	$	477		$	242		$	117	$	889		$	2	$	730		$	69		$	—	$	2,526

Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	414		$	5		$	—	$	96		$	—	$	45		$	—		$	—	$	560
Collectively evaluated for impairment		63			237			117		793			2		685			69			—		1,966
Total allowance for loan losses	$	477		$	242		$	117	$	889		$	2	$	730		$	69		$	—	$	2,526
Ending balance of loans receivable:
Individually evaluated for impairment	$	1,296		$	191		$	—	$	538		$	—	$	70		$	—		$	—	$	2,095
Collectively evaluated for impairment		11,128			32,036			16,702		112,499			226		65,017			5,671			—		243,279
Total loans receivable	$	12,424		$	32,227		$	16,702	$	113,037		$	226	$	65,087		$	5,671		$	—	$	245,374

	ALC
	Six Months Ended June 30, 2017
	Construction, Land		1-4 Family			Real Estate Multi- Family		Non-Farm Non-Residential		Other		Commercial		Consumer			Indirect Sales			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	—	$	107		$	—	$	—	$	—	$	—	$	1,717		$	623		$	2,447
Charge-offs		—		(17	)		—		—		—		—		(1,177	)		(345	)		(1,539	)
Recoveries		—		22			—		—		—		—		264			94			380
Provision		—		(64	)		—		—		—		—		886			269			1,091
Ending balance	$	—	$	48		$	—	$	—	$	—	$	—	$	1,690		$	641		$	2,379

Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—	$	—	$	—		$	—		$	—
Collectively evaluated for impairment		—		48			—		—		—		—		1,690			641			2,379
Total allowance for loan losses	$	—	$	48		$	—	$	—	$	—	$	—	$	1,690		$	641		$	2,379
Ending balance of loans receivable:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—	$	—	$	—		$	—		$	—
Collectively evaluated for impairment		—		12,229			—		—		—		—		31,920			52,134			96,283
Total loans receivable	$	—	$	12,229		$	—	$	—	$	—	$	—	$	31,920		$	52,134		$	96,283

	Bank and ALC
	Six Months Ended June 30, 2017
	Construction, Land			1-4 Family			Real Estate Multi- Family		Non-Farm Non-Residential			Other		Commercial			Consumer			Indirect Sales			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	535		$	411		$	88	$	903		$	2	$	527		$	1,767		$	623		$	4,856
Charge-offs		—			(17	)		—		—			—		(16	)		(1,239	)		(345	)		(1,617	)
Recoveries		—			93			—		68			—		12			308			94			575
Provision		(58	)		(197	)		29		(82	)		—		207			923			269			1,091
Ending balance	$	477		$	290		$	117	$	889		$	2	$	730		$	1,759		$	641		$	4,905

Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	414		$	5		$	—	$	96		$	—	$	45		$	—		$	—		$	560
Collectively evaluated for impairment		63			285			117		793			2		685			1,759			641			4,345
Total allowance for loan losses	$	477		$	290		$	117	$	889		$	2	$	730		$	1,759		$	641		$	4,905
Ending balance of loans receivable:
Individually evaluated for impairment	$	1,296		$	191		$	—	$	538		$	—	$	70		$	—		$	—		$	2,095
Collectively evaluated for impairment		11,128			44,265			16,702		112,499			226		65,017			37,591			52,134			339,562
Total loans receivable	$	12,424		$	44,456		$	16,702	$	113,037		$	226	$	65,087		$	37,591		$	52,134		$	341,657

	Bank
	Year Ended December 31, 2016
	Construction, Land		1-4 Family			Real Estate Multi- Family		Non-Farm Non-Residential			Other		Commercial			Consumer			Indirect Sales		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	110	$	138		$	29	$	351		$	1	$	659		$	41		$	—	$	1,329
Charge-offs		—		(66	)		—		(40	)		—		(2	)		(43	)		—		(151	)
Recoveries		200		23			—		—			—		73			50			—		346
Provision		225		209			59		592			1		(203	)		2			—		885
Ending balance	$	535	$	304		$	88	$	903		$	2	$	527		$	50		$	—	$	2,409

Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	423	$	5		$	—	$	107		$	—	$	—		$	—		$	—	$	535
Collectively evaluated for impairment		112		299			88		796			2		527			50			—		1,874
Total allowance for loan losses	$	535	$	304		$	88	$	903		$	2	$	527		$	50		$	—	$	2,409
Ending balance of loans receivable:
Individually evaluated for impairment	$	1,361	$	193		$	—	$	549		$	—	$	—		$	—		$	—	$	2,103
Collectively evaluated for impairment		22,411		32,762			16,627		101,563			234		57,963			6,206			—		237,766
Total loans receivable	$	23,772	$	32,955		$	16,627	$	102,112		$	234	$	57,963		$	6,206		$	—	$	239,869

	ALC
	Year Ended December 31, 2016
	Construction, Land		1-4 Family			Real Estate Multi- Family		Non-Farm Non-Residential		Other		Commercial		Consumer			Indirect Sales			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	—	$	250		$	—	$	—	$	—	$	—	$	1,584		$	618		$	2,452
Charge-offs		—		(56	)		—		—		—		—		(2,218	)		(752	)		(3,026	)
Recoveries		—		39			—		—		—		—		451			220			710
Provision		—		(126	)		—		—		—		—		1,900			537			2,311
Ending balance	$	—	$	107		$	—	$	—	$	—	$	—	$	1,717		$	623		$	2,447

Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—	$	—	$	—		$	—		$	—
Collectively evaluated for impairment		—		107			—		—		—		—		1,717			623			2,447
Total allowance for loan losses	$	—	$	107		$	—	$	—	$	—	$	—	$	1,717		$	623		$	2,447
Ending balance of loans receivable:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—	$	—	$	—		$	—		$	—
Collectively evaluated for impairment		—		13,724			—		—		—		—		36,413			44,775			94,912
Total loans receivable	$	—	$	13,724		$	—	$	—	$	—	$	—	$	36,413		$	44,775		$	94,912

	Bank and ALC
	Year Ended December 31, 2016
	Construction, Land		1-4 Family			Real Estate Multi- Family		Non-Farm Non-Residential			Other		Commercial			Consumer			Indirect Sales			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	110	$	388		$	29	$	351		$	1	$	659		$	1,625		$	618		$	3,781
Charge-offs		—		(122	)		—		(40	)		—		(2	)		(2,261	)		(752	)		(3,177	)
Recoveries		200		62			—		—			—		73			501			220			1,056
Provision		225		83			59		592			1		(203	)		1,902			537			3,196
Ending balance	$	535	$	411		$	88	$	903		$	2	$	527		$	1,767		$	623		$	4,856

Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	423	$	5		$	—	$	107		$	—	$	—		$	—		$	—		$	535
Collectively evaluated for impairment		112		406			88		796			2		527			1,767			623			4,321
Total allowance for loan losses	$	535	$	411		$	88	$	903		$	2	$	527		$	1,767		$	623		$	4,856
Ending balance of loans receivable:
Individually evaluated for impairment	$	1,361	$	193		$	—	$	549		$	—	$	—		$	—		$	—		$	2,103
Collectively evaluated for impairment		22,411		46,486			16,627		101,563			234		57,963			42,619			44,775			332,678
Total loans receivable	$	23,772	$	46,679		$	16,627	$	102,112		$	234	$	57,963		$	42,619		$	44,775		$	334,781

Credit Quality Indicators

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

●

Pass (Risk Grades 1-5): 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 Bank management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Although a special mention asset has a higher probability of default than pass-rated categories, its default is not imminent.

●

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

●

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

●

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

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

The tables below illustrate the carrying amount of loans by credit quality indicator as of June 30, 2017.

	Bank
	Pass 1-5		Special Mention 6		Substandard 7		Doubtful 8		Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	10,961	$	—	$	1,463	$	—	$	12,424
Secured by 1-4 family residential properties		31,231		205		791		—		32,227
Secured by multi-family residential properties		16,702		—		—		—		16,702
Secured by non-farm, non-residential properties		110,263		2,236		538		—		113,037
Other		226		—		—		—		226
Commercial and industrial loans		62,717		2,142		228		—		65,087
Consumer loans		5,671		—		—		—		5,671
Total	$	237,771	$	4,583	$	3,020	$	—	$	245,374

	ALC
	Performing		Nonperforming		Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	12,058	$	171	$	12,229
Consumer loans:
Consumer		31,123		797		31,920
Indirect sales		51,609		525		52,134
Total	$	94,790	$	1,493	$	96,283

The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31, 2016.

	Bank
	Pass 1-5		Special Mention 6		Substandard 7		Doubtful 8		Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	22,240	$	—	$	1,532	$	—	$	23,772
Secured by 1-4 family residential properties		31,995		213		747		—		32,955
Secured by multi-family residential properties		16,627		—		—		—		16,627
Secured by non-farm, non-residential properties		99,082		2,315		715		—		102,112
Other		234		—		—		—		234
Commercial and industrial loans		55,481		2,227		255		—		57,963
Consumer loans		6,126		—		80		—		6,206
Total	$	231,785	$	4,755	$	3,329	$	—	$	239,869

	ALC
	Performing		Nonperforming		Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	13,507	$	217	$	13,724
Consumer loans:
Consumer		35,278		1,135		36,413
Indirect sales		44,228		547		44,775
Total	$	93,013	$	1,899	$	94,912

The following tables provide an aging analysis of past due loans by class as of June 30, 2017.

