First US Bancshares (FUSB) 10-Q 2019 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, 2019

OR

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

For the transition period from                        to                        

Commission File Number: 0-14549

First US Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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

(205) 582-1200

(Registrant’s Telephone Number, Including Area Code)

N/A

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

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

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

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

Yes    ☒  No    ☐

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

Yes    ☒  No    ☐

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

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

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

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

Yes    ☐  No    ☒

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

Class	Outstanding at August 6, 2019
Common Stock, $0.01 par value	6,306,161 shares

1

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

		PAGE
	PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
Interim Condensed Consolidated Balance Sheets at June 30, 2019 (Unaudited) and December 31, 2018		4
Interim Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)		5
Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)		6
Interim Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)		7
Interim Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited)		8
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)		9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	40
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	51
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 5.	OTHER INFORMATION	52
ITEM 6.	EXHIBITS	53
Signature Page		54

2

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, First US Bancshares, Inc. (“Bancshares” and, together with its subsidiaries, the “Company”), through its senior management, from time to time makes forward-looking statements concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe,” “continues” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based on current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in Part I, Item 1A of the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2018. Specifically, with respect to statements relating to the sufficiency of the allowance for loan and lease losses, loan demand, cash flows, growth and earnings potential and expansion, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy generally and in the Company’s service areas, market conditions and investment returns, changes in interest rates, the pending discontinuation of LIBOR as an interest rate benchmark, the availability of quality loans in the Company’s service areas, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets, collateral values and cybersecurity threats. With respect to the Company’s acquisition of The Peoples Bank, these factors include, but are not limited to, difficulties, delays and unanticipated costs in integrating the organizations’ businesses or realized expected cost savings and other benefits; business disruptions as a result of the integration of the organizations, including possible loss of customers; diversion of management time to address integration-related issues; and changes in asset quality and credit risk as a result of the transaction. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

3

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,
	2019			2018
	(Unaudited)
ASSETS
Cash and due from banks	$	10,895		$	9,796
Interest-bearing deposits in banks		33,964			39,803
Total cash and cash equivalents		44,859			49,599
Federal funds sold		15,081			8,354
Investment securities available-for-sale, at fair value		117,961			132,487
Investment securities held-to-maturity, at amortized cost		18,688			21,462
Federal Home Loan Bank stock, at cost		713			703
Loans, net of allowance for loan and lease losses of $5,087 and $5,055, respectively		511,515			514,867
Premises and equipment, net of accumulated depreciation		29,491			27,643
Cash surrender value of bank-owned life insurance		15,391			15,237
Accrued interest receivable		2,476			2,816
Goodwill and core deposit intangible, net		9,056			9,312
Other real estate owned		1,258			1,505
Other assets		10,682			7,954
Total assets	$	777,171		$	791,939
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	682,806		$	704,725
Accrued interest expense		526			424
Other liabilities		10,018			6,826
Short-term borrowings		73			527
Total liabilities		693,423			712,502
Shareholders’ equity:
Common stock, par value $0.01 per share, 10,000,000 shares authorized; 7,567,784 and 7,562,264 shares issued, respectively; 6,306,161 and 6,298,062 shares outstanding, respectively		75			75
Surplus		13,646			13,496
Accumulated other comprehensive loss, net of tax		(338	)		(2,377	)
Retained earnings		90,737			88,668
Less treasury stock: 1,261,623 and 1,264,202 shares at cost, respectively		(20,372	)		(20,414	)
Noncontrolling interest		—			(11	)
Total shareholders’ equity		83,748			79,437
Total liabilities and shareholders’ equity	$	777,171		$	791,939

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

4

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Unaudited)				(Unaudited)
Interest income:
Interest and fees on loans	$	9,833	$	7,331	$	19,506	$	14,420
Interest on investment securities		1,090		1,059		2,230		2,089
Total interest income		10,923		8,390		21,736		16,509
Interest expense:
Interest on deposits		1,690		798		3,330		1,499
Interest on borrowings		—		90		—		194
Total interest expense		1,690		888		3,330		1,693
Net interest income		9,233		7,502		18,406		14,816
Provision for loan and lease losses		715		702		1,115		1,360
Net interest income after provision for loan and lease losses		8,518		6,800		17,291		13,456
Non-interest income:
Service and other charges on deposit accounts		443		444		903		911
Credit insurance income		108		100		251		318
Mortgage fees from secondary market		186		144		289		261
Other income, net		554		444		1,113		782
Total non-interest income		1,291		1,132		2,556		2,272
Non-interest expense:
Salaries and employee benefits		5,195		4,533		10,183		9,100
Net occupancy and equipment		1,046		873		2,135		1,762
Computer services		333		317		684		609
Fees for professional services		321		266		563		539
Other expense		1,609		1,503		3,392		2,783
Total non-interest expense		8,504		7,492		16,957		14,793
Income before income taxes		1,305		440		2,890		935
Provision for income taxes		300		81		651		162
Net income	$	1,005	$	359	$	2,239	$	773
Basic net income per share	$	0.16	$	0.06	$	0.35	$	0.13
Diluted net income per share	$	0.15	$	0.06	$	0.33	$	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.

5

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

For the three months ended June 30, 2019 and 2018 (Unaudited)

	Common Stock Shares Outstanding		Common Stock		Surplus			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock, at Cost			Non- controlling Interest			Total Shareholders’ Equity
Balance, March 31, 2018		6,087,264	$	73	$	10,867		$	(1,955	)	$	86,965		$	(20,414	)	$	(11	)	$	75,525
Net income		—		—		—			—			359			—			—			359
Net change in fair value of securities available-for-sale, net of tax		—		—		—			(298	)		—			—			—			(298	)
Net change in fair value of derivative instruments, net of tax		—		—		—			66			—			—			—			66
Dividends declared: $.02 per share		—		—		—			—			(121	)		—			—			(121	)
Impact of stock-based compensation plans, net		5,000		—		103			—			—			—			—			103
Balance, June 30, 2018		6,092,264	$	73	$	10,970		$	(2,187	)	$	87,203		$	(20,414	)	$	(11	)	$	75,634
Balance, March 31, 2019		6,303,582	$	75	$	13,589		$	(1,536	)	$	89,859		$	(20,414	)	$	—		$	81,573
Net income		—		—		—			—			1,005			—			—			1,005
Net change in fair value of securities available-for-sale, net of tax		—		—		—			1,198			—			—			—			1,198
Dividends declared: $.02 per share		—		—		—			—			(127	)		—			—			(127	)
Impact of stock-based compensation plans, net		—		—		99			—			—			—			—			99
Reissuance of treasury stock as compensation		2,579		—		(42	)		—			—			42			—			—
Balance, June 30, 2019		6,306,161	$	75	$	13,646		$	(338	)	$	90,737		$	(20,372	)	$	—		$	83,748

For the six months ended June 30, 2019 and 2018 (Unaudited)

	Common Stock Shares Outstanding		Common Stock		Surplus			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock, at Cost			Non- controlling Interest			Total Shareholders’ Equity
Balance, January 1, 2018		6,081,744	$	73	$	10,755		$	(868	)	$	86,673		$	(20,414	)	$	(11	)	$	76,208
Net income		—		—		—			—			773			—			—			773
Net change in fair value of securities available-for-sale, net of tax		—		—		—			(1,719	)		—			—			—			(1,719	)
Net change in fair value of derivative instruments, net of tax		—		—		—			400			—			—			—			400
Dividends declared: $.02 per share		—		—		—			—			(243	)		—			—			(243	)
Impact of stock-based compensation plans, net		10,520		—		215			—			—			—			—			215
Balance, June 30, 2018		6,092,264	$	73	$	10,970		$	(2,187	)	$	87,203		$	(20,414	)	$	(11	)	$	75,634
Balance, January 1, 2019		6,298,062	$	75	$	13,496		$	(2,377	)	$	88,668		$	(20,414	)	$	(11	)	$	79,437
Net income		—		—		—			—			2,239			—			—			2,239
Net change in fair value of securities available-for-sale, net of tax		—		—		—			2,039			—			—			—			2,039
Dividends declared: $.02 per share		—		—		—			—			(253	)		—			—			(253	)
Impact of stock-based compensation plans, net		5,520		—		192			—			—			—			—			192
Reissuance of treasury stock as compensation		2,579		—		(42	)		—			—			42			—			—
Discontinuation of partnership consolidation		—		—		—			—			83			—			11			94
Balance, June 30, 2019		6,306,161	$	75	$	13,646		$	(338	)	$	90,737		$	(20,372	)	$	—		$	83,748

6

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,
	2019			2018			2019			2018
	(Unaudited)						(Unaudited)
Net income	$	1,005		$	359		$	2,239		$	773
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available-for-sale arising during period, net of tax expense (benefit) of $402, $(74), $686 and $(547), respectively		1,205			(222	)		2,056			(1,640	)
Reclassification adjustment for net gains on securities available-for-sale realized in net income, net of tax of $2, $26, $5 and $26, respectively		(7	)		(76	)		(17	)		(79	)
Unrealized holding gains arising during the period on effective cash flow hedge derivatives, net of tax expense of $0, $22, $0 and $134, respectively		—			66			—			400
Other comprehensive income (loss)		1,198			(232	)		2,039			(1,319	)
Total comprehensive income (loss)	$	2,203		$	127		$	4,278		$	(546	)

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

7

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Six Months Ended
	June 30,
	2019			2018
	(Unaudited)
Cash flows from operating activities:
Net income	$	2,239		$	773
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		796			704
Provision for loan and lease losses		1,115			1,360
Deferred income tax provision		624			154
Net gain on sale and prepayment of investment securities		(22	)		(105	)
Stock-based compensation expense		192			215
Net amortization of securities		306			424
Amortization of intangible assets		256			—
Net loss on premises and equipment and other real estate		245			293
Changes in assets and liabilities:
Decrease in accrued interest receivable		340			98
Increase in other assets		(4,079	)		(77	)
Increase in accrued interest expense		102			63
Increase (decrease) in other liabilities		3,192			(155	)
Net cash provided by operating activities		5,306			3,747
Cash flows from investing activities:
Net increase in federal funds sold		(6,727	)		—
Purchases of investment securities, available-for-sale		(2,784	)		(15,224	)
Proceeds from sales of investment securities, available-for-sale		—			4,221
Proceeds from maturities and prepayments of investment securities, available-for-sale		19,787			20,899
Proceeds from maturities and prepayments of investment securities, held-to-maturity		2,733			1,903
Net (increase) decrease in Federal Home Loan Bank stock		(10	)		196
Proceeds from the sale of premises and equipment and other real estate		768			1,915
Net (increase) decrease in loans		1,455			(11,146	)
Purchases of premises and equipment		(2,642	)		(715	)
Net cash provided by investing activities		12,580			2,049
Cash flows from financing activities:
Net increase (decrease) in deposits		(21,919	)		14,349
Net decrease in short-term borrowings		(454	)		(5,228	)
Dividends paid		(253	)		(243	)
Net cash provided by (used in) financing activities		(22,626	)		8,878
Net increase (decrease) in cash and cash equivalents		(4,740	)		14,674
Cash and cash equivalents, beginning of period		49,599			27,124
Cash and cash equivalents, end of period	$	44,859		$	41,798
Supplemental disclosures:
Cash paid for:
Interest	$	3,228		$	1,630
Income taxes		151			137
Non-cash transactions:
Assets acquired in settlement of loans		782			378
Reissuance of treasury stock as compensation		42			—

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

8

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

The accompanying unaudited interim condensed consolidated financial statements include the accounts of First US Bancshares, Inc. (“Bancshares”) and its subsidiaries (collectively, the “Company”). Bancshares is the parent holding company of First US Bank (the “Bank”). The Bank operates a finance company subsidiary, Acceptance Loan Company, Inc. (“ALC”). Management has determined that the Bank and ALC comprise Bancshares’ 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, 2019. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2018.

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, 2018.

Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding (basic shares). Included in basic shares are certain shares that have been accrued as of the balance sheet date as deferred compensation for members of Bancshares’ Board of Directors. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding, adjusted for the effect of potentially dilutive stock awards outstanding during the period (dilutive shares). The dilutive shares consist of nonqualified stock option grants issued to employees and members of Bancshares’ Board of Directors pursuant to Bancshares’ 2013 Incentive Plan (as amended, 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,
	2019		2018		2019		2018
Basic shares		6,423,642		6,195,801		6,420,653		6,192,117
Dilutive shares		427,282		378,701		427,282		378,701
Diluted shares		6,850,924		6,574,502		6,847,935		6,570,818

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Dollars in Thousands, Except Per Share Data)
Net income	$	1,005	$	359	$	2,239	$	773
Basic net income per share	$	0.16	$	0.06	$	0.35	$	0.13
Diluted net income per share	$	0.15	$	0.06	$	0.33	$	0.12

Comprehensive Income

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

Accounting Policies Recently Adopted

Accounting Standards Update (“ASU”) 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU simplifies and expands the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies the application of Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the ASU provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period. ASU 2017-12 became effective for the Company on January 1, 2019. The adoption of ASU 2017-12 did not have a material impact on the Company’s consolidated financial statements.

9

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the Financial Accounting Standards Board (“FASB”) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 requires 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. ASU 2016-02 became effective for the Company on January 1, 2019. Refer to Note 13, Leases, for additional information regarding the adoption of ASU 2016-02. As a result of implementation of the standard, the Company recorded a right-of-use asset and lease liability. As of June 30, 2019, both the right-of-use asset and lease liability totaled approximately $3.8 million.

Pending Accounting Pronouncements

ASU 2018-15, “Intangibles-Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).” Issued in August 2018, ASU 2018-15 aims to reduce complexity in the accounting for costs of implementing a cloud computing service arrangement. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments of ASU 2018-15 require an entity to follow the guidance in FASB ASC Subtopic 350-40, “Intangibles-Goodwill and Other – Internal-Use Software,” in order to determine which implementation costs to capitalize as assets related to the service contract and which costs to expense. The amendments of ASU 2018-15 also require an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement (i.e., the noncancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the entity is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the entity is reasonably certain not to exercise the option and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor). ASU 2018-15 also requires an entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement, and to classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not currently have any material amount of implementation costs related to hosting arrangements that are service contracts, and the Company does not expect the adoption of ASU 2018-15 to have a material impact on the Company’s consolidated financial statements.

ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” Issued in August 2018, the amendments in this ASU remove disclosure requirements in ASC Topic 820 related to (1) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels and (3) the valuation processes for Level 3 fair value measurements. The ASU also modifies disclosure requirements such that (1) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date that restrictions from redemption might lapse, only if the investee has communicated the timing to the entity or announced the timing publicly, and (2) it is clear that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Additionally, this ASU adds disclosure requirements for public entities about (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments of ASU 2018-13 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

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

ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.” 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 removes all current recognition thresholds and requires companies to recognize an allowance for lifetime expected credit losses. Credit losses will be immediately recognized through net income; the amount recognized will be based on the current estimate of contractual cash flows not expected to be collected over the financial asset’s contractual term. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities. The standard will add new disclosures related to factors that influenced management’s estimate, including current expected credit losses, the changes in those factors and reasons for the changes, as well as the method applied to revert to historical credit loss experience. As originally issued, 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, with institutions required to apply the changes through a cumulative-effect adjustment to their retained earnings balance as of the beginning of the first reporting period in which the guidance is effective. In July 2019, the FASB proposed rules that would delay implementation of ASU 2016-13 by three years for certain small public lenders, which would include the Company. The proposal is currently undergoing a 30-day comment period. Management has been in the process of developing a revised model to calculate the allowance for loan and lease losses upon implementation of ASU 2016-13 in order to determine the impact on the Company’s consolidated financial statements and, at this time, expects to recognize a one-time cumulative effect adjustment to the allowance for loan and lease losses as of the beginning of the first reporting period in which the new standard is effective, although the magnitude of any such one-time adjustment is not yet known. In light of the recent FASB proposal, management will continue to monitor developments with respect to the implementation date of ASU 2016-13.

Revenue

On January 1, 2018, the Company implemented ASU 2014-09, Revenue from Contracts with Customers, codified at ASC Topic 606. The Company adopted ASC Topic 606 using the modified retrospective transition method. As of the implementation date, the Company had no uncompleted customer contracts and, as a result, no cumulative transition adjustment was made to the Company’s accumulated deficit during the year ended December 31, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC Topic 606, while prior period amounts continue to be reported under legacy U.S. GAAP.

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The majority of the Company’s revenue is generated through interest earned on financial instruments, including loans and investment securities, which falls outside the scope of ASC Topic 606. The Company also generates revenue from insurance- and lease-related contracts that fall outside the scope of ASC Topic 606.

All of the Company’s revenue that is subject to ASC Topic 606 is included in non-interest income; however, not all non-interest income is subject to ASC Topic 606. Revenue earned by the Company that is subject to ASC Topic 606 primarily consists of service and other charges on deposit accounts, mortgage fees from secondary market transactions at the Bank, ATM fee income and other non-interest income. Revenue generated from these sources for both of the six-month periods ended June 30, 2019 and 2018 was $1.6 million, and for both of the three-month periods ended June 30, 2019 and 2018 was $0.8 million. All sources of the Company’s revenue subject to ASC Topic 606 are transaction-based, and revenue is recognized at the time at which the transaction is executed, which is the same time at which the Company’s performance obligation is satisfied. The Company had no contract liabilities or unsatisfied performance obligations with customers as of June 30, 2019.

3. ACQUISITION ACTIVITY

On August 31, 2018, the Company completed the acquisition of The Peoples Bank (“TPB”) and then merged TPB with and into the Bank. The acquisition of TPB provided the Company with an opportunity to enter the Knoxville, Tennessee market, as well as southwest Virginia, and was consistent with the Company’s strategy to expand in selected high-growth metropolitan markets. As of the acquisition date, TPB’s assets totaled $166.5 million, consisting primarily of pre-discounted gross loans totaling $156.8 million. Total deposits were $140.0 million. Purchase accounting adjustments were recorded as of the acquisition date, resulting in goodwill of $7.4 million. 

The acquisition of TPB was accounted for using the purchase method of accounting in accordance with ASC Topic 805, Business Combinations. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. No adjustments to fair value were recorded during the first or second quarters of 2019.

In accordance with the transaction agreement, the Company acquired 100% of the capital stock of TPB for the purchase price of $23.4 million calculated on the net book value of TPB as of December 31, 2017 and a mutually agreed upon multiple of 1.62, less certain mutually agreed upon deductions that are described in the transaction agreement, which reduced the purchase price by approximately $0.4 million. Approximately 90% of the purchase price was paid in cash, which totaled approximately $20.7 million, and approximately 10% was paid in the form of unregistered shares of the Company’s common stock, which consisted of 204,355 shares of Bancshares common stock. The aggregate purchase price was subject to adjustment following the closing date of the transaction based on determination of TPB’s final net book value as of the date of closing, which resulted in the payment by the Company of an additional cash amount of approximately $1.4 million.

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

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

ASSETS ACQUIRED AND LIABILITIES ASSUMED FROM THE PEOPLES BANK

AUGUST 31, 2018

(Dollars in Thousands)

	Acquired from TPB			Fair Value Adjustments			Fair Value as of August 31, 2018
Assets Acquired:
Cash and cash equivalents	$	3,085		$	—		$	3,085
Investment securities, available-for-sale		5,977			—			5,977
Federal Home Loan Bank stock, at cost		565			—			565
Loans		156,772			(2,195	)		154,577
Allowance for loan losses		(1,702	)		1,702			—
Net loans		155,070			(493	)		154,577
Premises and equipment, net		1,198			17			1,215
Other real estate owned		85			—			85
Other assets		551			(328	)		223
Core deposit intangible		—			2,048			2,048
Total assets acquired	$	166,531		$	1,244		$	167,775
Liabilities Assumed:
Deposits		140,033			342			140,375
Short-term borrowings		10,000			—			10,000
Other liabilities		437			—			437
Total liabilities assumed		150,470			342			150,812
Shareholders’ Equity Assumed:
Common stock		1,027			(1,027	)		—
Surplus		5,280			(5,280	)		—
Accumulated other comprehensive income, net of tax		17			(17	)		—
Retained earnings		9,737			(9,737	)		—
Total shareholders’ equity assumed		16,061			(16,061	)		—
Total liabilities and shareholders’ equity assumed	$	166,531		$	(15,719	)	$	150,812
Net assets acquired							$	16,963
Purchase price								24,398
Goodwill							$	7,435

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

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

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

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

Loans — Fair values for performing loans were determined based on a discounted cash flow methodology that aggregated model inputs and loan information into selected pools and calculated the loan level cash flows used to value the pools. The model calculated the contractual cash flows and expected cash flows, and then discounted the expected cash flows to present value in order to determine fair value. The assumptions used to estimate the fair value of the loans included unpaid principal balance, maturity date, coupon, prepayment speed, expected credit losses and discount rates. The fair value adjustment, also described as the discount on the purchased loans, for the performing loans is being accreted into income over the lives of the loans. Purchased credit impaired (“PCI”) loans were valued using the cost recovery method. The Company did not recognize any accretable yield, or income expected to be collected, associated with the PCI loans. The table below summarizes the carrying amounts and fair value adjustments of the loans acquired from TPB as of the acquisition date.

	August 31, 2018
	Acquired from TPB		Fair Value Adjustments			Fair Value as of August 31, 2018
	(Dollars in Thousands)
Purchased performing loans	$	153,862	$	(2,116	)	$	151,746
Purchased credit impaired loans		2,910		(79	)		2,831
Total purchased loans	$	156,772	$	(2,195	)	$	154,577

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

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

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

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

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

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

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

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

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4. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity as of June 30, 2019 and December 31, 2018 were as follows:

	Available-for-Sale
	June 30, 2019
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	64,271	$	330	$	(334	)	$	64,267
Commercial		49,306		46		(603	)		48,749
Obligations of states and political subdivisions		4,754		111		—			4,865
U.S. Treasury securities		79		1		—			80
Total	$	118,410	$	488	$	(937	)	$	117,961

	Held-to-Maturity
	June 30, 2019
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	10,483	$	—	$	(86	)	$	10,397
Obligations of U.S. government-sponsored agencies		6,548		—		(40	)		6,508
Obligations of states and political subdivisions		1,657		13		(1	)		1,669
Total	$	18,688	$	13	$	(127	)	$	18,574

	Available-for-Sale
	December 31, 2018
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	73,859	$	113	$	(1,517	)	$	72,455
Commercial		56,101		10		(1,822	)		54,289
Obligations of states and political subdivisions		5,617		51		(4	)		5,664
U.S. Treasury securities		79		—		—			79
Total	$	135,656	$	174	$	(3,343	)	$	132,487

	Held-to-Maturity
	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	11,716	$	—	$	(349	)	$	11,367
Obligations of U.S. government-sponsored agencies		8,026		—		(244	)		7,782
Obligations of states and political subdivisions		1,720		—		(17	)		1,703
Total	$	21,462	$	—	$	(610	)	$	20,852

The scheduled maturities of investment securities available-for-sale and held-to-maturity as of June 30, 2019 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	$	259	$	261	$	122	$	122
Maturing after one to five years		34,821		34,766		3,397		3,400
Maturing after five to ten years		47,803		47,686		6,176		6,113
Maturing after ten years		35,527		35,248		8,993		8,939
Total	$	118,410	$	117,961	$	18,688	$	18,574

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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, 2019 and December 31, 2018.