	Bank
	As of June 30, 2017
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days And Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	12,424	$	12,424	$	—
Secured by 1-4 family residential properties		32		46		45		123		32,104		32,227		—
Secured by multi-family residential properties		—		—		—		—		16,702		16,702		—
Secured by non-farm, non-residential properties		—		—		—		—		113,037		113,037		—
Other		—		—		—		—		226		226		—
Commercial and industrial loans		22		31		—		53		65,034		65,087		—
Consumer loans		3		24		—		27		5,644		5,671		—
Total	$	57	$	101	$	45	$	203	$	245,171	$	245,374	$	—

	ALC
	As of June 30, 2017
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days And Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		65		83		180		328		11,901		12,229		—
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans:
Consumer		545		302		742		1,589		30,331		31,920		—
Indirect sales		240		171		472		883		51,251		52,134		—
Total	$	850	$	556	$	1,394	$	2,800	$	93,483	$	96,283	$	—

The following tables provide an aging analysis of past due loans by class as of December 31, 2016.

	Bank
	As of December 31, 2016
	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	$	—	$	—	$	86	$	86	$	23,686	$	23,772	$	—
Secured by 1-4 family residential properties		164		69		145		378		32,577		32,955		—
Secured by multi-family residential properties		—		—		—		—		16,627		16,627		—
Secured by non-farm, non-residential properties		762		—		—		762		101,350		102,112		—
Other		—		—		—		—		234		234		—
Commercial and industrial loans		—		—		14		14		57,949		57,963		—
Consumer loans		—		28		—		28		6,178		6,206		—
Total	$	926	$	97	$	245	$	1,268	$	238,601	$	239,869	$	—

	ALC
	As of December 31, 2016
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days And Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		61		29		213		303		13,421		13,724		—
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans:
Consumer		441		413		1,104		1,958		34,455		36,413		—
Indirect sales		191		139		489		819		43,956		44,775		—
Total	$	693	$	581	$	1,806	$	3,080	$	91,832	$	94,912	$	—

The following table provides an analysis of non-accruing loans by class as of June 30, 2017 and December 31, 2016.

	Loans on Non-Accrual Status
	June 30, 2017		December 31, 2016
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	86
Secured by 1-4 family residential properties		507		570
Secured by multi-family residential properties		—		—
Secured by non-farm, non-residential properties		36		53
Commercial and industrial loans		16		32
Consumer loans:
Consumer		816		1,676
Indirect sales		472		—
Total loans	$	1,847	$	2,417

Impaired Loans

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

As of June 30, 2017, the carrying amount of impaired loans consisted of the following:

	June 30, 2017
Impaired loans with no related allowance recorded	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		—		—		—
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		—		—		—
Commercial and industrial		—		—		—
Total loans with no related allowance recorded	$	—	$	—	$	—

Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	1,296	$	1,296	$	414
Secured by 1-4 family residential properties		191		191		5
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		538		538		96
Commercial and industrial		70		70		45
Total loans with an allowance recorded	$	2,095	$	2,095	$	560

Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	1,296	$	1,296	$	414
Secured by 1-4 family residential properties		191		191		5
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		538		538		96
Commercial and industrial		70		70		45
Total impaired loans	$	2,095	$	2,095	$	560

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

	December 31, 2016
Impaired loans with no related allowance recorded	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		—		—		—
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		—		—		—
Commercial and industrial		—		—		—
Total loans with no related allowance recorded	$	—	$	—	$	—

Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	1,361	$	1,361	$	423
Secured by 1-4 family residential properties		193		193		5
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		549		549		107
Commercial and industrial		—		—		—
Total loans with an allowance recorded	$	2,103	$	2,103	$	535

Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	1,361	$	1,361	$	423
Secured by 1-4 family residential properties		193		193		5
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		549		549		107
Commercial and industrial		—		—		—
Total impaired loans	$	2,103	$	2,103	$	535

The average net investment in impaired loans and interest income recognized and received on impaired loans as of the six months ended June 30, 2017 and the year ended December 31, 2016 were as follows:

	June 30, 2017
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	1,340	$	20	$	20
Secured by 1-4 family residential properties		192		7		7
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		541		18		18
Commercial and industrial		47		4		2
Total	$	2,120	$	49	$	47

	December 31, 2016
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	1,381	$	41	$	39
Secured by 1-4 family residential properties		232		14		14
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		557		33		31
Commercial and industrial		—		—		—
Total	$	2,170	$	88	$	84

Loans on which the accrual of interest has been discontinued amounted to $1.8 million and $2.4 million as of June 30, 2017 and December 31, 2016, respectively. If interest on those loans had been accrued, there would have been $5 thousand and $35 thousand of interest accrued for the periods ended June 30, 2017 and December 31, 2016, respectively. Interest income related to these loans as of June 30, 2017 and December 31, 2016 was $3 thousand and $4 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 six-month period ended June 30, 2017. Restructured loans may involve loans remaining on non-accrual, moving to non-accrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Non-accrual restructured loans are included with all other non-accrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, then the loan remains on non-accrual. As of both June 30, 2017 and December 31, 2016, the Company had $0.1 million of non-accruing loans that were previously restructured and that remained on non-accrual status. For the six months ended June 30, 2017, the Company had no loans that were restored to accrual status based on a sustained period of repayment performance. For the year ended December 31, 2016, the Company had $0.3 million in restructured loans that were restored to accrual status based on a sustained period of repayment performance.

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

	June 30, 2017						December 31, 2016
	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		2	$	1,960	$	1,296		2	$	1,960	$	1,286
Secured by 1-4 family residential properties		3		318		211		3		318		249
Secured by non-farm, non-residential properties		1		53		39		1		53		41
Commercial loans		2		116		86		2		116		88
Total		8	$	2,447	$	1,632		8	$	2,447	$	1,664

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

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

All loans with a principal balance of $0.5 million or more that have been modified in a troubled debt restructuring are considered impaired and evaluated individually for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, are considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses attributable to such restructured loans of $8 thousand as of June 30, 2017 and $15 thousand as of December 31, 2016.

5.	OTHER REAL ESTATE OWNED

Other real estate and certain other assets acquired in foreclosure are reported at the lower of the investment in the loan or the fair value of the property, less estimated costs to sell. The following table summarizes foreclosed property activity for the six months ended June 30, 2017 and 2016:

	June 30, 2017
	Bank			ALC			Total
	(Dollars in Thousands)
Beginning balance	$	4,353		$	505		$	4,858
Transfers from loans		—			68			68
Sales proceeds		(369	)		(125	)		(494	)

Gross gains		14			—			14
Gross losses		(1	)		(48	)		(49	)
Net gains (losses)		13			(48	)		(35	)
Impairment		(46	)		—			(46	)
Ending balance	$	3,951		$	400		$	4,351

	June 30, 2016
	Bank			ALC			Total
	(Dollars in Thousands)
Beginning balance	$	5,327		$	711		$	6,038
Transfers from loans		269			68			337
Sales proceeds		(629	)		(251	)		(880	)

Gross gains		—			27			27
Gross losses		(23	)		(71	)		(94	)
Net gains (losses)		(23	)		(44	)		(67	)
Impairment		—			(23	)		(23	)
Ending balance	$	4,944		$	461		$	5,405

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. Fair value less estimated cost to sell of foreclosed residential real estate held by the Company was $0.8 million and $1.0 million as of June 30, 2017 and 2016, respectively. In addition, the Company held $0.1 million and $0.2 million in consumer mortgage loans collateralized by residential real estate that were in the process of foreclosure as of June 30, 2017 and 2016, respectively.

6.	INVESTMENT IN LIMITED PARTNERSHIP

The Company holds an investment in an affordable housing project for which it provides funding as a limited partner and has received tax credits related to its investment in the project based on its partnership share. The net assets of the partnership consist primarily of apartment complexes, and the primary liabilities consist of those associated with the operation of the partnership. The Company has determined that this investment requires consolidation as a variable interest entity under ASC Topic 810, Consolidation. The Company holds a 99.9% interest in the limited partnership. Assets recorded by the Company as a result of the consolidation were less than $0.1 million as of both June 30, 2017 and December 31, 2016.

7.	SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, and short-term Federal Home Loan Bank (“FHLB”) advances with original maturities of one year or less. Short-term borrowings totaled $10.7 million and $10.1 million as of June 30, 2017 and December 31, 2016, respectively.

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

Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The Bank monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements as of June 30, 2017 and December 31, 2016 totaled $0.7 million and $0.1 million, respectively.

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

8.	LONG-TERM DEBT

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

Assets pledged associated with FHLB advances totaled $23.0 million and $28.0 million as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017 and December 31, 2016, the Company had $165.8 million and $155.0 million, respectively, in remaining credit from the FHLB (subject to available collateral).

9.	INCOME TAXES

The provision for income taxes was $0.3 million and $0.2 million for the six-month periods ended June 30, 2017 and 2016, respectively. The Company’s effective tax rate was 24.2% and 23.9%, 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 investments and loan income.

The Company had a net deferred tax asset of $7.7 million and $8.7 million as of June 30, 2017 and December 31, 2016, respectively. The reduction in the net deferred tax asset resulted primarily from the impact of changes in the fair value of securities available-for-sale.

10.	DEFERRED COMPENSATION PLANS

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

Non-employee directors may elect to defer payment of all or any portion of their Bancshares and Bank director fees under Bancshares’ Non-Employee Directors’ Deferred Compensation Plan (the “Deferral Plan”). The Deferral Plan, which was ratified by shareholders at the annual meeting held on May 11, 2004, permits non-employee directors to invest their directors’ fees and to receive the adjusted value of the deferred amounts in cash and/or shares of Bancshares’ common stock. Neither Bancshares nor the Bank makes any contribution to participants’ accounts under the Deferral Plan. As of June 30, 2017 and December 31, 2016, a total of 102,969 and 114,547 shares of stock, respectively, were deferred in connection with the Deferral Plan. All deferred fees, whether in the form of cash or shares of stock, are reflected as compensation expense in the period earned. The Company classifies all deferred directors' fees allocated to be paid in shares of stock as equity surplus. The Company uses shares of treasury stock to satisfy these obligations when due.

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 $0.1 million for both of the six-month periods ended June 30, 2017 and 2016.

Stock Options

The stock option awards were 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 based on the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock.

	2017			2016
Risk-free interest rate		2.23	%		1.58	%
Expected term	7.5 years			7.5 years
Expected stock price volatility		25.36	%		25.25	%
Dividend yield		1.50	%		1.50	%

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

	Six Months Ended
	June 30, 2017				June 30, 2016
	Number of Shares		Average Exercise Price		Number of Shares		Average Exercise Price
Options:
Outstanding, beginning of period		272,550	$	8.21		175,550	$	8.17
Granted		68,600		13.91		97,000		8.30
Exercised		19,316		8.15		—		—
Expired		—		—		—		—
Forfeited		3,333		11.79		—		—
Options outstanding, end of period		318,501	$	9.41		272,550	$	8.21
Options exercisable, end of period		208,633	$	8.20		175,550	$	8.17

The aggregate intrinsic value of stock options outstanding (calculated as the amount by which the market value of underlying stock exceeds the exercise price of the option) was approximately $0.1 million as of both June 30, 2017 and 2016.

Restricted Stock

During the first six months of 2017, 7,533 shares of restricted stock were granted with vesting periods of either one or three years. No shares of restricted stock were granted during the six months ended June 30, 2016. 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.	DERIVATIVE FINANCIAL INSTRUMENTS

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

No ineffectiveness related to the interest rate swap designated as a cash flow hedge was recognized in the consolidated statements of operations for the three- or six-month periods ended June 30, 2017. The accumulated net after-tax gain related to the effective cash flow hedge included in accumulated other comprehensive income totaled $0.2 million as of both June 30, 2017 and December 31, 2016.

13.	SEGMENT REPORTING

Under ASC Topic 280, Segment Reporting, certain information is disclosed for the two reportable operating segments of Bancshares: the Bank and ALC. The reportable segments were determined using the internal management reporting system. These segments comprise Bancshares’ and the Bank’s significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016. 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 June 30, 2017:
Net interest income	$	4,066	$	2,988	$	3		$	—		$	7,057
Provision (reduction in reserve) for loan losses		—		576		—			—			576
Total non-interest income		806		237		647			(760	)		930
Total non-interest expense		4,422		2,286		310			(155	)		6,863
Income before income taxes		450		363		340			(605	)		548
Provision for income taxes		103		126		(97	)		—			132
Net income	$	347	$	237	$	437		$	(605	)	$	416
Other significant items:
Total assets	$	618,431	$	91,629	$	83,655		$	(177,497	)	$	616,218
Total investment securities		200,751		—		80			—			200,831
Total loans, net		321,797		88,049		—			(79,320	)		330,526
Investment in subsidiaries		5		—		78,036			(78,036	)		5
Fixed asset additions		3,735		28		—			—			3,763
Depreciation and amortization expense		218		42		—			—			260
Total interest income from external customers		3,506		4,177		—			—			7,683
Total interest income from affiliates		1,189		—		3			(1,192	)		—

For the six months ended June 30, 2017:
Net interest income	$	7,977	$	5,993	$	6		$	—		$	13,976
Provision (reduction in reserve) for loan losses		—		1,091		—			—			1,091
Total non-interest income		1,642		480		1,498			(1,523	)		2,097
Total non-interest expense		8,823		4,662		739			(324	)		13,900
Income before income taxes		796		720		765			(1,199	)		1,082
Provision for income taxes		201		256		(195	)		—			262
Net income	$	595	$	464	$	960		$	(1,199	)	$	820
Other significant items:
Fixed asset additions		7,760		90		—			—			7,850
Depreciation and amortization expense		419		83		—			—			502
Total interest income from external customers		6,897		8,296		—			—			15,193
Total interest income from affiliates		2,302		—		6			(2,308	)		—


						All
	Bank			ALC		Other			Eliminations			Consolidated
	(Dollars in Thousands)
As of and for the three months ended June 30, 2016:
Net interest income	$	3,683		$	3,231	$	3		$	—		$	6,917
Provision (reduction in reserve) for loan losses		(170	)		706		—			—			536
Total non-interest income		1,120			342		834			(816	)		1,480
Total non-interest expense		4,463			2,478		458			(144	)		7,255
Income before income taxes		510			389		379			(672	)		606
Provision for income taxes		123			130		(109	)		—			144
Net income	$	387		$	259	$	488		$	(672	)	$	462
Other significant items:
Total assets	$	603,722		$	89,758	$	83,936		$	(175,662	)	$	601,754
Total investment securities		213,085			—		80			—			213,165
Total loans, net		290,473			86,006		—			(77,578	)		298,901
Investment in subsidiaries		5			—		78,511			(78,511	)		5
Fixed asset additions		337			12		—			—			349
Depreciation and amortization expense		191			56		—			—			247
Total interest income from external customers		3,211			4,267		—			—			7,478
Total interest income from affiliates		1,036			—		3			(1,039	)		—

For the six months ended June 30, 2016:
Net interest income	$	7,281		$	6,291	$	6		$	—		$	13,578
Provision (reduction in reserve) for loan losses		(450	)		1,153		—			—			703
Total non-interest income		1,842			593		1,508			(1,474	)		2,469
Total non-interest expense		8,798			4,904		898			(279	)		14,321
Income before income taxes		775			827		616			(1,195	)		1,023
Provision for income taxes		171			288		(215	)		—			244
Net income	$	604		$	539	$	831		$	(1,195	)	$	779
Other significant items:
Fixed asset additions		3,561			17		—			—			3,578
Depreciation and amortization expense		371			108		—			—			479
Total interest income from external customers		6,335			8,339		—			—			14,674
Total interest income from affiliates		2,048			—		5			(2,053	)		—

14.	GUARANTEES, COMMITMENTS AND CONTINGENCIES

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

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

	June 30, 2017		December 31, 2016
	(Dollars in Thousands)
Standby letters of credit	$	180	$	183
Commitments to extend credit	$	57,476	$	41,267

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

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

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

The Company is self-insured for a significant portion of employee health benefits. However, we maintain stop-loss coverage with third party insurers to limit our individual claim and total exposure related to self-insurance. We estimate our accrued liability for the ultimate costs to close known claims, as well as claims incurred but not yet reported, as of the balance sheet date. Our recorded estimated liability for self-insurance is based on the insurance companies’ incurred loss estimates and management’s judgment, including assumptions and factors related to the frequency and severity of claims, our claims development history and our 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. The ultimate settlement of loss contingencies and self-insurance reserves may differ significantly from amounts we have accrued in our consolidated financial statements.

In 2016, the Bank entered into an agreement with a general contractor to manage construction of an office complex on a parcel of land located in the Birmingham, Alabama area that was purchased by the Bank in 2016. As of June 30, 2017, construction of the office complex was nearing completion. Approximately $10.1 million in cost had been incurred under the contract with the general contractor as of June 30, 2017 and was included on the balance sheet in premises and equipment. Remaining contractual commitments with the general contractor totaled $0.6 million.

Litigation

The Company is 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.

15.	FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Fair Value Hierarchy

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

●

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

●

Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-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 six months ended June 30, 2017 or the year ended December 31, 2016.

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.

The following table presents assets measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016. There were no liabilities measured at fair value on a recurring basis for either period presented.