	Available-for-Sale
	June 30, 2019
	Less than 12 Months				12 Months or More
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	180	$	—	$	40,760	$	(334	)
Commercial		2		—		41,114		(603	)
U.S. Treasury securities		80		—		—		—
Total	$	262	$	—	$	81,874	$	(937	)

	Held-to-Maturity
	June 30, 2019
	Less than 12 Months				12 Months or More
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	—	$	—	$	10,397	$	(86	)
Obligations of U.S. government-sponsored agencies		—		—		6,386		(40	)
Obligations of states and political subdivisions		—		—		508		(1	)
Total	$	—	$	—	$	17,291	$	(127	)

	Available-for-Sale
	December 31, 2018
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	9,417	$	(87	)	$	53,507	$	(1,430	)
Commercial		461		(3	)		53,430		(1,819	)
Obligations of states and political subdivisions		879		(2	)		420		(2	)
U.S. Treasury securities		79		—			—		—
Total	$	10,836	$	(92	)	$	107,357	$	(3,251	)

	Held-to-Maturity
	December 31, 2018
	Less than 12 Months				12 Months or More
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	—	$	—	$	11,367	$	(349	)
Obligations of U.S. government-sponsored agencies		—		—		7,782		(244	)
Obligations of states and political subdivisions		770		—		933		(17	)
Total	$	770	$	—	$	20,082	$	(610	)

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

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As of June 30, 2019, 137 debt securities had been in a loss position for more than 12 months, and 5 debt securities had been in a loss position for less than 12 months. As of December 31, 2018, 153 debt securities had been in a loss position for more than 12 months, and 21 debt securities had been in a loss position for less than 12 months. As of both June 30, 2019 and December 31, 2018, 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. Most of the securities in an unrealized loss position are residential or commercial mortgage-backed securities that are either direct obligations of the U.S. government or government-sponsored entities and, accordingly, have little associated credit risk. 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, 2019 or December 31, 2018.

Investment securities with a carrying value of $57.3 million and $46.7 million as of June 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for other purposes.

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

Portfolio Segments

The Company has divided the loan portfolio into nine 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 home.

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

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

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

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

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.

Branch retail – This portfolio segment includes loans secured by collateral purchased by consumers at retail stores with whom ALC has an established relationship through its branch network to provide financing for the retail products sold if applicable underwriting standards are met.

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

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As of June 30, 2019 and December 31, 2018, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:

	June 30, 2019
	Bank		ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	27,521	$	—	$	27,521
Secured by 1-4 family residential properties		96,805		6,549		103,354
Secured by multi-family residential properties		28,033		—		28,033
Secured by non-farm, non-residential properties		158,748		—		158,748
Other		880		—		880
Commercial and industrial loans(1)		91,489		—		91,489
Consumer loans:
Consumer		7,241		29,919		37,160
Branch retail		—		29,609		29,609
Indirect sales		—		45,466		45,466
Total loans		410,717		111,543		522,260
Less: Unearned interest, fees and deferred cost		411		5,247		5,658
Allowance for loan losses		2,798		2,289		5,087
Net loans	$	407,508	$	104,007	$	511,515

	December 31, 2018
	Bank		ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	41,340	$	—	$	41,340
Secured by 1-4 family residential properties		102,971		7,785		110,756
Secured by multi-family residential properties		23,009		—		23,009
Secured by non-farm, non-residential properties		156,162		—		156,162
Other		1,308		—		1,308
Commercial and industrial loans(1)		85,779		—		85,779
Consumer loans:
Consumer		6,927		31,656		38,583
Branch retail		���		28,324		28,324
Indirect sales		—		40,609		40,609
Total loans		417,496		108,374		525,870
Less: Unearned interest, fees and deferred cost		331		5,617		5,948
Allowance for loan losses		2,735		2,320		5,055
Net loans	$	414,430	$	100,437	$	514,867

⁽¹⁾ Includes equipment financing leases.

The Company makes commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 61.0% and 63.2% of the portfolio was concentrated in loans secured by real estate as of June 30, 2019 and December 31, 2018, respectively.

Loans with a carrying value of $36.9 million and $27.0 million were pledged as collateral to secure FHLB borrowings as of June 30, 2019 and December 31, 2018, respectively.

Related Party Loans

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with unrelated parties. Management believes that such loans do not represent more than a normal risk of collectability, nor do they present other unfavorable features. The aggregate balances of such related party loans and commitments as of June 30, 2019 and December 31, 2018 were $0.9 million and $0.8 million, respectively. During the six months ended June 30, 2019, there were $0.1 million of new loans to these parties, and repayments by active related parties were $5 thousand. During the year ended December 31, 2018, there were $0.5 million of new loans to these parties, and repayments by active related parties were $0.2 million.

16

Acquired Loans

The Company acquired loans through the TPB acquisition completed on August 31, 2018. At acquisition, certain acquired loans evidenced deterioration of credit quality since origination and it was probable that all contractually-required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. PCI loans are accounted for under ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. On the date of acquisition, the outstanding principal balance and carrying value of PCI loans accounted for under ASC Topic 310-30 were $2.9 million and $2.8 million, respectively.

The carrying amount of PCI loans, which is included within loans on the balance sheet, is set forth in the table below as of June 30, 2019 and December 31, 2018:

	June 30, 2019			December 31, 2018
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	—		$	75
Secured by 1-4 family residential properties		236			492
Outstanding balance		236			567
Fair value adjustment		(66	)		(70	)
Carrying amount, net of fair value adjustment	$	170		$	497

During both the six months ended June 30, 2019 and the year ended December 31, 2018, the Company did not recognize any accretable yield, or income expected to be collected, associated with these loans. Additionally, the Company did not increase or reverse the allowance for loan losses related to the remaining PCI loans.

17

Allowance for Loan Losses

The following tables present changes in the allowance for loan losses during the six months ended June 30, 2019 and the year ended December 31, 2018 and the related loan balances by loan portfolio segment and loan type as of June 30, 2019 and December 31, 2018:

	Bank
	Six Months Ended June 30, 2019
	Construction, Land			1-4 Family			Real Estate Multi-Family		Non- Farm Non-Residential			Other		Commercial		Consumer			Branch Retail		Indirect Sales		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	240		$	322		$	128	$	831		$	1	$	1,138	$	75		$	—	$	—	$	2,735
Charge-offs		—			(47	)		—		—			—		—		(15	)		—		—		(62	)
Recoveries		—			9			—		—			—		3		23			—		—		35
Provision		(50	)		77			38		(22	)		—		63		(16	)		—		—		90
Ending balance	$	190		$	361		$	166	$	809		$	1	$	1,204	$	67		$	—	$	—	$	2,798
Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	95		$	16		$	—	$	—		$	—	$	65	$	12		$	—	$	—	$	188
Collectively evaluated for impairment		95			345			166		809			1		1,139		55			—		—		2,610
Loans acquired with deteriorated credit quality		—			—			—		—			—		—		—			—		—		—
Total allowance for loan losses	$	190		$	361		$	166	$	809		$	1	$	1,204	$	67		$	—	$	—	$	2,798
Ending balance of loans receivable:
Individually evaluated for impairment	$	421		$	947		$	—	$	504		$	—	$	65	$	35		$	—	$	—	$	1,972
Collectively evaluated for impairment		27,100			95,688			28,033		158,244			880		91,424		7,206			—		—		408,575
Loans acquired with deteriorated credit quality		—			170			—		—			—		—		—			—		—		170
Total loans receivable	$	27,521		$	96,805		$	28,033	$	158,748		$	880	$	91,489	$	7,241		$	—	$	—	$	410,717

	ALC
	Six Months Ended June 30, 2019
	Construction, Land		1-4 Family			Real Estate Multi-Family		Non- Farm Non-Residential		Other		Commercial		Consumer			Branch Retail			Indirect Sales			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	—	$	24		$	—	$	—	$	—	$	—	$	1,724		$	427		$	145		$	2,320
Charge-offs		—		(30	)		—		—		—		—		(1,075	)		(201	)		(128	)		(1,434	)
Recoveries		—		6			—		—		—		—		311			59			2			378
Provision		—		28			—		—		—		—		662			151			184			1,025
Ending balance	$	—	$	28		$	—	$	—	$	—	$	—	$	1,622		$	436		$	203		$	2,289
Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—	$	—	$	—		$	—		$	—		$	—
Collectively evaluated for impairment		—		28			—		—		—		—		1,622			436			203			2,289
Total allowance for loan losses	$	—	$	28		$	—	$	—	$	—	$	—	$	1,622		$	436		$	203		$	2,289
Ending balance of loans receivable:
Individually evaluated for impairment	$	—	$	194		$	—	$	—	$	—	$	—	$	—		$	—		$	—		$	194
Collectively evaluated for impairment		—		6,355			—		—		—		—		29,919			29,609			45,466			111,349
Total loans receivable	$	—	$	6,549		$	—	$	—	$	—	$	—	$	29,919		$	29,609		$	45,466		$	111,543

18

	Bank and ALC
	Six Months Ended June 30, 2019
	Construction, Land			1-4 Family			Real Estate Multi-Family		Non- Farm Non-Residential			Other		Commercial		Consumer			Branch Retail			Indirect Sales			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	240		$	346		$	128	$	831		$	1	$	1,138	$	1,799		$	427		$	145		$	5,055
Charge-offs		—			(77	)		—		—			—		—		(1,090	)		(201	)		(128	)		(1,496	)
Recoveries		—			15			—		—			—		3		334			59			2			413
Provision		(50	)		105			38		(22	)		—		63		646			151			184			1,115
Ending balance	$	190		$	389		$	166	$	809		$	1	$	1,204	$	1,689		$	436		$	203		$	5,087
Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	95		$	16		$	—	$	—		$	—	$	65	$	12		$	—		$	—		$	188
Collectively evaluated for impairment		95			373			166		809			1		1,139		1,677			436			203			4,899
Loans acquired with deteriorated credit quality		—			—			—		—			—		—		—			—			—			—
Total allowance for loan losses	$	190		$	389		$	166	$	809		$	1	$	1,204	$	1,689		$	436		$	203		$	5,087
Ending balance of loans receivable:
Individually evaluated for impairment	$	421		$	1,141		$	—	$	504		$	—	$	65	$	35		$	—		$	—		$	2,166
Collectively evaluated for impairment		27,100			102,043			28,033		158,244			880		91,424		37,125			29,609			45,466			519,924
Loans acquired with deteriorated credit quality		—			170			—		—			—		—		—			—			—			170
Total loans receivable	$	27,521		$	103,354		$	28,033	$	158,748		$	880	$	91,489	$	37,160		$	29,609		$	45,466		$	522,260

	Bank
	Year Ended December 31, 2018
	Construction, Land		1-4 Family			Real Estate Multi-Family		Non- Farm Non-Residential		Other			Commercial			Consumer			Branch Retail		Indirect Sales		Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	203	$	238		$	116	$	777	$	2		$	1,049		$	62		$	—	$	—	$	2,447
Charge-offs		—		(9	)		—		—		—			(3	)		(4	)		—		—		(16	)
Recoveries		—		51			—		4		—			11			23			—		—		89
Provision		37		42			12		50		(1	)		81			(6	)		—		—		215
Ending balance	$	240	$	322		$	128	$	831	$	1		$	1,138		$	75		$	—	$	—	$	2,735
Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	28	$	50		$	—	$	1	$	—		$	67		$	20		$	—	$	—	$	166
Collectively evaluated for impairment		212		272			128		830		1			1,071			55			—		—		2,569
Loans acquired with deteriorated credit quality		—		—			—		—		—			—			—			—		—		—
Total allowance for loan losses	$	240	$	322		$	128	$	831	$	1		$	1,138		$	75		$	—	$	—	$	2,735
Ending balance of loans receivable:
Individually evaluated for impairment	$	153	$	57		$	—	$	511	$	—		$	67		$	43		$	—	$	—	$	831
Collectively evaluated for impairment		41,114		102,490			23,009		155,651		1,308			85,712			6,884			—		—		416,168
Loans acquired with deteriorated credit quality		73		424			—		—		—			—			—			—		—		497
Total loans receivable	$	41,340	$	102,971		$	23,009	$	156,162	$	1,308		$	85,779		$	6,927		$	—	$	—	$	417,496

19

	ALC
	Year Ended December 31, 2018
	Construction, Land		1-4 Family			Real Estate Multi-Family		Non- Farm Non-Residential		Other		Commercial		Consumer			Branch Retail			Indirect Sales			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	—	$	52		$	—	$	—	$	—	$	—	$	1,653		$	393		$	229		$	2,327
Charge-offs		—		(92	)		—		—		—		—		(2,478	)		(415	)		(116	)		(3,101	)
Recoveries		—		23			—		—		—		—		545			113			6			687
Provision		—		41			—		—		—		—		2,004			336			26			2,407
Ending balance	$	—	$	24		$	—	$	—	$	—	$	—	$	1,724		$	427		$	145		$	2,320
Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—	$	—	$	—		$	—		$	—		$	—
Collectively evaluated for impairment		—		24			—		—		—		—		1,724			427			145			2,320
Total allowance for loan losses	$	—	$	24		$	—	$	—	$	—	$	—	$	1,724		$	427		$	145		$	2,320
Ending balance of loans receivable:
Individually evaluated for impairment	$	—	$	211		$	—	$	—	$	—	$	—	$	—		$	—		$	—		$	211
Collectively evaluated for impairment		—		7,574			—		—		—		—		31,656			28,324			40,609			108,163
Total loans receivable	$	—	$	7,785		$	—	$	—	$	—	$	—	$	31,656		$	28,324		$	40,609		$	108,374