	Fair Value Measurements as of June 30, 2017 Using
	Totals At June 30, 2017		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Investment securities, available-for-sale
Mortgage-backed securities:
Residential	$	90,568	$	—	$	90,568	$	—
Commercial		72,080		—		72,080		—
Obligations of states and political subdivisions		7,557		—		7,557		—
Obligations of U.S. government-sponsored agencies		2,002		—		2,002		—
U.S. Treasury securities		80		—		80		—
Other assets - derivatives		293		—		293		—

	Fair Value Measurements as of December 31, 2016 Using
	Totals At December 31, 2016		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Investment securities, available-for-sale
Mortgage-backed securities:
Residential	$	98,409	$	—	$	98,409	$	—
Commercial		70,530		—		70,530		—
Obligations of states and political subdivisions		10,142		—		10,142		—
Obligations of U.S. government-sponsored agencies		1,993		—		1,993		—
Corporate notes		756		—		756		—
U.S. Treasury securities		80		—		80		—
Other assets - derivatives		346		—		346		—

Fair Value Measurements 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

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is recorded at the lower of the loan’s carrying amount or the fair value of the property, 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.

Other Assets

Included within other assets are certain assets that were formerly included as premises and equipment but have been removed from service, and as of the balance sheet date, were designated as assets to be disposed of by sale. These include assets associated with branches of the Bank that have been closed. When an asset is designated as held for sale, the Company ceases depreciation of the asset, and the asset is recorded at the lower of its carrying amount or fair value less estimated cost to sell. Estimates of fair value are generally based on third-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 measured at fair value on a non-recurring basis as of June 30, 2017 and December 31, 2016.

	Fair Value Measurements as of June 30, 2017 Using
	Totals At June 30, 2017		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Impaired loans	$	1,535	$	—	$	—	$	1,535
OREO		4,351		—		—		4,351
Other assets		280		—		—		280

	Fair Value Measurements as of December 31, 2016 Using
	Totals At December 31, 2016		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Impaired loans	$	1,568	$	—	$	—	$	1,568
OREO		4,858		—		—		4,858
Other assets		280		—		—		280

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 June 30, 2017. 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 June 30, 2017 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 June 30, 2017		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs (Weighted Average)
	(Dollars in Thousands)
Non-recurring fair value measurements:

Impaired loans	$	1,535	Multiple data points, including discount to appraised value of collateral based on recent market activity	Appraisal comparability adjustment (discount)	9% - 10% (9.5%)

OREO	$	4,351	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal comparability adjustment (discount)	9% - 10% (9.5%)

Other assets	$	280	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

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

Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. 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: For variable-rate loans, fair values are based on carrying values. Fixed-rate commercial loans, other installment loans and certain real estate mortgage loans are valued using discounted cash flows. The discount rate used to determine the present value of these loans is based on interest rates charged by the Company on comparable loans as to credit risk and term at the determination date.

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

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

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

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

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 June 30, 2017 and December 31, 2016 were as follows:

	June 30, 2017
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	26,727	$	26,727	$	26,727	$	—	$	—
Investment securities available-for-sale		172,287		172,287		—		172,287		—
Investment securities held-to-maturity		28,544		28,496		—		28,496		—
Federal Home Loan Bank stock		1,396		1,396		—		—		1,396
Loans, net of allowance for loan losses		330,526		321,440		—		—		321,440
Other liabilities - derivatives		293		293		—		293		—
Liabilities:
Deposits		509,245		508,283		—		508,283		—
Short-term borrowings		10,692		10,692		—		10,692		—
Long-term debt		10,000		10,002		—		10,002		—

	December 31, 2016
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	23,530	$	23,530	$	23,530	$	—	$	—
Investment securities available-for-sale		181,910		181,910		—		181,910		—
Investment securities held-to-maturity		25,904		25,508		—		25,508		—
Federal Home Loan Bank stock		1,581		1,581		—		—		1,581
Loans, net of allowance for loan losses		322,772		319,881		—		—		319,881
Other assets – derivatives		346		346		—		346		—
Liabilities:
Deposits		497,556		497,037		—		497,037		—
Short-term borrowings		10,119		10,119		—		10,119		—
Long-term debt		15,000		14,998		—		14,998		—

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”), is a bank holding company with its principal offices in Thomasville, Alabama. Bancshares operates one commercial banking subsidiary, First US Bank (the “Bank”). As of June 30, 2017, the Bank operated and served its customers through fifteen banking offices located in Bucksville, Butler, Calera, Centreville, Columbiana, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama, in addition to a loan production office in Jefferson County, Alabama, that opened in April 2016.

The Bank owns all of the stock of Acceptance Loan Company, Inc., an Alabama corporation (“ALC”). ALC is a finance company organized for the purpose of making and purchasing consumer loans. ALC’s principal office is located in Mobile, Alabama. The Bank is the funding source for ALC. As of June 30, 2017, in addition to its principal office, ALC operated twenty-one offices located in Alabama and southeast Mississippi.

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

FUSB Reinsurance, Inc., an Arizona corporation and a wholly owned subsidiary of the Bank (“FUSB Reinsurance”), reinsures or “underwrites” credit life and credit accident and health insurance policies sold to the Bank’s and ALC’s consumer loan customers. FUSB Reinsurance is responsible for the first level of risk on these policies up to a specified maximum amount, and a primary third-party insurer retains the remaining risk. The third-party insurer is also responsible for performing most of the administrative functions of FUSB Reinsurance on a contract basis.

Delivery of the best possible financial services to customers remains an overall operational focus of Bancshares and its subsidiaries (collectively, the “Company”). We recognize 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 256 full-time equivalent employees, to ensure customer satisfaction and convenience.

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general banking practices. These estimates include accounting for the allowance for loan losses, other real estate owned, valuation of deferred tax assets and fair value measurements. A description of these estimates, which significantly affect the determination of the Company’s consolidated financial position, results of operations and cash flows, is set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2016.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of June 30, 2017 to December 31, 2016, while comparing income and expense for the six-month periods ended June 30, 2017 and 2016.

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

This information should be read in conjunction with the Company’s unaudited consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2016.

EXECUTIVE OVERVIEW

The Company earned net income of $0.06 per diluted common share during the three months ended June 30, 2017, compared to $0.07 per diluted common share during the corresponding three-month period of 2016. For the six months ended June 30, 2017, net income totaled $0.13 per diluted common share, compared to $0.12 per diluted common share for the corresponding six-month period of 2016.

The composition of earnings changed significantly during both the three- and six-month periods ended June 30, 2017, compared to the corresponding periods of the previous year. The 2017 results were positively impacted by increased pre-provision net interest income as a result of growth in net loans, as well as decreases in non-interest expenses, including regulatory assessments, insurance expense and occupancy and equipment expense. By contrast, the 2016 results were bolstered by one-time gains on sale of securities and reductions in loan loss reserves that were not repeated in 2017.

As of June 30, 2017, the Company’s net loans totaled $330.5 million, an increase of $7.8 million and $31.6 million compared to December 31, 2016 and June 30, 2016, respectively. The majority of loan growth occurred in the Bank’s commercial loan portfolio, and was concentrated in the Bank’s larger metropolitan service territories of Birmingham and Tuscaloosa, Alabama. The Bank’s commercial loan growth strategy has been focused on these larger metropolitan growth markets over the previous 12 to 24 months. Consistent with that strategy, during the third quarter of 2017, the Bank substantially completed construction of an office complex along U.S. Highway 280 in Birmingham. The office complex houses a retail branch of the Bank, as well as the Birmingham commercial lending team and certain members of the Bank’s executive management team. The office complex is intended to significantly enhance the Bank’s growth opportunities in the Birmingham area.

Additional financial results for the first six months of 2017 are summarized below.

●

For the six months ended June 30, 2017, pre-provision net interest income totaled $14.0 million, compared to $13.6 million during the same period of the previous year. The increase in net interest income resulted from growth in the loan portfolio. Average loans totaled $325.4 million and $268.0 million during the six months ended June 30, 2017 and 2016, respectively.

●

Due to growth of the loan portfolio, certain investment security assets were redeployed into the loan portfolio upon maturity or prepayment. As a result of this shift in earning assets to higher-yielding loans, the average balance of the investment securities portfolio (including both available-for-sale and held-to-maturity securities) decreased to $209.9 million for the six months ended June 30, 2017, compared to $236.1 million for the six months ended June 30, 2016.

●

Net yield on interest-earning assets was 5.07% for the six months ended June 30, 2017, compared to 5.15% for the six months ended June 30, 2016. Yields declined at the Bank and ALC as a result of continued efforts by management at both entities to adhere to practices designed to improve the credit quality of the Company’s loan portfolio. The Bank’s yield on loans totaled 4.10% for the six months ended June 30, 2017, compared to 4.43% for the first six months of 2016. ALC’s yield totaled 19.06% and 19.89% during the six months ended June 30, 2017 and 2016, respectively. The yield reduction at ALC was underscored by a continued mix-shift away from traditional consumer loans to point-of-sale retail lending, which provides higher credit quality, but at reduced yields. Average cost of funds on deposits and other borrowings was 0.55% and 0.52% during the six months ended June 30, 2017 and 2016, respectively.