	Bank and ALC
	Year Ended December 31, 2018
	Construction, Land		1-4 Family			Real Estate Multi-Family		Non- Farm Non-Residential		Other			Commercial			Consumer			Branch Retail			Indirect Sales			Total
	(Dollars in Thousands)
Allowance for loan losses:
Beginning balance	$	203	$	290		$	116	$	777	$	2		$	1,049		$	1,715		$	393		$	229		$	4,774
Charge-offs		—		(101	)		—		—		—			(3	)		(2,482	)		(415	)		(116	)		(3,117	)
Recoveries		—		74			—		4		—			11			568			113			6			776
Provision		37		83			12		50		(1	)		81			1,998			336			26			2,622
Ending balance	$	240	$	346		$	128	$	831	$	1		$	1,138		$	1,799		$	427		$	145		$	5,055
Ending balance of allowance attributable to loans:
Individually evaluated for impairment	$	28	$	50		$	—	$	1	$	—		$	67		$	20		$	—		$	—		$	166
Collectively evaluated for impairment		212		296			128		830		1			1,071			1,779			427			145			4,889
Loans acquired with deteriorated credit quality		—		—			—		—		—			—			—			—			—			—
Total allowance for loan losses	$	240	$	346		$	128	$	831	$	1		$	1,138		$	1,799		$	427		$	145		$	5,055
Ending balance of loans receivable:
Individually evaluated for impairment	$	153	$	268		$	—	$	511	$	—		$	67		$	43		$	—		$	—		$	1,042
Collectively evaluated for impairment		41,114		110,064			23,009		155,651		1,308			85,712			38,540			28,324			40,609			524,331
Loans acquired with deteriorated credit quality		73		424			—		—		—			—			—			—			—			497
Total loans receivable	$	41,340	$	110,756		$	23,009	$	156,162	$	1,308		$	85,779		$	38,583		$	28,324		$	40,609		$	525,870

20

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 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 assets, even though partial recovery may be realized 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, 2019:

	Bank
	Pass 1-5		Special Mention 6		Substandard 7		Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	27,034	$	340	$	147	$	27,521
Secured by 1-4 family residential properties		94,586		152		2,067		96,805
Secured by multi-family residential properties		28,033		—		—		28,033
Secured by non-farm, non-residential properties		155,808		1,911		1,029		158,748
Other		880		—		—		880
Commercial and industrial loans		89,418		1,925		146		91,489
Consumer loans		7,178		—		63		7,241
Total	$	402,937	$	4,328	$	3,452	$	410,717

The above amounts include purchased credit impaired loans. As of June 30, 2019, $0.2 million of purchased credit impaired loans were rated “Substandard.”

	ALC
	Performing		Nonperforming		Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	6,438	$	111	$	6,549
Consumer loans:
Consumer		29,409		510		29,919
Branch retail		29,499		110		29,609
Indirect sales		45,360		106		45,466
Total	$	110,706	$	837	$	111,543

21

The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31, 2018:

	Bank
	Pass 1-5		Special Mention 6		Substandard 7		Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	40,200	$	914	$	226	$	41,340
Secured by 1-4 family residential properties		100,485		154		2,332		102,971
Secured by multi-family residential properties		23,009		—		—		23,009
Secured by non-farm, non-residential properties		153,077		1,996		1,089		156,162
Other		1,308		—		—		1,308
Commercial and industrial loans		83,261		1,977		541		85,779
Consumer loans		6,848		—		79		6,927
Total	$	408,188	$	5,041	$	4,267	$	417,496

The above amounts include purchased credit impaired loans. As of December 31, 2018, $0.5 million of purchased credit impaired loans were rated “Substandard.”

	ALC
	Performing		Nonperforming		Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	7,657	$	128	$	7,785
Consumer loans:
Consumer		30,826		830		31,656
Branch retail		28,171		153		28,324
Indirect sales		40,491		118		40,609
Total	$	107,145	$	1,229	$	108,374

The following tables provide an aging analysis of past due loans by class as of June 30, 2019:

	Bank
	As of June 30, 2019
	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	$	—	$	—	$	—	$	—	$	27,521	$	27,521	$	—
Secured by 1-4 family residential properties		185		369		—		554		96,251		96,805		—
Secured by multi-family residential properties		—		—		—		—		28,033		28,033		—
Secured by non-farm, non-residential properties		470		—		10		480		158,268		158,748		—
Other		—		—		10		10		870		880		—
Commercial and industrial loans		116		—		—		116		91,373		91,489		—
Consumer loans		62		23		18		103		7,138		7,241		—
Total	$	833	$	392	$	38	$	1,263	$	409,454	$	410,717	$	—

The above amounts include purchased credit impaired loans. As of June 30, 2019, $7 thousand of purchased credit impaired loans were 90 or more days past due.

22

	ALC
	As of June 30, 2019
	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		56		111		232		6,317		6,549		—
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans:
Consumer		369		272		510		1,151		28,768		29,919		—
Branch retail		154		55		110		319		29,290		29,609		—
Indirect sales		192		10		106		308		45,158		45,466		—
Total	$	780	$	393	$	837	$	2,010	$	109,533	$	111,543	$	—

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

	Bank
	As of December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days And Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	415	$	582	$	74	$	1,071	$	40,269	$	41,340	$	—
Secured by 1-4 family residential properties		991		36		539		1,566		101,405		102,971		—
Secured by multi-family residential properties		—		—		—		—		23,009		23,009		—
Secured by non-farm, non-residential properties		458		13		—		471		155,691		156,162		—
Other		—		—		—		—		1,308		1,308		—
Commercial and industrial loans		2,608		30		384		3,022		82,757		85,779		—
Consumer loans		80		—		4		84		6,843		6,927		—
Total	$	4,552	$	661	$	1,001	$	6,214	$	411,282	$	417,496	$	—

The above amounts include purchased credit impaired loans. As of December 31, 2018, $0.3 million of purchased credit impaired loans were 90 or more days past due.

23

	ALC
	As of December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days And Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Secured by 1-4 family residential properties		60		65		128		253		7,532		7,785		—
Secured by multi-family residential properties		—		—		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—		—		—
Consumer loans:
Consumer		563		354		830		1,747		29,909		31,656		—
Branch retail		164		98		153		415		27,909		28,324
Indirect sales		184		79		118		381		40,228		40,609		—
Total	$	971	$	596	$	1,229	$	2,796	$	105,578	$	108,374	$	—

The following table provides an analysis of non-accruing loans by class as of June 30, 2019 and December 31, 2018:

	Loans on Non-Accrual Status
	June 30, 2019		December 31, 2018
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	—	$	73
Secured by 1-4 family residential properties		632		1,097
Secured by multi-family residential properties		—		—
Secured by non-farm, non-residential properties		20		14
Other		10		—
Commercial and industrial loans		33		424
Consumer loans:
Consumer		568		879
Branch retail		110		153
Indirect sales		106		119
Total loans	$	1,479	$	2,759

As of June 30, 2019 and December 31, 2018, purchased credit impaired loans comprised $0.2 million and $0.5 million of nonaccrual loans, respectively.

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the related loan agreement. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the liquidation of the collateral at the Bank. All loans of $0.5 million or more that have a credit quality risk grade of seven or above are identified for impairment analysis. At management’s discretion, additional loans may be impaired based on homogeneous factors such as changes in the nature and volume of the portfolio, portfolio quality, adequacy of the underlying collateral value, loan concentrations, historical charge-off trends and economic conditions that may affect the borrower’s ability to pay. At ALC, all loans of $50 thousand or more that are 90 days or more past due are identified for impairment analysis. As of both June 30, 2019 and December 31, 2018, there were $0.2 million of impaired loans with no related allowance recorded at ALC. Impaired loans, or portions thereof, are charged off when deemed uncollectable.

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As of June 30, 2019, the carrying amount of impaired loans at the Bank and ALC consisted of the following:

	June 30, 2019
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		1,289		1,289		—
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		504		504		—
Commercial and industrial		—		—		—
Consumer		—		—		—
Total loans with no related allowance recorded	$	1,793	$	1,793	$	—
Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	421	$	421	$	95
Secured by 1-4 family residential properties		22		22		16
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		—		—		—
Commercial and industrial		65		65		65
Consumer		35		35		12
Total loans with an allowance recorded	$	543	$	543	$	188
Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	421	$	421	$	95
Secured by 1-4 family residential properties		1,311		1,311		16
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		504		504		—
Commercial and industrial		65		65		65
Consumer		35		35		12
Total impaired loans	$	2,336	$	2,336	$	188

The above amounts include purchased credit impaired loans. As of June 30, 2019, purchased credit impaired loans comprised $0.2 million of impaired loans without a related allowance recorded.

25

As of December 31, 2018, the carrying amount of impaired loans at the Bank and ALC consisted of the following:  

	December 31, 2018
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	73	$	73	$	—
Secured by 1-4 family residential properties		635		635		—
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		—		—		—
Commercial and industrial		—		—		—
Consumer		—		—		—
Total loans with no related allowance recorded	$	708	$	708	$	—
Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	153	$	153	$	28
Secured by 1-4 family residential properties		57		57		50
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		511		511		1
Commercial and industrial		67		67		67
Consumer		43		43		20
Total loans with an allowance recorded	$	831	$	831	$	166
Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	226	$	226	$	28
Secured by 1-4 family residential properties		692		692		50
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		511		511		1
Commercial and industrial		67		67		67
Consumer		43		43		20
Total impaired loans	$	1,539	$	1,539	$	166

The above amounts include purchased credit impaired loans. As of December 31, 2018, purchased credit impaired loans comprised $0.5 million of impaired loans without a related allowance recorded.

The average net investment in impaired loans and interest income recognized and received on impaired loans during the six months ended June 30, 2019 and the year ended December 31, 2018 were as follows:

	Six Months Ended June 30, 2019
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	181	$	7	$	6
Secured by 1-4 family residential properties		1,062		31		28
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		718		19		18
Other		—		—		—
Commercial and industrial		66		4		3
Consumer		40		1		1
Total	$	2,067	$	62	$	56

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	Year Ended December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	70	$	8	$	8
Secured by 1-4 family residential properties		794		16		16
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		523		34		35
Other		1		—		—
Commercial and industrial		57		4		5
Consumer		15		3		3
Total	$	1,460	$	65	$	67

Loans on which the accrual of interest has been discontinued amounted to $1.5 million and $2.8 million as of June 30, 2019 and December 31, 2018, respectively. If interest on those loans had been accrued, there would have been $10 thousand and $44 thousand of interest accrued for the periods ended June 30, 2019 and December 31, 2018, respectively. Interest income related to these loans for the six months ended June 30, 2019 and the year ended December 31, 2018 was $8 thousand and $27 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, 2019 or the year ended December 31, 2018. Restructured loans may involve loans remaining on non-accrual, moving to non-accrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Non-accrual restructured loans are included with all other non-accrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, then the loan remains on non-accrual. As of June 30, 2019 and December 31, 2018, the Company had $22 thousand and $65 thousand of non-accruing loans that were previously restructured and that remained on non-accrual status. For both the six months ended June 30, 2019 and the year ended December 31, 2018, the Company had no loans that were restored to accrual status based on a sustained period of repayment performance.

The following table provides, as of June 30, 2019 and December 31, 2018, the number of loans remaining in each loan category 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, 2019						December 31, 2018
	Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance		Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans		1	$	107	$	69		1	$	107	$	73
Secured by 1-4 family residential properties		3		318		64		3		318		118
Secured by non-farm, non-residential properties		—		—		—		1		53		34
Commercial loans		2		116		67		2		116		72
Total		6	$	541	$	200		7	$	594	$	297

As of June 30, 2019 and December 31, 2018, 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 $2 thousand as of both June 30, 2019 and December 31, 2018.

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6. OTHER REAL ESTATE OWNED AND REPOSSESSIONS

Other Real Estate Owned

Other real estate and certain other assets acquired in foreclosure are reported at the net realizable value of the property, less estimated costs to sell. The following tables summarize foreclosed property activity as of the six months ended June 30, 2019 and 2018:

	June 30, 2019
	Bank			ALC			Total
	(Dollars in Thousands)
Beginning balance	$	1,401		$	104		$	1,505
Additions (1)		224			38			262
Sales proceeds		(404	)		(79	)		(483	)
Gross gains		37			2			39
Gross losses		—			(27	)		(27	)
Net gains (losses)		37			(25	)		12
Impairment		—			(38	)		(38	)
Ending balance	$	1,258		$	—		$	1,258

	June 30, 2018
	Bank			ALC			Total
	(Dollars in Thousands)
Beginning balance	$	3,527		$	265		$	3,792
Additions (1)		106			25			131
Sales proceeds		(1,598	)		(43	)		(1,641	)
Gross gains		121			—			121
Gross losses		(45	)		(54	)		(99	)
Net gains (losses)		76			(54	)		22
Impairment		(109	)		(14	)		(123	)
Ending balance	$	2,002		$	179		$	2,181

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

Valuation adjustments are recorded in other non-interest expense and are primarily post-foreclosure write-downs that are a result of continued declining property values based on updated appraisals or other indications of value, such as offers to purchase. Net realizable value less estimated costs to sell of foreclosed residential real estate held by the Company was $0.1 million and $0.5 million as of June 30, 2019 and 2018, respectively. In addition, the Company did not hold any consumer mortgage loans collateralized by residential real estate that were in the process of foreclosure as of June 30, 2019 and held $48 thousand of these loans as of June 30, 2018.

Repossessions

In addition to the other real estate and other assets acquired in foreclosure, the Bank and ALC also acquire assets through the repossession of the underlying collateral of loans in default. Total repossessed assets as of both June 30, 2019 and December 31, 2018 were$0.2 million.

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7. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company recorded $7.4 million of goodwill as a result of its acquisition of TPB in 2018. Goodwill impairment was neither indicated nor recorded during the six months ended June 30, 2019 or the year ended December 31, 2018.

Goodwill is tested annually, or more often if circumstances warrant, for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements. Goodwill totaled $7.4 million as of both June 30, 2019 and December 31, 2018.

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

The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) as of June 30, 2019 were as follows:

	June 30, 2019
	(Dollars in Thousands)
Goodwill	$	7,435
Core deposit intangible:
Gross carrying amount		2,048
Accumulated amortization		(427	)
Core deposit intangible, net		1,621
Total	$	9,056

The Company’s estimated remaining amortization expense on intangibles as of June 30, 2019 was as follows:

	Amortization Expense
	(Dollars in Thousands)
2019	$	232
2020		414
2021		341
2022		268
2023		195
2024		122
2025		49
Total	$	1,621

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

8. SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, and short-term FHLB advances with original maturities of one year or less. Short-term borrowings totaled $0.1 million and $0.5 million as of June 30, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, there were no federal funds purchased outstanding. The Bank had $72.0 million and $72.2 million in available unused lines of credit with correspondent banks and the Federal Reserve as of June 30, 2019 and December 31, 2018, respectively.

Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The Bank monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements as of June 30, 2019 and December 31, 2018 totaled $0.1 million and $0.5 million, respectively.

Short-term FHLB advances are secured borrowings available to the Bank as an alternative funding source. As of both June 30, 2019 and December 31, 2018, the Bank did not have any outstanding FHLB advances with original maturities of less than one year. 

9. 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. As of both June 30, 2019 and December 31, 2018, the Company did not have any long-term FHLB advances outstanding.

Assets pledged (including loans and investment securities) associated with FHLB advances totaled $36.9 million and $27.0 million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019 and December 31, 2018, the Bank had $238.5 million and $282.2 million, respectively, in remaining credit from the FHLB (subject to available collateral).

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10. INCOME TAXES

The provision for income taxes was $0.7 million and $0.2 million for the six-month periods ended June 30, 2019 and 2018, respectively. The Company’s effective tax rate was 22.5% and 17.3%, respectively, for the same periods. The effective tax rate is impacted by recurring permanent differences, such as those associated with bank-owned life insurance and tax-exempt investment and loan income.

The Company had a net deferred tax asset of $3.4 million and $4.6 million as of June 30, 2019 and December 31, 2018, respectively. The decrease in the net deferred tax asset resulted primarily from the impact of changes in the fair value of securities available-for-sale, combined with reductions in net operating loss carryforwards and other book-to-tax temporary differences.

11. DEFERRED COMPENSATION PLANS

The Company 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 $3.3 million and $3.4 million as of June 30, 2019 and December 31, 2018, respectively.

Non-employee directors may elect to defer payment of all or any portion of their Bancshares and Bank director fees under Bancshares’ Non-Employee Directors’ Deferred Compensation Plan (the “Deferral Plan”). The Deferral Plan permits non-employee directors to invest their directors’ fees and to receive the adjusted value of the deferred amounts in cash and/or shares of Bancshares’ common stock. Neither Bancshares nor the Bank makes any contribution to participants’ accounts under the Deferral Plan. As of June 30, 2019 and December 31, 2018, a total of 119,519 and 116,766 shares of Bancshares common stock, respectively, were deferred in connection with the Deferral Plan. All deferred fees, whether in the form of cash or shares of Bancshares common stock, are reflected as compensation expense in the period earned. The Company classifies all deferred directors’ fees allocated to be paid in shares as equity surplus. The Company may use issued shares or shares of treasury stock to satisfy these obligations when due.

12. 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, 2019 and 2018.

Stock Options

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

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

	2019			2018
Risk-free interest rate		2.59	%		2.77	%
Expected term (in years)		7.5			7.5
Expected stock price volatility		30.9	%		28.3	%
Dividend yield		1.25	%		1.50	%
Fair value of stock option		3.30			3.51

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

��	Six Months Ended
	June 30, 2019				June 30, 2018
	Number of Shares		Average Exercise Price		Number of Shares		Average Exercise Price
Options:
Outstanding, beginning of period		377,950	$	9.80		318,000	$	9.43
Granted		66,150		10.01		62,150		11.71
Exercised		—		—		—		—
Expired		—		—		—		—
Forfeited		16,819		11.39		1,450		11.05
Options outstanding, end of period		427,281	$	9.77		378,700	$	9.80
Options exercisable, end of period		309,682	$	9.20		249,300	$	8.71

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 $0.3 million and $0.9 million as of June 30, 2019 and 2018, respectively.

Restricted Stock

During the first six months of 2019 and 2018, respectively, 5,520 shares and 10,520 shares of restricted stock were granted. The Company recognizes the cost of services received in exchange for restricted stock awards based on the grant date closing price of the stock, with compensation expense recognized on a straight-line basis over the award’s vesting period. 

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13. LEASES

The Bank and ALC are involved in a number of operating leases, primarily for branch locations. Branch leases have remaining lease terms ranging from less than one year to 15 years, some of which include options to extend the leases for up to five years, and some of which include an option to terminate the lease within one year. The Bank leases certain office facilities to third parties and classifies these leases as operating leases.

The following table provides a summary of the components of lease expense, as well as the reporting location in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018:

	Location in the Condensed	Three Months Ended				Six Months Ended
	Consolidated Statements of Operations	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
		(Dollars in Thousands)				(Dollars in Thousands)
Operating lease expense (1)	Net occupancy and equipment	$	210	$	137	$	420	$	295
Operating lease income (2)	Other income, net	$	212	$	—	$	421	$	34

⁽¹⁾ Includes short-term lease costs. For the three and six month periods ended June 30, 2019 and 2018, short-term lease costs were nominal in amount.

⁽²⁾ Operating lease income includes rental income from owned properties.

The following table provides supplemental lease information for operating leases on the Condensed Consolidated Balance Sheet as of June 30, 2019:

	Location in the Condensed
	Consolidated Balance Sheet	June 30, 2019
		(Dollars in Thousands)
Operating lease right-of-use assets	Other assets	$	3,776
Operating lease liabilities	Other liabilities	$	3,792
Weighted-average remaining lease term (in years)			7.28
Weighted-average discount rate			3.19	%

The following table provides supplemental lease information for the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018:

		Six Months Ended
		June 30, 2019	June 30, 2018
		(Dollars in Thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	385	$	230

The following table is a schedule of remaining future minimum lease payments for operating leases that had an initial or remaining non-cancellable lease term in excess of one year as of June 30, 2019:

	Minimum Rental Payments
	(Dollars in Thousands)
2019	$	371
2020		677
2021		574
2022		512
2023		453
2024 and thereafter		1,714
Total future minimum lease payments	$	4,301
Less: Imputed interest		509
Total operating lease liabilities	$	3,792

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14. SEGMENT REPORTING

Under ASC Topic 280, Segment Reporting, certain information is disclosed for the two reportable operating segments of Bancshares: the Bank and ALC. The reportable segments were determined using the internal management reporting system. These segments comprise Bancshares’ and the Bank’s significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2018. 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, 2019:
Net interest income	$	5,986	$	3,240	$	7		$	—		$	9,233
Provision for loan losses		90		625		—			—			715
Total non-interest income		1,108		228		1,384			(1,429	)		1,291
Total non-interest expense		5,798		2,366		493			(153	)		8,504
Income before income taxes		1,206		477		898			(1,276	)		1,305
Provision for income taxes		249		121		(70	)		—			300
Net income	$	957	$	356	$	968		$	(1,276	)	$	1,005
Other significant items:
Total assets	$	778,252	$	107,911	$	89,102		$	(198,094	)	$	777,171
Total investment securities		136,569		—		80			—			136,649
Total loans, net		501,177		104,007		—			(93,669	)		511,515
Goodwill and core deposit intangible, net		9,056		—		—			—			9,056
Investment in subsidiaries		5		—		83,436			(83,436	)		5
Fixed asset additions		887		64		—			—			951
Depreciation and amortization expense		361		35		—			—			396
Total interest income from external customers		6,476		4,447		—			—			10,923
Total interest income from affiliates		1,206		—		7			(1,213	)		—
For the six months ended June 30, 2019:
Net interest income	$	11,995	$	6,398	$	13		$	—		$	18,406
Provision for loan losses		90		1,025		—			—			1,115
Total non-interest income		2,186		447		2,965			(3,042	)		2,556
Total non-interest expense		11,631		4,734		920			(328	)		16,957
Income before income taxes		2,460		1,086		2,058			(2,714	)		2,890
Provision for income taxes		511		264		(124	)		—			651
Net income	$	1,949	$	822	$	2,182		$	(2,714	)	$	2,239
Other significant items:
Fixed asset additions		2,564		78		—			—			2,642
Depreciation and amortization expense		728		68		—			—			796
Total interest income from external customers		12,969		8,766		1			—			21,736
Total interest income from affiliates		2,367		—		12			(2,379	)		—

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					All
	Bank		ALC		Other			Eliminations			Consolidated
	(Dollars in Thousands)
As of and for the three months ended June 30, 2018:
Net interest income	$	4,244	$	3,254	$	4		$	—		$	7,502
Provision for loan losses		—		702		—			—			702
Total non-interest income		948		272		684			(772	)		1,132
Total non-interest expense		4,888		2,426		365			(187	)		7,492
Income before income taxes		304		398		323			(585	)		440
Provision for income taxes		60		82		(61	)		—			81
Net income	$	244	$	316	$	384		$	(585	)	$	359
Other significant items:
Total assets	$	636,623	$	103,624	$	81,132		$	(187,343	)	$	634,036
Total investment securities		165,660		—		80			—			165,740
Total loans, net		345,673		100,792		—			(90,936	)		355,529
Goodwill and core deposit intangible, net		—		—		—			—			—
Investment in subsidiaries		5		—		75,241			(75,241	)		5
Fixed asset additions		439		55		—			—			494
Depreciation and amortization expense		321		32		—			—			353
Total interest income from external customers		3,983		4,407		—			—			8,390
Total interest income from affiliates		1,154		—		4			(1,158	)		—
For the six months ended June 30, 2018:
Net interest income	$	8,361	$	6,447	$	8		$	—		$	14,816
Provision for loan losses		39		1,321		—			—			1,360
Total non-interest income		1,815		528		1,537			(1,608	)		2,272
Total non-interest expense		9,419		4,950		812			(388	)		14,793
Income before income taxes		718		704		733			(1,220	)		935
Provision for income taxes		130		152		(120	)		—			162
Net income	$	588	$	552	$	853		$	(1,220	)	$	773
Other significant items:
Fixed asset additions		658		57		—			—			715
Depreciation and amortization expense		639		65		—			—			704
Total interest income from external customers		7,820		8,689		—			—			16,509
Total interest income from affiliates		2,243		—		8			(2,251	)		—

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15. 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.