●

For the six months ended June 30, 2017, the provision for loan losses totaled $1.1 million, compared to $0.7 million for the six months ended June 30, 2016. The increase in the provision in 2017 compared to the 2016 period resulted from reductions in reserves that occurred at the Bank in 2016 that were not repeated in 2017. The allowance for loan losses as a percentage of loans was 1.46% as of June 30, 2017, compared to 1.48% as of December 31, 2016.

●

Non-interest income decreased to $2.1 million for the six months ended June 30, 2017, compared to $2.5 during the corresponding period of 2016. The decrease was primarily due to reductions in gains on sale and prepayments of investment securities totaling $0.3 million. In addition, other income decreased by $0.1 million as a result of reductions in certain ancillary service revenues at ALC.

●

Non-interest expense decreased to $13.9 million for the six months ended June 30, 2017, compared to $14.3 million for the corresponding period of 2016. The decrease was due to reductions in insurance and regulatory assessments, as well as occupancy and equipment expenses, postage, stationery and supplies, and fees for professional services. These reductions were partially offset by an increase in salary and employee benefits of 3.3% for the six months ended June 30, 2017 compared to the corresponding period of 2016.

●

The Company continued to experience improvement in asset quality metrics during the first six months of 2017. Non-performing assets, including loans in non-accrual status and OREO, decreased to 1.01% of total assets as of June 30, 2017, compared to 1.20% as of December 31, 2016, and 1.33% as of June 30, 2016.

●

Premises and equipment increased by $7.4 million during the first six months of 2017 due to capital expenditures associated with the Bank’s new office complex in the Birmingham, Alabama area.

●

Deposits increased to $509.2 million as of June 30, 2017, compared to $497.6 million as of December 31, 2016 and $495.6 million as of June 30, 2016. Short and long-term borrowings totaled $20.7 million as of June 30, 2017, compared to $25.1 million as of December 31, 2016.

The Company continues to maintain excess funding capacity to provide adequate liquidity for loan growth, capital expenditures and ongoing operations. The Company benefits from a strong deposit base, a liquid investment securities portfolio and access to funding from a variety of sources, including federal funds lines, Federal Home Loan Bank (“FHLB”) advances and brokered deposits. Management believes that continued success in loan growth efforts at both the Bank and ALC, combined with continued adherence to established credit underwriting standards, will strengthen both the diversity and credit quality of the Company’s loan portfolio, while improving interest and fee income on loans.

RESULTS OF OPERATIONS

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2017		2016		2017		2016
	(Dollars in Thousands)
Interest income	$	7,683	$	7,478	$	15,193	$	14,674
Interest expense		626		561		1,217		1,096
Net interest income		7,057		6,917		13,976		13,578
Provision for loan losses		576		536		1,091		703
Net interest income after provision for loan losses		6,481		6,381		12,885		12,875
Non-interest income		930		1,480		2,097		2,469
Non-interest expense		6,863		7,255		13,900		14,321
Income before income taxes		548		606		1,082		1,023
Provision for income taxes		132		144		262		244
Net income	$	416	$	462	$	820	$	779

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 are comprised of loans at both the Bank and ALC, as well as taxable and nontaxable investments and federal funds sold by the Bank. Interest-bearing liabilities are comprised of interest-bearing demand deposits and savings and time deposits, as well as short-term borrowings and long-term debt. Net interest income for the Company increased $0.1 million, or 2.0%, for the three months ended June 30, 2017 compared to the three months ended June 30, 2016. Net interest income for the Company increased $0.4 million, or 2.9%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016.

The following tables show the average balances of each principal category of assets, liabilities and shareholders’ equity for the three- and six-month periods ended June 30, 2017 and 2016. Additionally, the tables provide an analysis of interest revenue or expense associated with each category, along with the accompanying yield or rate percentage. Net yield is calculated for each period presented as net interest income divided by average total interest-earning assets.

	Three Months Ended							Three Months Ended
	June 30, 2017							June 30, 2016
	Average Balance		Interest		Annualized Yield/ Rate %			Average Balance		Interest		Annualized Yield/ Rate %
	(Dollars in Thousands)
ASSETS
Interest-earning assets:
Loans – Bank (Note A)	$	237,546	$	2,453		4.14	%	$	191,262	$	2,099		4.39	%
Loans – ALC (Note A)		88,112		4,177		19.01	%		84,595		4,267		20.18	%
Taxable investment securities		200,302		918		1.84	%		221,737		939		1.69	%
Non-taxable investment securities		8,668		80		3.70	%		15,105		131		3.47	%
Federal funds sold		—		—		—	%		923		1		—	%
Interest-bearing deposits in banks		21,050		55		1.06	%		19,098		41		0.86	%
Total interest-earning assets		555,678		7,683		5.55	%		532,720		7,478		5.61	%
Non-interest-earning assets:
Other assets		55,526							50,015
Total	$	611,204						$	582,735
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	163,825	$	158		0.39	%	$	148,709	$	132		0.35	%
Savings deposits		81,459		43		0.21	%		78,276		36		0.19	%
Time deposits		182,982		367		0.80	%		179,572		345		0.77	%
Borrowings		19,151		58		1.21	%		16,613		48		1.13	%
Total interest-bearing liabilities		447,417		626		0.56	%		423,170		561		0.53	%
Non-interest-bearing liabilities:
Demand deposits		79,040							74,428
Other liabilities		6,717							6,839
Shareholders’ equity		78,030							78,298
Total	$	611,204						$	582,735
Net interest income (Note B)			$	7,057						$	6,917
Net yield on interest-earning assets						5.09	%						5.19	%

Note A

—

For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. At the Bank, these loans averaged $0.5 million and $1.2 million for the three months ended June 30, 2017 and 2016, respectively. At ALC, these loans averaged $1.5 million for both of the respective periods presented.

Note B

—

Loan fees are included in the interest amounts presented. At the Bank, loan fees totaled $0.1 million for both of the three-month periods ended June 30, 2017 and 2016. At ALC, loan fees totaled $0.5 million and $0.7 million for the respective periods presented.

	Six Months Ended							Six Months Ended
	June 30, 2017							June 30, 2016
	Average Balance		Interest		Annualized Yield/ Rate %			Average Balance		Interest		Annualized Yield/ Rate %
	(Dollars in Thousands)
ASSETS
Interest-earning assets:
Loans – Bank (Note A)	$	237,625	$	4,830		4.10	%	$	184,176	$	4,080		4.43	%
Loans – ALC (Note A)		87,761		8,296		19.06	%		83,847		8,339		19.89	%
Taxable investment securities		200,536		1,802		1.81	%		220,039		1,888		1.72	%
Non-taxable investment securities		9,378		170		3.66	%		16,018		276		3.45	%
Federal funds sold		—		—		—	%		1,923		5		0.52	%
Interest-bearing deposits in banks		20,396		95		0.94	%		21,736		86		0.79	%
Total interest-earning assets		555,697		15,193		5.51	%		527,739		14,674		5.56	%
Non-interest-earning assets:
Other assets		54,602							49,019
Total	$	610,299						$	576,758
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	161,938	$	303		0.38	%	$	148,049	$	270		0.36	%
Savings deposits		79,430		80		0.20	%		76,903		71		0.19	%
Time deposits		183,667		713		0.78	%		180,131		695		0.77	%
Borrowings		22,358		121		1.09	%		13,029		60		0.92	%
Total interest-bearing liabilities		447,393		1,217		0.55	%		418,112		1,096		0.52	%
Non-interest-bearing liabilities:
Demand deposits		78,105							73,241
Other liabilities		7,193							7,666
Shareholders’ equity		77,608							77,739
Total	$	610,299						$	576,758
Net interest income (Note B)			$	13,976						$	13,578
Net yield on interest-earning assets						5.07	%						5.15	%

Note A

—

For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. At the Bank, these loans averaged $0.6 million and $1.3 million for the six months ended June 30, 2017 and 2016, respectively. At ALC, these loans averaged $1.5 million and $1.7 million for the respective periods presented.

Note B

—

Loan fees are included in the interest amounts presented. At the Bank, loan fees totaled $0.2 million for both of the six-month periods ended June 30, 2017 and 2016. At ALC, loan fees totaled $1.1 million and $1.0 million for the respective periods presented.

Interest income for the Company increased $0.2 million and $0.5 million comparing the three and six months ended June 30, 2017 to the three and six months ended June 30, 2016. The increase resulted from increases in average loan balances at both the Bank and ALC. The Bank’s average loan balance increased $46.3 million and $53.4 million comparing the three and six months ended June 30, 2017 to the three and six months ended June 30, 2016, while ALC’s average loan balances increased $3.5 million and $3.9 million comparing the three and six months ended June 30, 2017 to the corresponding periods of 2016. These volume increases were partially offset by decreases in the average balances of taxable and non-taxable investments and federal funds sold. The shift in the mix of earning assets is consistent with management’s ongoing strategy to utilize cash flows from the maturity and paydown of investment securities to fund loan growth as opportunities permit. The investment portfolio has been structured to provide monthly cash flows through the maturity and paydown of securities in a manner that management believes can continue to fund a substantial portion of loan growth over time.