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, 2019		December 31, 2018
	(Dollars in Thousands)
Standby letters of credit	$	180	$	180
Standby performance letters of credit		652		704
Commitments to extend credit	$	102,789	$	85,972

Standby letters of credit and standby performance letters of credit are contingent commitments issued by the Bank generally to guarantee the performance of a customer to a third party. The Bank has recourse against the customer for any amount that it is required to pay to a third party under a standby letter of credit or standby performance letter of credit. Revenues are recognized over the lives of the standby letters of credit and standby performance letters of credit. As of June 30, 2019 and December 31, 2018, the potential amounts of future payments that the Bank could be required to make under its standby letters of credit and standby performance letters of credit, which represent the Bank’s total credit risk in these categories, are included in the table above.

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

The Company is self-insured for a significant portion of employee health benefits. However, the Company maintains stop-loss coverage with third-party insurers to limit the Company’s individual claim and total exposure related to self-insurance. The Company estimates accrued liability for the ultimate costs to settle known claims, as well as claims incurred but not yet reported, as of the balance sheet date. The Company’s recorded estimated liability for self-insurance is based on the insurance companies’ incurred loss estimates and management’s judgment, including assumptions and evaluation of factors related to the frequency and severity of claims, the Company’s claims development history and the Company’s claims settlement practices. The assessment of loss contingencies and self-insurance reserves is a highly subjective process that requires judgments about future events. Contingencies are reviewed at least quarterly to determine the adequacy of self-insurance accruals. Self-insurance accruals totaled $0.2 million and $0.1 million as of June 30, 2019 and December 31, 2018, respectively. The ultimate settlement of loss contingencies and self-insurance reserves may differ significantly from amounts accrued in the Company’s consolidated financial statements.

Litigation

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

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16. 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 representation of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Fair Value Hierarchy

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

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

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

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

The Company rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. Trading account assets and securities available-for-sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occurred at the beginning of a reporting period. There were no such transfers during the six months ended June 30, 2019 or the year ended December 31, 2018.

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.

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The following table presents assets measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018. There were no liabilities measured at fair value on a recurring basis for either period presented.

	Fair Value Measurements as of June 30, 2019 Using
	Totals At June 30, 2019		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	$	64,267	$	—	$	64,267	$	—
Commercial		48,749		—		48,749		—
Obligations of states and political subdivisions		4,865		—		4,865		—
U.S. Treasury securities		80		—		80		—

	Fair Value Measurements as of December 31, 2018 Using
	Totals At December 31, 2018		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Investment securities, available-for-sale
Mortgage-backed securities:
Residential	$	72,455	$	—	$	72,455	$	—
Commercial		54,289		—		54,289		—
Obligations of states and political subdivisions		5,664		—		5,664		—
U.S. Treasury securities		79		—		79		—

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.

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OREO

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is recorded at net realizable value, less estimated cost to sell. Estimates of fair value are generally based on third-party 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.

Assets Held-for-Sale

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

The following table presents the balances of impaired loans, OREO and assets held-for-sale measured at fair value on a non-recurring basis as of June 30, 2019 and December 31, 2018:

	Fair Value Measurements as of June 30, 2019 Using
	Totals At June 30, 2019		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	$	355	$	—	$	—	$	355
OREO		1,258		—		—		1,258
Assets held-for-sale		198		—		—		198

	Fair Value Measurements as of December 31, 2018 Using
	Totals At December 31, 2018		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Impaired loans	$	665	$	—	$	—	$	665
OREO		1,505		—		—		1,505
Assets held-for-sale		198		—		—		198

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Non-recurring Fair Value Measurements Using Significant Unobservable Inputs

The following table presents information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of June 30, 2019. 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, 2019 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, 2019		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs (Weighted Average)
	(Dollars in Thousands)
Non-recurring fair value measurements:
Impaired loans	$	355	Multiple data points, including discount to appraised value of collateral based on recent market activity	Appraisal comparability adjustment (discount)	9%	-	10%	(9.5%)
OREO	$	1,258	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal comparability adjustment (discount)	9%	-	10%	(9.5%)
Assets held-for-sale	$	198	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal comparability adjustment (discount)	9%	-	10%	(9.5%)

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.

Assets Held-for-Sale

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

Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate. 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.

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

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

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

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

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

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

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

The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of June 30, 2019 and December 31, 2018 were as follows:

	June 30, 2019
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	44,859	$	44,859	$	44,859	$	—	$	—
Investment securities available-for-sale		117,961		117,961		—		117,961		—
Investment securities held-to-maturity		18,688		18,574		—		18,574		—
Federal funds sold		15,081		15,081		—		15,081		—
Federal Home Loan Bank stock		713		713		—		—		713
Loans, net of allowance for loan losses		511,515		516,490		—		—		516,490
Liabilities:
Deposits		682,806		682,865		—		682,865		—
Short-term borrowings		73		73		—		73		—

	December 31, 2018
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	49,599	$	49,599	$	49,599	$	—	$	—
Investment securities available-for-sale		132,487		132,487		—		132,487		—
Investment securities held-to-maturity		21,462		20,852		—		20,852		—
Federal funds sold		8,354		8,354		—		8,354		—
Federal Home Loan Bank stock		703		703		—		—		703
Loans, net of allowance for loan losses		514,867		516,420		—		—		516,420
Liabilities:
Deposits		704,725		702,832		—		702,832		—
Short-term borrowings		527		527		—		527		—

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

DESCRIPTION OF THE BUSINESS

First US Bancshares, Inc., a Delaware corporation (“Bancshares”), is a bank holding company with its principal offices in Birmingham, Alabama. Bancshares operates one commercial banking subsidiary, First US Bank (the “Bank”). As of June 30, 2019, the Bank operated and served its customers through 20 banking offices located in Birmingham, Bucksville, Butler, Calera, Centreville, Columbiana, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama; Knoxville and Powell, Tennessee; and Rose Hill and Ewing, Virginia. In addition, as of June 30, 2019, the Bank operated loan production offices in Mobile, Alabama and the Chattanooga, Tennessee area.

The Bank owns all of the stock of Acceptance Loan Company, Inc., an Alabama corporation (“ALC”). ALC is a finance company headquartered in Mobile, Alabama that performs both indirect lending through third-party retailers and conventional consumer finance lending through a branch network. ALC conducts indirect lending in 11 states, including Alabama, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia, with loans underwritten centrally at ALC’s headquarters location. ALC’s branch network serves customers through 21 offices located in Alabama and southeast Mississippi. The Bank serves as the primary funding source for ALC’s operations. In recent years, ALC’s indirect lending portfolio has grown at a more rapid pace than conventional consumer finance lending. In general, the credit quality of indirect lending exceeds the credit quality of conventional consumer finance lending, with a commensurate reduction in yield and lower loss ratios.

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

Delivery of the best possible financial services to customers remains an overall operational focus of Bancshares and its subsidiaries (collectively, the “Company”). The Company recognizes that attention to detail and responsiveness to customers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 284 full-time equivalent employees (as of June 30, 2019), to ensure customer satisfaction and convenience.

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general banking practices. These estimates include accounting for the allowance for loan and lease losses, goodwill and other intangible assets, 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, 2018.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of June 30, 2019 to December 31, 2018, while comparing income and expense for the six-month periods ended June 30, 2019 and 2018.

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, 2018. As used in the following discussion, the words “we,” “us,” “our” and the “Company” refer to Bancshares and its consolidated subsidiaries, unless the context indicates otherwise.

EXECUTIVE OVERVIEW

The Company earned net income of $1.0 million, or $0.15 per diluted common share, during the three months ended June 30, 2019, compared to $0.4 million, or $0.06 per diluted common share, for the three months ended June 30, 2018. For the six months ended June 30, 2019, net income totaled $2.2 million, or $0.33 per diluted common share, compared to $0.8 million, or $0.12 per diluted common share, for the corresponding six-month period of 2018.

Summarized condensed consolidated statements of operations are included below for the three-month and six-month periods ended June 30, 2019 and 2018, respectively.

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2019		2018		2019		2018
	(Dollars in Thousands)
Interest income	$	10,923	$	8,390	$	21,736	$	16,509
Interest expense		1,690		888		3,330		1,693
Net interest income		9,233		7,502		18,406		14,816
Provision for loan and lease losses		715		702		1,115		1,360
Net interest income after provision for loan and lease losses		8,518		6,800		17,291		13,456
Non-interest income		1,291		1,132		2,556		2,272
Non-interest expense		8,504		7,492		16,957		14,793
Income before income taxes		1,305		440		2,890		935
Provision for income taxes		300		81		651		162
Net income	$	1,005	$	359	$	2,239	$	773

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Significant Impacts on Earnings

The following discussion summarizes the most significant activity that drove changes in the Company’s net income during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. 

Net Interest Income

Net interest income increased by $3.6 million, or 24.2%, comparing the six months ended June 30, 2019 to the same period in 2018, due primarily to increases in average loans outstanding following the acquisition of TPB. The average loan balance for the six months ended June 30, 2019 was $512.7 million, compared to $355.7 million for the six months ended June 30, 2018. The increases in interest income resulting from loan growth were partially offset by increases in interest expense due to an increase in average interest-bearing liabilities following the acquisition of TPB. The average balance of interest-bearing liabilities was $586.6 million during the first half of 2019, compared to $458.7 million during the first half of 2018. Net interest margin decreased to 5.19% for the six months ended June 30, 2019, compared to 5.28% for the six months ended June 30, 2018. Yields earned on interest-earning assets improved by 25 basis points comparing the six-month period ended June 30, 2019 to the same period of 2018; however, these gains were offset by a 40-basis point increase in funding costs, comparing the two periods. The increases in both loan yields and funding costs were consistent with the prevailing interest rate environments comparing the two periods. In addition, there was a decrease in the average yield of loans at ALC due to a continued shift toward indirect sales loans with a lower yield but higher credit quality.

Provision for Loan and Lease Losses

The provision for loan and lease losses decreased by $0.2 million, or 18.0%, during the first half of 2019 compared to the first half of 2018, due primarily to slower loan growth at ALC in 2019 compared to 2018. During the first half of 2019, ALC’s indirect sales portfolio increased by $4.9 million, compared to an increase of $8.6 million during the first half of 2018. Additionally, ALC’s consumer and branch retail portfolios decreased by $0.5 million during the first half of 2019, compared to an increase of $2.6 million in these portfolios during the first half of 2018. 

Non-interest Income

Non-interest income increased by $0.3 million comparing the first half of 2019 to the first half of 2018. The increase was mostly attributable to rental income of $0.4 million associated with the lease-up of remaining unused office space at the Company’s headquarters location in Birmingham, Alabama. Lease-up of the space occurred in the fourth quarter of 2018. The increase was partially offset by a decrease in credit insurance commissions and fees at ALC, as well as a decrease in the net gains on the sale and prepayment of investment securities at the Bank, during the six months ended June 30, 2019 compared to the same period in 2018.

Non-interest Expense

Non-interest expense increased by $2.2 million comparing the first half of 2019 to the first half of 2018. The increase was attributable primarily to additional salaries and benefits, occupancy and other expenses associated with the addition of employees, facilities and other services in connection with the acquisition of TPB.

Provision for Income Taxes

The Company’s effective tax rate increased to 22.5% during the six months ended June 30, 2019, compared to 17.3% during the corresponding period of 2018. The increased effective tax rate resulted from growth in taxable earnings.

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Balance Sheet Management

As of June 30, 2019, the Company’s assets totaled $777.2 million, compared to $791.9 million as of December 31, 2018, a decrease of 1.86%. The discussion below presents significant balance sheet components comparing June 30, 2019 to December 31, 2018.

Loans and Credit Quality

Net loans decreased to $511.5 million as of June 30, 2019, compared to $514.9 million as of December 31, 2018. Net loans at the Bank decreased $6.9 million during the first half of 2019, while net loans at ALC increased by $3.6 million during the same period. At the Bank, the reduction in loan volume resulted primarily from the scheduled pay-off of one significant loan relationship that occurred during the first quarter of 2019. Net loans increased $8.8 million during the second quarter of 2019. This growth included $3.7 million attributable to the Bank’s commercial lending efforts, along with $5.1 million in growth at ALC. ALC’s growth was most pronounced in its indirect sales portfolio, which has been an area of focus for management over the past several years.

As of both June 30, 2019 and December 31, 2018, the allowance for loan and lease losses totaled $5.1 million, or 0.98% and 0.97% of gross loans outstanding, respectively, representing a decrease from 1.37% as of June 30, 2018. In accordance with generally accepted accounting principles for acquisition accounting, the loans acquired through the TPB acquisition were recorded at fair value; accordingly, there was no allowance for loan and lease losses associated with the acquired loan portfolio at the acquisition date. Management continues to evaluate the need for an allowance on the acquired portfolio, factoring in the remaining fair value discount on the loans, which totaled 1.07% of gross purchased loans as of June 30, 2019. Management has also recorded an allowance for loan and lease losses of approximately $50 thousand on the acquired portfolio, bringing the allowance on purchased loans combined with the fair value discount to $1.5 million, or 1.10% of the gross purchased loans balance, as of June 30, 2019. The allowance for loan and lease losses as a percentage of non-purchased gross loans outstanding was 1.32% as of June 30, 2019.

Nonperforming assets, including loans in non-accrual status and other real estate owned (OREO), decreased to $2.7 million as of June 30, 2019, compared to $4.3 million as of December 31, 2018. As a percentage of total assets, non-performing assets totaled 0.35% as of June 30, 2019, compared to 0.54% of total assets as of December 31, 2018. Non-accrual loans totaled $1.5 million as of June 30, 2019, compared to $2.8 million as of December 31, 2018.

Investment Securities

The investment securities portfolio continues to provide the Company with additional liquidity and allows management to fund a portion of loan growth from the maturity and payoff of securities within the portfolio. During the first half of 2019 and the year ended December 31, 2018, investment maturities outpaced purchases as management generally re-deployed maturing securities into other interest-earning assets, including loans or excess cash and federal funds sold that may be used to fund future loan growth. As of June 30, 2019, the investment securities portfolio totaled $136.6 million, compared to $153.9 million as of December 31, 2018. Management monitors its liquidity position, including forecasted expectations related to loan growth, when making determinations about whether to re-invest in the securities portfolio. 

Right-of-Use Asset and Lease Liability

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases,” by recognizing a right-of-use asset and lease liability associated with certain leases in which the Bank or ALC is lessee. As of June 30, 2019, the right-of-use asset and lease liability both totaled $3.8 million. The right-of-use asset is included in other assets on the balance sheet, while the lease liability is included in other liabilities. The adoption of ASU 2016-02 did not have a material impact on the Company’s income or expenses associated with its existing leases.

Deposits and Borrowings

Deposits totaled $682.8 million as of June 30, 2019, compared to $704.7 million as of December 31, 2018. In an effort to improve the efficiency of the Company’s balance sheet and reduce interest expense, during the first six months of 2019, management reduced wholesale deposit funding sources by allowing $28.3 million in brokered deposits to mature without renewal. The reduction in wholesale deposits was partially offset by organic growth in deposits at the Bank of approximately $6.4 million. As of June 30, 2019, the Company’s brokered deposits balances totaled $5.0 million.

Liquidity and Capital

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

During the second quarter of 2019, the Bank continued to maintain capital ratios at higher levels than the ratios required to be considered a “well-capitalized” institution under applicable banking regulations. As of June 30, 2019, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 12.86%. Its total capital ratio was 13.76%, and its Tier 1 leverage ratio was 9.43%.

42

RESULTS OF OPERATIONS

Net Interest Income

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

The following 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, 2019 and 2018. Additionally, the tables provide an analysis of interest revenue or expense associated with each category, along with the accompanying yield or rate percentage. Net interest margin is calculated for each period presented as net interest income divided by average total interest-earning assets.

	Three Months Ended							Three Months Ended
	June 30, 2019							June 30, 2018
	Average Balance		Interest		Annualized Yield/ Rate %			Average Balance		Interest		Annualized Yield/ Rate %
	(Dollars in Thousands)
ASSETS
Interest-earning assets:
Loans – Bank (Note A)	$	410,609	$	5,386		5.26	%	$	258,956	$	2,923		4.53	%
Loans – ALC (Note A)		102,675		4,447		17.37	%		99,080		4,408		17.84	%
Taxable investment securities		141,429		747		2.12	%		171,752		869		2.03	%
Tax-exempt investment securities		2,197		15		2.74	%		4,992		44		3.54	%
Federal funds sold		15,080		98		2.61	%		4,121		22		2.14	%
Interest-bearing deposits in banks		39,492		230		2.34	%		27,682		124		1.80	%
Total interest-earning assets		711,482		10,923		6.16	%		566,583		8,390		5.94	%
Non-interest-earning assets:
Other assets		73,189							58,053
Total	$	784,671						$	624,636
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	169,745	$	215		0.51	%	$	157,335	$	169		0.43	%
Savings deposits		165,318		460		1.12	%		102,627		140		0.55	%
Time deposits		244,984		1,015		1.66	%		180,505		489		1.09	%
Borrowings		98		—		—	%		20,341		90		1.77	%
Total interest-bearing liabilities		580,145		1,690		1.17	%		460,808		888		0.77	%
Non-interest-bearing liabilities:
Demand deposits		111,929							82,200
Other liabilities		10,262							6,181
Shareholders’ equity		82,335							75,447
Total	$	784,671						$	624,636
Net interest income (Note B)			$	9,233						$	7,502
Net interest margin						5.21	%						5.31	%

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 $0.8 million and $0.4 million for the three months ended June 30, 2019 and 2018, respectively. At ALC, these loans averaged $0.8 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 $0.1 million for both of the three-month periods ended June 30, 2019 and 2018. At ALC, loan fees totaled $0.4 million and $0.5 million for the respective periods presented.

43

	Six Months Ended							Six Months Ended
	June 30, 2019							June 30, 2018
	Average Balance		Interest		Annualized Yield/ Rate %			Average Balance		Interest		Annualized Yield/ Rate %
	(Dollars in Thousands)
ASSETS
Interest-earning assets:
Loans – Bank (Note A)	$	410,264	$	10,740		5.28	%	$	259,099	$	5,731		4.46	%
Loans – ALC (Note A)		102,405		8,766		17.26	%		96,566		8,689		18.15	%
Taxable investment securities		145,211		1,552		2.16	%		175,313		1,734		1.99	%
Tax-exempt investment securities		2,199		30		2.75	%		5,549		100		3.63	%
Federal funds sold		11,129		142		2.57	%		7,182		65		1.83	%
Interest-bearing deposits in banks		43,989		506		2.32	%		22,454		190		1.71	%
Total interest-earning assets		715,197		21,736		6.13	%		566,163		16,509		5.88	%
Non-interest-earning assets:
Other assets		71,539							58,308
Total	$	786,736						$	624,471
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	169,507	$	421		0.50	%	$	162,122	$	340		0.42	%
Savings deposits		167,111		921		1.11	%		93,705		210		0.45	%
Time deposits		249,771		1,988		1.61	%		180,387		949		1.06	%
Borrowings		223		—		—	%		22,496		194		1.74	%
Total interest-bearing liabilities		586,612		3,330		1.14	%		458,710		1,693		0.74	%
Non-interest-bearing liabilities:
Demand deposits		109,501							83,311
Other liabilities		9,151							6,815
Shareholders’ equity		81,472							75,635
Total	$	786,736						$	624,471
Net interest income (Note B)			$	18,406						$	14,816
Net interest margin						5.19	%						5.28	%

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 $1.0 million and $0.4 million for the six months ended June 30, 2019 and 2018, respectively. At ALC, these loans averaged $1.0 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, 2019 and 2018. At ALC, loan fees totaled $0.9 million for both of the respective periods presented.

Interest earned on loans at the Bank increased in both the three- and six-month periods ended June 30, 2019 compared to the corresponding periods of the previous year, primarily due to the increase in average loan balance resulting from the acquisition of TPB. Comparing the three- and six-month periods, the average loan balance increased by $151.7 million and $151.2 million, respectively. Yield on loans at the Bank increased in part due to higher yielding loans acquired from TPB, and in part due to the general interest rate environment comparing the 2019 periods to the 2018 periods. At ALC, interest income was flat comparing the three and six months ended June 30, 2019 to the corresponding periods of 2018. Increases in the average balance of loans at ALC were generally offset by a decrease in average yield resulting from the continuing shift of ALC’s earning assets mix to a higher percentage of indirect sales loans relative to the loan portfolio total. Indirect sales lending has been ALC’s prominent focus over the past several years, and generally provides loans of higher credit quality than ALC’s other consumer loan categories, but at lower yields. Interest income from other earnings assets, including taxable and tax-exempt investment securities, federal funds sold and interest-bearing deposits in banks, increased in both the three- and six-month periods ended June 30, 2019 compared to the corresponding periods of the previous year, primarily due to higher yields in most earning asset categories. 

Interest expense increased comparing the three and six months ended June 30, 2019 to the corresponding periods of 2018, primarily due to an increase in average interest-bearing liabilities resulting from the acquisition of TPB. Average interest-bearing liabilities increased $119.3 million and $127.9 million comparing the three- and six-month periods, respectively. To a lesser extent, the increase in interest expense was also attributable to the increased interest rate environment comparing the 2019 periods to the corresponding periods of 2018. Consistent with the prevailing interest rate environment, the average rate on interest-bearing liabilities increased 40 basis points comparing the 2019 and 2018 periods.

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 excess cash balances, federal funds sold and investment securities into 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. In addition, the Bank experiences significant competitive pressure to both obtain and retain deposits. In recent quarters, the general interest rate environment has resulted in increasing deposit rates. Net interest income could experience downward pressure as a result of increased competition for quality loan and deposit funding opportunities.

44

Provision for Loan and Lease Losses

The provision for loan and lease losses is an expense used to establish the allowance for loan and lease losses. Actual losses, net of recoveries, are charged directly to the allowance for loan and lease losses. The expense recorded for each reporting period is a reflection of actual net losses experienced during the period and management’s judgment as to the adequacy of the allowance to absorb losses inherent in the portfolio as of the balance sheet date. The following table presents the provision for loan and lease losses for the Bank and ALC for the three and six months ended June 30, 2019 and 2018.

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2019		2018		2019		2018
Bank	$	90	$	—	$	90	$	39
ALC		625		702		1,025		1,321
Total	$	715	$	702	$	1,115	$	1,360

At the Bank, the increase in provision expense comparing the three and six months ended June 30, 2019 and 2018 was due to an increase in loan volume during the second quarter of 2019 that was not experienced during the second quarter of 2018. The Bank experienced loan growth of $11.4 million during the second quarter of 2019 attributable to the Bank’s commercial lending efforts. This growth was partially offset by a decline in the Bank’s purchased loan portfolio of $7.7 million during the quarter, resulting in net loan growth during the second quarter of 2019 of $3.7 million. The Bank’s allowance for loan and lease losses as a percentage of loans totaled 0.68% as of June 30, 2019, compared to 0.98% as of June 30, 2018. The decrease in the allowance for loan and lease losses as a percentage of loans was due to the acquisition of TPB that occurred during the third quarter of 2018. In accordance with generally accepted accounting principles for acquisition accounting, the loans acquired through the TPB acquisition were recorded at fair value; accordingly, there was no allowance for loan and lease losses associated with the acquired loan portfolio at the acquisition date. Management continues to evaluate the need for an allowance on the acquired portfolio, factoring in the remaining fair value discount on the loans, which totaled 1.07% of gross purchased loans as of June 30, 2019. Management has also recorded an allowance for loan and lease losses of approximately $50 thousand on the acquired portfolio, bringing the allowance on purchased loans combined with the fair value discount to $1.5 million, or 1.10% of the gross purchased loans balance, as of June 30, 2019. At the Bank, the allowance for loan and lease losses as a percentage of non-purchased gross loans outstanding was 1.00% as of June 30, 2019.