At both the Bank and ALC, the increases in interest income that resulted from growth in average loans for the three and six months ended June 30, 2017 were partially offset by reductions in yield. The yield reductions resulted from management’s strategic efforts to focus on problem asset resolution and the improvement of the credit quality of the loan portfolio through the tightening of credit standards at both entities. These activities have been ongoing for the past several years and have resulted in significant improvement in the credit quality of the loan portfolio, with a corresponding decrease in yield commensurate with reduced risk.

Comparing the three and six months ended June 30, 2017 and 2016, interest expense increased modestly due primarily to increased volume of interest-bearing deposits and borrowings. Average interest-bearing deposits and borrowings increased $21.7 million and $2.5 million, respectively, comparing the three months ended June 30, 2017 to the three months ended June 30, 2016 and increased $20.0 million and $9.3 million, respectively, comparing the six months ended June 30, 2017 to the six months ended June 30, 2016.

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

Provision (Reduction in Reserve) for Loan Losses

The provision for loan losses is an expense used to establish the allowance for loan losses. Actual loan losses, net of recoveries, are charged directly to the allowance for loan losses. The expense recorded for each reporting period is a reflection of actual net losses experienced during the period and management’s judgment as to the adequacy of the allowance to absorb losses inherent in the portfolio as of the balance sheet date. The Company’s provision for loan losses was $0.6 million and $1.1 million for the three and six months ended June 30, 2017, respectively, compared to $0.5 million and $0.7 million for the three and six months ended June 30, 2016, respectively.

The following table presents the provision (reduction in reserve) for loan losses for the Bank and ALC for the three and six months ended June 30, 2017 and 2016.

	Three Months Ended					Six Months Ended
	June 30,		June 30,			June 30,		June 30,
	2017		2016			2017		2016
Bank	$	—	$	(170	)	$	—	$	(450	)
ALC		576		706			1,091		1,153
Total	$	576	$	536		$	1,091	$	703

At the Bank, no provision for loan losses was recorded during the three and six months ended June 30, 2017, compared to a reduction in the reserve of $0.2 million and $0.5 million during the three and six months ended June 30, 2016. The Bank experienced net recoveries of $5 thousand and $0.1 million during the three and six months ended June 30, 2017, respectively, compared to $0.2 million and $0.3 million during the three and six months ended June 30, 2016, respectively. The reduction in reserve that was experienced during the second quarter of 2016 resulted from improvement in the overall credit quality of the Bank’s loan portfolio, including declining historical loss rates used in the calculation of the allowance for loan losses. During the second quarter of 2017, the Bank’s historical loss rates remained low; however, given the significant loan growth experienced by the Bank during 2016, management determined it was appropriate to maintain loan loss reserves at higher levels to address inherent uncertainty related to portfolio growth. The Bank’s allowance for loan losses as a percentage of loans totaled 1.03% as of June 30, 2017, compared to 1.01% as of December 31, 2016 and 0.53% as of June 30, 2016.

At ALC, the provision for loan losses decreased to $0.6 million and $1.1 million from $0.7 million and $1.2 million comparing the three and six months ended June 30, 2017 to the three and six months ended June 30, 2016, respectively. The decrease resulted primarily from increased credit quality in ALC’s loan portfolio, resulting in lower historical loss rates used in the calculation of the allowance for loan losses. ALC experienced net charge-offs of $0.6 million and $1.2 million during both the three- and six-month periods ended June 30, 2017 and 2016. ALC’s allowance for loan losses as a percentage of loans totaled 2.63% as of June 30, 2017, compared to 2.78% as of December 31, 2016 and 2.77% as of June 30, 2016.

Based on our evaluation of the loan portfolio, we believe that the allowance for loan losses at both the Bank and ALC is adequate to absorb losses inherent in the loan portfolio as of June 30, 2017. While we believe that the methodologies and calculations that have been used in the determination of the allowance are adequate, our conclusions are based on estimates and judgments and are, therefore, approximate and imprecise. Factors beyond our control, such as changes in economic conditions impacting the national economy or the local service areas in which the Bank and ALC operate, may negatively and materially affect asset quality and the adequacy of the allowance for loan losses, as well as the resulting provision for loan losses.

Non-Interest Income

Non-interest income represents fees and income derived from sources other than interest-earning assets. The following table presents the major components of non-interest income. Expanded discussion of certain significant non-interest income items and fluctuations is provided below the table.

	Three Months Ended June 30,											Six Months Ended June 30,
	2017		2016		$ Change			% Change				2017		2016		$ Change			% Change
	(Dollars in Thousands)											(Dollars in Thousands)
Service charges and other fees on deposit accounts	$	461	$	426	$	35			8.2		%	$	925	$	843	$	82			9.7		%
Credit insurance commissions and fees		43		162		(119	)		(73.5	)	%		299		314		(15	)		(4.8	)	%
Bank-owned life insurance		106		105		1			1.0		%		211		210		1			0.5		%
Net gain on sale and prepayment of investment securities		1		396		(395	)		(99.7	)	%		50		398		(348	)		(87.4	)	%
Other income		319		391		(72	)		(18.4	)	%		612		704		(92	)		(13.1	)	%
Total non-interest income	$	930	$	1,480	$	(550	)		(37.2	)	%	$	2,097	$	2,469	$	(372	)		(15.1	)	%

Service Charges and Other Fees on Deposit Accounts

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

Credit Insurance Commissions and Fees

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

Bank-owned Life Insurance

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

Net Gain on Sale and Prepayment of Investment Securities

The investment securities portfolio is used by management to provide liquidity, to generate interest income, and for use as collateral for public deposits and wholesale funding. Management reviews the securities in the investment portfolio periodically and, from time to time, may determine that it is appropriate to sell securities that are designated as securities available-for-sale. When this occurs, a gain or loss is recorded as the difference between the fair value of the security on the date of sale and the security’s carrying value. In addition, a gain may be recognized for prepayment penalties earned by the Company when a security is called by the debtor prior to its maturity date. During the six months ended June 30, 2017, no securities were sold from the investment securities portfolio. Approximately $50 thousand was recognized during the period as a result of prepayment penalties earned. During the six months ended June 30, 2016, approximately $0.4 million in gains were recognized resulting primarily from the sale of securities available-for-sale. Because determinations of whether to sell investment securities are made by management based on specific facts and circumstances at a given point in time, no assessment can be made as to the level of gains or losses that could be incurred related to sales of investment securities or prepayment penalties in the future.

Other Income

Other non-interest income includes fee income generated by the Bank for ancillary services, such as letters of credit, ATMs, debit and credit cards, wire transfers and real estate rental. In addition, other non-interest income is generated at ALC for ancillary services, including ALC’s auto club membership program, which provides members with emergency roadside assistance, lock and key services and reimbursement for emergency travel expenses. The decrease in other non-interest income during the three and six months ended June 30, 2017 compared to the corresponding periods of 2016 resulted primarily from reductions in ACH fees and services at the Bank and in ALC’s auto club membership revenue. Given the nature of the types of revenues categorized as other income, there is uncertainty as to the level of revenue that will be derived from these sources in the future.

Non-Interest Expense

Non-interest expense represents expenses incurred from sources other than interest-bearing liabilities. The following table presents the major components of non-interest expense for the periods indicated. Expanded discussion of certain significant non-interest expense items and fluctuations is provided below the table.

	Three Months Ended June 30,											Six Months Ended June 30,
	2017		2016		$ Change			% Change				2017		2016		$ Change			% Change
	(Dollars in Thousands)											(Dollars in Thousands)
Salaries and employee benefits	$	4,280	$	4,236	$	44			1.0		%	$	8,678	$	8,400	$	278			3.3		%
Net occupancy and equipment expense		693		782		(89	)		(11.4	)	%		1,470		1,551		(81	)		(5.2	)	%
Computer services		312		317		(5	)		(1.6	)	%		698		656		42			6.4		%
Insurance expense and assessments		157		251		(94	)		(37.5	)	%		318		520		(202	)		(38.8	)	%
Fees for professional services		230		294		(64	)		(21.8	)	%		463		516		(53	)		(10.3	)	%
Postage, stationery and supplies		150		187		(37	)		(19.8	)	%		304		378		(74	)		(19.6	)	%
Telephone/data communications		201		164		37			22.6		%		422		338		84			24.9		%
Other real estate/foreclosure expense:
Write-downs, net of gain or loss on sale		78		76		2			2.6		%		81		90		(9	)		(10.0	)	%
Carrying costs		55		53		2			3.8		%		136		156		(20	)		(12.8	)	%
Total other real estate/foreclosure expense		133		129		4			3.1		%		217		246		(29	)		(11.8	)	%
Other		707		895		(188	)		(21.0	)	%		1,330		1,716		(386	)		(22.5	)	%
Total non-interest expense	$	6,863	$	7,255	$	(392	)		(5.4	)	%	$	13,900	$	14,321	$	(421	)		(2.9	)	%

Salaries and Employee Benefits

Salaries and employee benefits expense, the largest category of non-interest expense, totaled $2.8 million at the Bank and $1.4 million at ALC for the second quarter of 2017, compared to $2.7 million at the Bank and $1.5 million at ALC during the second quarter of 2016. For the six-month period ended June 30, 2017, salaries and benefits expense totaled $5.7 million at the Bank and $2.9 million at ALC, compared to $5.4 million at the Bank and $3.0 million at ALC for the six-month period ended June 30, 2016. The expense amounts for the Bank are inclusive of salaries and benefits paid to certain members of management and employees for work performed on behalf of Bancshares, as well as current and deferred fees paid to members of the Bank’s and Bancshares’ Boards of Directors. The increase in this category of expense for the second quarter of 2017 compared to the second quarter of 2016 resulted primarily from the addition of reserves for self-insurance, as well as increases in estimated management incentive payments. Effective during the first quarter of 2017, the Company converted to a self-insured healthcare benefits plan for employees of both the Bank and ALC. Over time, we estimate that the self-insured plan will provide cost savings to the Company; however, charges were incurred at the conversion of the plan to establish an accrued liability for the estimated costs to close known claims, as well as claims incurred but not yet reported, as of the balance sheet date. Management remains committed to providing salaries and benefits packages to employees at competitive levels in order to ensure that we continue to provide quality service to our customers. Accordingly, we expect salaries and employee benefits expense to generally increase commensurate with the employment market over time.

Net Occupancy and Equipment Expense

This category of non-interest expense includes expenses associated with depreciation of buildings, equipment and furniture and fixtures, rent of office space, utilities expense and maintenance and repair costs. The majority of the Bank’s office space is owned, while the majority of ALC’s office space is leased. The decrease in this category for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016 resulted primarily from a decrease in maintenance and repair expense at the Bank. Occupancy and equipment expense is expected to increase over time as the Company depreciates expenditures associated with capital improvements. During the three and six months ended June 30, 2017, the Company recorded $3.8 million and $7.9 million, respectively, in additions to premises and equipment. The majority of these expenditures was associated with the purchase of land and construction in process related to an office complex being built for the Bank in the Birmingham, Alabama metropolitan area. As discussed in the executive overview, during the third quarter of 2017, the Bank substantially completed construction of the office complex, which will house a retail branch of the Bank, as well as the Bank's commercial lending team in Birmingham and certain other officers of the Bank. Approximately 25% of the square footage of the office complex will be utilized by the Bank, with the remainder to be leased to commercial tenants. Based on management's current estimates, it is expected that placement of the office complex into service will result in approximately $0.5 million in additional depreciation expense annually. Upon full lease-up of the office complex, management expects that the majority of depreciation expense, as well as additional operating costs associated with the complex, will be recovered through lease revenue; however, no assurance can be given regarding the office complex being fully leased by third-party tenants or the timing of such third-party leases.

Computer Services

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

Insurance Expense and Assessments

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

Fees for Professional Services

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

Postage, Stationery and Supplies

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

Telephone / Data Communications

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

Other Real Estate / Foreclosure Expense

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

Both OREO write-downs and carrying costs decreased during the six months ended June 30, 2017 compared to the corresponding period of 2016 as a result of continued reduction in the level of OREO at both the Bank and ALC. OREO totaled $4.0 million and $0.4 million at the Bank and ALC, respectively, as of June 30, 2017, compared to $4.9 million and $0.5 million, respectively, as of June 30, 2016, a decrease of $1.0 million for the Company on a consolidated basis.

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

Other

This category encompasses a variety of expenses, including advertising and marketing fees, security services, sales and other taxes, employee training, expenses associated with fixed asset write-downs, and other miscellaneous expenses. Comparing the three and six months ended June 30, 2017 to the three and six months ended June 30, 2016, expenses in this category decreased due to reductions in a number of expenses, including marketing and advertising, postage, impairment on closed branch assets, and increases in accident and health policy reserves at ALC. Certain of these reductions are expected to be offset in future quarters; however, management continues to maintain vigilance in efforts to reduce these costs where opportunities to do so exist.

Provision for Income Taxes

The provision for income taxes was $0.1 million for both of the three-month periods ended June 30, 2017 and 2016. The Company’s effective tax rate was 24.1% for the second quarter of 2017, compared to 23.8% for the second quarter of 2016. For the six months ended June 30, 2017 and 2016, the effective tax rate was 24.2% and 23.9%, respectively. The effective tax rate is expected to fluctuate based on recurring items, such as changes in tax-exempt interest income earned from bank-qualified municipal bonds and loans and the cash surrender value of bank-owned life insurance. Management makes decisions about whether to invest in tax-exempt instruments on a case-by-case basis after considering a number of factors, including investment return, credit quality and the consistency of such investments with the Company’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 2.9 years and 3.1 years as of June 30, 2017 and December 31, 2016, 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 June 30, 2017, available-for-sale securities totaled $172.3 million, or 85.8% of the total investment portfolio, compared to $181.9 million, or 87.5% of the total investment portfolio, as of December 31, 2016. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, obligations of U.S. government-sponsored agencies, obligations of state and political subdivisions and corporate notes.

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 June 30, 2017, held-to-maturity securities totaled $28.5 million, or 14.2% of the total investment portfolio, compared to $25.9 million, or 12.5% of the total investment portfolio, as of December 31, 2016. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies and obligations of state and political subdivisions.

Loans and Allowance for Loan Losses

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

	Bank
	2017				2016
	June 30,		March 31,		December 31,		September 30,		June 30,
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	12,424	$	25,853	$	23,772	$	24,610	$	24,306
Secured by 1-4 family residential properties		32,227		32,535		32,955		32,559		33,326
Secured by multi-family residential properties		16,702		16,464		16,627		16,801		5,972
Secured by non-farm, non-residential properties		113,037		97,294		102,112		97,859		105,541
Other		226		230		234		185		190
Commercial and industrial loans		65,087		57,253		57,963		54,459		38,160
Consumer loans		5,671		6,057		6,206		6,335		6,730
Total loans	$	245,374	$	235,686	$	239,869	$	232,808	$	214,225
Less unearned interest, fees and deferred cost		371		249		218		191		192
Allowance for loan losses		2,526		2,521		2,409		1,216		1,138
Net loans	$	242,477	$	232,916	$	237,242	$	231,401	$	212,895

	ALC
	2017				2016
	June 30,		March 31,		December 31,		September 30,		June 30,
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		12,229		12,993		13,724		14,462		15,430
Secured by multi-family residential properties		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—
Other		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—
Consumer loans:
Consumer		31,920		32,892		36,413		35,533		35,879
Indirect sales		52,134		47,196		44,775		45,382		45,007
Total loans	$	96,283	$	93,081	$	94,912	$	95,377	$	96,316
Less unearned interest, fees and deferred cost		5,855		5,962		6,935		7,205		7,857
Allowance for loan losses		2,379		2,358		2,447		2,452		2,453
Net loans	$	88,049	$	84,761	$	85,530	$	85,720	$	86,006

The tables below summarize changes in the allowance for loan losses and certain asset quality ratios at the end of each of the most recent five quarters as of June 30, 2017 at both the Bank and ALC.

	Bank
	2017						2016
	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter
	(Dollars in Thousands)
Balance at beginning of period	$	2,521		$	2,409		$	1,216		$	1,138		$	1,068
Charge-offs:
Real estate loans:
Construction, land development and other land loans		—			—			—			—			—
Secured by 1-4 family residential properties		—			—			(56	)		(3	)		(7	)
Secured by multi-family residential properties		—			—			—			—			—
Secured by non-farm, non-residential properties		—			—			—			—			—
Other		—			—			—			—			—
Commercial and industrial		(16	)		—			(1	)		(41	)		—
Consumer loans		(60	)		(2	)		(13	)		(3	)		(6	)
Other loans		—			—			—			—			—
Total charge-offs		(76	)		(2	)		(70	)		(47	)		(13	)
Recoveries		81			114			28			25			253
Net recoveries (charge-offs)		5			112			(42	)		(22	)		240
Provision (reduction in reserve) for loan losses		—			—			1,235			100			(170	)
Ending balance	$	2,526		$	2.521		$	2,409		$	1,216		$	1,138
as a % of loans		1.03	%		1.07	%		1.01	%		0.52	%		0.53	%

	ALC
	2017						2016
	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter
	(Dollars in Thousands)
Balance at beginning of period	$	2,358		$	2,447		$	2,452		$	2,453		$	2,307
Charge-offs:
Real estate loans:
Construction, land development and other land loans		—			—			—			—			—
Secured by 1-4 family residential properties		(4	)		(13	)		(7	)		(28	)		(16	)
Secured by multi-family residential properties		—			—			—			—			—
Secured by non-farm, non-residential properties		—			—			—			—			—
Other		—			—			—			—			—
Commercial and industrial		—			—			—			—			—
Consumer loans:
Consumer		(569	)		(658	)		(398	)		(596	)		(595	)
Indirect sales		(160	)		(135	)		(354	)		(111	)		(151	)
Other loans		—			—			—			—			—
Total charge-offs		(733	)		(806	)		(759	)		(735	)		(762	)
Recoveries		178			202			176			154			202
Net recoveries (charge-offs)		(555	)		(604	)		(583	)		(581	)		(560	)
Provision (reduction in reserve) for loan losses		576			515			578			580			706
Ending balance	$	2,379		$	2,358		$	2,447		$	2,452		$	2,453
as a % of loans		2.63	%		2.71	%		2.78	%		2.78	%		2.77	%

Nonperforming Assets

Nonperforming assets at the end of the five most recent quarters as of June 30, 2017 were as follows:

	Consolidated
	2017						2016
	June 30,			March 31,			December 31,			September 30,			June 30,
	(Dollars in Thousands)
Non-accrual loans	$	1,847		$	2,205		$	2,417		$	2,266		$	2,619
Other real estate owned		4,351			4,587			4,858			5,391			5,405
Total	$	6,198		$	6,792		$	7,275		$	7,657		$	8,024
Nonperforming assets as a percentage of loans and other real estate		1.82	%		2.08	%		2.19	%		2.37	%		2.61	%
Nonperforming assets as a percentage of total assets		1.01	%		1.10	%		1.20	%		1.28	%		1.33	%

	Bank
	2017						2016
	June 30,			March 31,			December 31,			September 30,			June 30,
	(Dollars in Thousands)
Non-accrual loans	$	343		$	609		$	603		$	766		$	1,086
Other real estate owned		3,951			4,161			4,353			4,887			4,944
Total	$	4,294		$	4,770		$	4,956		$	5,653		$	6,030
Nonperforming assets as a percentage of loans and other real estate		1.72	%		1.99	%		2.03	%		2.38	%		2.75	%
Nonperforming assets as a percentage of total assets		0.69	%		0.77	%		0.81	%		0.94	%		1.00	%

	ALC
	2017						2016
	June 30,			March 31,			December 31,			September 30,			June 30,
	(Dollars in Thousands)
Non-accrual loans	$	1,504		$	1,596		$	1,814		$	1,500		$	1,533
Other real estate owned		400			426			505			504			461
Total	$	1,904		$	2,022		$	2,319		$	2,004		$	1,994
Nonperforming assets as a percentage of loans and other real estate		2.10	%		2.31	%		2.62	%		2.26	%		2.24	%
Nonperforming assets as a percentage of total assets		2.08	%		2.29	%		2.59	%		2.24	%		2.22	%

Deposits

Total deposits increased by 2.3% to $509.2 million as of June 30, 2017, from $497.6 million as of December 31, 2016. Core deposits, which exclude time deposits of $0.25 million or more, provide a relatively stable funding source that supports earning assets. Core deposits totaled $476.2 million, or 93.5% of total deposits, as of June 30, 2017, compared to $461.8 million, or 92.8% of total deposits, as of December 31, 2016.

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

Other Interest-Bearing Liabilities

Other interest-bearing liabilities consist of federal funds purchased, securities sold under agreements to repurchase, and FHLB advances. This category continues to be utilized as an alternative source of funds. During the second quarter of 2017, these borrowings represented 4.3% of average interest-bearing liabilities, compared to 3.9% in the second quarter of 2016.

Shareholders’ Equity

The Company has historically placed great emphasis on maintaining its strong capital base. As of June 30, 2017, shareholders’ equity totaled $78.4 million, or 12.7% of total assets, compared to $76.2 million, or 12.6% of total assets, as of December 31, 2016. Management believes that this level of equity is an indicator of the financial soundness of the Company and the Company’s ability to sustain future growth and profitability. The increase in shareholders’ equity during the period ended June 30, 2017 resulted from increases in accumulated other comprehensive income related to changes in the fair value of investment securities available-for-sale. The fair value of the available-for-sale portfolio fluctuates based primarily on changes in interest rates. Accordingly, the net unrealized gains during the second quarter of 2017 are not necessarily indicative of future performance of the portfolio.

The Company’s Board of Directors evaluates dividend payments based on the Company’s level of earnings and our desire to maintain a strong capital base, as well as regulatory requirements relating to the payment of dividends. During each of the three-month periods ended June 30, 2017 and 2016, the Company declared dividends of $0.02 per common share, or approximately $0.1 million in aggregate amount.

As of June 30, 2017 and December 31, 2016, the Company retained approximately $20.5 million and $20.8 million in treasury stock, respectively. The Company initiated a share repurchase program in January 2006, under which the Company was authorized to repurchase up to 642,785 shares of common stock before December 31, 2007. In December 2007, and in each year since, the Board of Directors has extended the expiration date of the share repurchase program for an additional year. Currently, the share repurchase program is set to expire on December 31, 2017. There are 242,303 shares available for repurchase under this program, at management’s discretion. No shares were purchased under this program to date in 2017 or in 2016.

As of June 30, 2017 and December 31, 2016, a total of 102,969 and 114,547 shares of stock, respectively, were deferred in connection with the Company’s Non-Employee Directors’ Deferred Compensation Plan. The plan permits non-employee directors to invest their directors’ fees and to receive the adjusted value of the deferred amounts in cash or shares of common stock. All deferred fees, whether in the form of cash or shares of stock, are reflected as compensation expense in the period earned. The Company classifies all deferred directors' fees allocated to be paid in shares of stock as equity surplus. The Company uses shares of treasury stock to satisfy these obligations when due.

LIQUIDITY AND CAPITAL RESOURCES

The asset portion of the balance sheet provides liquidity primarily from two sources: (1) principal payments and maturities of loans and (2) maturities and principal payments from the investment portfolio. Other short-term investments, such as federal funds sold, may also provide additional sources of liquidity. Loans maturing or repricing in one year or less amounted to $119.9 million as of June 30, 2017 and $127.3 million as of December 31, 2016. Investment securities forecasted to mature or reprice in one year or less are estimated to be $11.1 million of the investment portfolio as of June 30, 2017.

Although the majority of the securities portfolio has legal final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. As of June 30, 2017, the investment securities portfolio had an estimated average life of 2.94 years, and approximately 83.76% of the portfolio (including both available-for-sale and held-to-maturity investments) was expected to be repaid within five years. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

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

As of June 30, 2017 and December 31, 2016, the Company had $20.0 million and $25.0 million, respectively, in outstanding borrowings under FHLB advances. The Company had up to $165.8 million and $155.0 million in remaining unused credit from the FHLB (subject to available collateral) as of June 30, 2017 and December 31, 2016, respectively. In addition, the Company had $18.8 million in unused established federal funds lines as of both June 30, 2017 and December 31, 2016.

Management believes that the Company has adequate sources of liquidity to more than cover its contractual obligations and commitments over the next twelve months. Management is not aware of any condition that currently exists that would have an adverse effect on the liquidity, capital resources or operation of the Company. However, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. See Note 14, “Guarantees, Commitments and Contingencies,” in the Notes to the Interim Condensed Consolidated Financial Statements for further discussion.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Financial simulation models are the primary tools used by the Asset/Liability Committee of the Bank'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.

Measuring Interest Rate Sensitivity

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

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

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

See Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of Bancshares' Annual Report on Form 10-K as of and for the year ended December 31, 2016 for additional disclosures related to market risk. Management’s evaluation as of June 30, 2017 did not indicate any significant increase in the Company’s exposure to market risk from those disclosed as of December 31, 2016.

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 June 30, 2017, 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 June 30, 2017, that Bancshares’ disclosure controls and procedures are effective to ensure that the information required to be disclosed in Bancshares’ periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified.

Changes in Internal Control Over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See Note 14 to Item 1, “Guarantees, Commitments and Contingencies,” for information regarding certain litigation matters relating to the Company.

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

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2016 that could materially affect the Company’s business, financial condition or future results. The risks described in Bancshares’ Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The 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 second quarter of 2017.

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs⁽¹⁾		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Programs ⁽¹⁾
April 1 – April 30		—		$	—		—		242,303
May 1 – May 31		1,305		$	11.18		—		242,303
June 1 – June 30		—		$	—		—		242,303
Total		1,305	⁽²⁾	$	11.18		—		242,303

(1)

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

(2)	1,305 shares were purchased in open-market transactions by an independent trustee for Bancshares’ 401(k) Plan during the second quarter of 2017.

ITEM 6.

EXHIBITS

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

SIGNATURES

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

FIRST US BANCSHARES, INC.

DATE: August 9, 2017

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

INDEX TO EXHIBITS

Exhibit No.		Description

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

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

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

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

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

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

101		Interactive Data Files for the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017.

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First US Bancshares (FUSB) 10-Q2017 Q2 Quarterly report

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