At ALC, the provision for loan and lease losses decreased comparing the three and six months ended June 30, 2019 and 2018 due to slower loan growth at ALC during the first half of 2019 compared to the first half of 2018. During the first half of 2019, ALC’s indirect sales portfolio increased by $4.9 million, compared to an increase of $8.6 million during the first half of 2018. Additionally, ALC’s consumer and branch retail portfolios decreased by $0.5 million during the first half of 2019, compared to an increase of $2.6 million in these portfolios during the first half of 2018. ALC’s allowance for loan and lease losses as a percentage of loans totaled 2.15% as of June 30, 2019, compared to 2.26% as of December 31, 2018 and 2.36% as of June 30, 2018. The decrease in the allowance for loan and lease losses as a percentage of loans was due to the changing mix of ALC’s portfolio to indirect lending, which has enhanced the credit quality of ALC’s loan portfolio.

For the Company, the allowance for loan and lease losses as a percentage of loans totaled 0.98% as of June 30, 2019, compared to 1.37% as of June 30, 2018. As discussed above, the decrease in the allowance for loan and lease losses as a percentage of loans was due to the acquisition of TPB that occurred during the third quarter of 2018. For the Company, the allowance for loan and lease losses as a percentage of non-purchased gross loans outstanding was 1.32% as of June 30, 2019. Based on our evaluation of the loan portfolio, we believe that the allowance for loan and lease losses at both the Bank and ALC is adequate to absorb losses inherent in the loan portfolio as of June 30, 2019. 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. Factors beyond our control, such as changes in economic conditions impacting the national economy or the local service areas in which the Bank and ALC operate, may negatively and materially affect asset quality and the adequacy of the allowance for loan and lease losses, as well as the resulting provision for loan and lease losses. In general, we expect the provision for loan and lease losses to increase commensurate with growth in loan volume at both the Bank and ALC.

Non-Interest Income

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

	Three Months Ended June 30,										Six Months Ended June 30,
	2019		2018		$ Change			% Change			2019		2018		$ Change			% Change
	(Dollars in Thousands)										(Dollars in Thousands)
Service charges and other fees on deposit accounts	$	443	$	444	$	(1	)		(0.2	)%	$	903	$	911	$	(8	)		(0.9	)%
Credit insurance commissions and fees		108		100		8			8.0	%		251		318		(67	)		(21.1	)%
Bank-owned life insurance		107		106		1			0.9	%		214		211		3			1.4	%
Net gain on sale and prepayment of investment securities		9		102		(93	)		(91.2	)%		22		105		(83	)		(79.0	)%
Mortgage fees from secondary market		186		144		42			29.2	%		289		261		28			10.7	%
Lease income		212		—		212			NM			421		34		387			1,138.2	%
Other income		226		236		(10	)		(4.2	)%		456		432		24			5.6	%
Total non-interest income	$	1,291	$	1,132	$	159			14.0	%	$	2,556	$	2,272	$	284			12.5	%

NM: Not measurable

45

Non-interest income at the Bank consists of service charges and other fees on deposit accounts; bank-owned life insurance; net gains on the sale and prepayment of investment securities; fees from the secondary market mortgage activities; lease income; and other non-interest income, which includes fee income generated by the Bank, such as ATM fees and real estate rental income. Non-interest income at ALC consists of credit insurance commissions and fees and other non-interest income generated for ancillary services, such as ALC’s auto club membership program. The increase in non-interest income for the three and six months ended June 30, 2019 compared to the same periods in 2018 was mostly attributable to rental income associated with the lease-up of remaining unused office space at the Company’s headquarters location in Birmingham, Alabama. Lease-up of the space occurred in December of 2018. The increase comparing the 2019 periods to the same periods of 2018 was also attributable to an increase in fees from the secondary market mortgage activities. These increases were partially offset by decreases in credit insurance commissions and fees at ALC during the six months ended June 30, 2019 compared to the same period in 2018, along with decreases in the net gain on the sale and prepayment of investment securities comparing the three and six months ended June 30, 2019 to the same periods in 2018. Certain categories of non-interest income are expected to provide a relatively stable source of revenues, while others may fluctuate significantly based on changes in economic conditions, regulation or other factors.

Non-Interest Expense

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

	Three Months Ended June 30,											Six Months Ended June 30,
	2019			2018		$ Change			% Change			2019		2018		$ Change			% Change
	(Dollars in Thousands)											(Dollars in Thousands)
Salaries and employee benefits	$	5,195		$	4,533	$	662			14.6	%	$	10,183	$	9,100	$	1,083			11.9	%
Net occupancy and equipment expense		1,046			873		173			19.8	%		2,135		1,762		373			21.2	%
Computer services		333			317		16			5.0	%		684		609		75			12.3	%
Insurance expense and assessments		192			191		1			0.5	%		473		377		96			25.5	%
Fees for professional services		321			266		55			20.7	%		563		539		24			4.5	%
Postage, stationery and supplies		212			190		22			11.6	%		450		402		48			11.9	%
Telephone/data communications		205			193		12			6.2	%		418		388		30			7.7	%
Other real estate/foreclosure expense:
Write-downs, net of gain or loss on sale		(3	)		152		(155	)		(102.0	)%		27		101		(74	)		(73.3	)%
Carrying costs		34			35		(1	)		(2.9	)%		62		75		(13	)		(17.3	)%
Total other real estate/foreclosure expense		31			187		(156	)		(83.4	)%		89		176		(87	)		(49.4	)%
Other		969			742		227			30.6	%		1,962		1,440		522			36.3	%
Total non-interest expense	$	8,504		$	7,492	$	1,012			13.5	%	$	16,957	$	14,793	$	2,164			14.6	%

The increase in non-interest expense for the three and six months ended June 30, 2019 compared to the same periods in 2018 was attributable primarily to additional salaries and benefits, occupancy and other expenses associated with the addition of employees, facilities and other services in connection with the acquisition of TPB in the third quarter of 2018. In general, non-interest expense is expected to increase over time due to inflationary pressures; however, management continues to maintain vigilance in efforts to reduce these costs where opportunities to do so exist.

Provision for Income Taxes

The provision for income taxes was $0.7 million and $0.2 million for the six-month periods ended June 30, 2019 and 2018, respectively. The Company’s effective tax rate was 22.5% and 17.3%, respectively, for the same periods. The increase in the effective tax rate resulted from an increase in the amount of taxable income earned by the Company comparing the first half of 2019 to the first half of 2018.

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

46

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 2.5 years and 2.9 years as of June 30, 2019 and December 31, 2018, 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, 2019, available-for-sale securities totaled $118.0 million, or 86.3% of the total investment portfolio, compared to $132.5 million, or 86.1% of the total investment portfolio, as of December 31, 2018. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities and obligations of state and political subdivisions.

Held-to-maturity securities are recorded at amortized cost and represent securities that the Company both intends and has the ability to hold to maturity. As of June 30, 2019, held-to-maturity securities totaled $18.7 million, or 13.7% of the total investment portfolio, compared to $21.5 million, or 13.9% of the total investment portfolio, as of December 31, 2018. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies and obligations of states and political subdivisions.

Loans and Allowance for Loan and Lease Losses

The tables below summarize loan balances by portfolio category for both the Bank and ALC at the end of each of the most recent five quarters as of June 30, 2019:

	Bank
	2019				2018
	June 30,		March 31,		December 31,		September 30,		June 30,
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	27,521	$	27,065	$	41,340	$	43,501	$	22,878
Secured by 1-4 family residential properties		96,805		99,933		102,971		111,555		38,968
Secured by multi-family residential properties		28,033		27,602		23,009		22,915		18,374
Secured by non-farm, non-residential properties		158,748		157,023		156,162		150,523		112,461
Other		880		949		1,308		1,100		187
Commercial and industrial loans		91,489		87,865		85,779		83,087		59,320
Consumer loans		7,241		6,484		6,927		7,075		5,420
Total loans	$	410,717	$	406,921	$	417,496	$	419,756	$	257,608
Less unearned interest, fees and deferred cost		411		352		331		331		351
Allowance for loan and lease losses		2,798		2,711		2,735		2,709		2,520
Net loans	$	407,508	$	403,858	$	414,430	$	416,716	$	254,737

	ALC
	2019				2018
	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		6,549		7,058		7,785		8,472		9,176
Secured by multi-family residential properties		—		—		—		—		—
Secured by non-farm, non-residential properties		—		—		—		—		—
Other		—		—		—		—		—
Commercial and industrial loans		—		—		—		—		—
Consumer loans:
Consumer		29,919		29,808		31,656		31,965		32,902
Branch retail		29,609		27,066		28,324		29,904		30,188
Indirect sales		45,466		42,280		40,609		41,101		37,241
Total loans	$	111,543	$	106,212	$	108,374	$	111,442	$	109,507
Less unearned interest, fees and deferred cost		5,247		5,097		5,617		5,929		6,283
Allowance for loan and lease losses		2,289		2,213		2,320		2,407		2,432
Net loans	$	104,007	$	98,902	$	100,437	$	103,106	$	100,792

47

The tables below summarize changes in the allowance for loan and lease losses for each of the most recent five quarters as of June 30, 2019 at both the Bank and ALC:

	Bank
	2019						2018
	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter
	(Dollars in Thousands)
Balance at beginning of period	$	2,711		$	2,735		$	2,709		$	2,520		$	2,500
Charge-offs:
Real estate loans:
Construction, land development and other land loans		—			—			—			—			—
Secured by 1-4 family residential properties		(13	)		(34	)		—			—			(1	)
Secured by multi-family residential properties		—			—			—			—			—
Secured by non-farm, non-residential properties		—			—			—			—			—
Other		—			—			—			—			—
Commercial and industrial		—			—			—			—			—
Consumer loans		—			(15	)		(1	)		—			(2	)
Other loans		—			—			(1	)		(3	)		—
Total charge-offs		(13	)		(49	)		(2	)		(3	)		(3	)
Recoveries		10			25			28			16			23
Net recoveries (charge-offs)		(3	)		(24	)		26			13			20
Provision (reduction in reserve) for loan losses		90			—			—			176			—
Ending balance	$	2,798		$	2,711		$	2,735		$	2,709		$	2,520
as a percentage of loans		0.68	%		0.67	%		0.66	%		0.65	%		0.98	%
as a percentage of loans, excluding acquired loans		1.00	%		1.01	%		1.01	%		1.03	%		0.98	%

	ALC
	2019						2018
	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter
	(Dollars in Thousands)
Balance at beginning of period	$	2,213		$	2,320		$	2,407		$	2,432		$	2,329
Charge-offs:
Real estate loans:
Construction, land development and other land loans		—			—			—			—			—
Secured by 1-4 family residential properties		(11	)		(19	)		(19	)		(41	)		(18	)
Secured by multi-family residential properties		—			—			—			—			—
Secured by non-farm, non-residential properties		—			—			—			—			—
Other		—			—			—			—			—
Commercial and industrial		—			—			—			—			—
Consumer loans:
Consumer		(554	)		(521	)		(637	)		(628	)		(609	)
Branch retail		(103	)		(98	)		(73	)		(123	)		(98	)
Indirect sales		(76	)		(52	)		(36	)		(21	)		(33	)
Other loans		—			—			—			—			—
Total charge-offs		(744	)		(690	)		(765	)		(813	)		(758	)
Recoveries		195			183			204			176			159
Net recoveries (charge-offs)		(549	)		(507	)		(561	)		(637	)		(599	)
Provision (reduction in reserve) for loan losses		625			400			474			612			702
Ending balance	$	2,289		$	2,213		$	2,320		$	2,407		$	2,432
as a percentage of loans		2.15	%		2.19	%		2.26	%		2.28	%		2.36	%

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Nonperforming Assets

Nonperforming assets at the end of the five most recent quarters as of June 30, 2019 were as follows:

	Consolidated
	2019						2018
	June 30,			March 31,			December 31,			September 30,			June 30,
	(Dollars in Thousands)
Non-accrual loans	$	1,479		$	1,864		$	2,759		$	3,782		$	1,713
Other real estate owned		1,258			1,222			1,505			1,489			2,181
Total	$	2,737		$	3,086		$	4,264		$	5,271		$	3,894
Nonperforming assets as a percentage of loans and other real estate		0.53	%		0.61	%		0.82	%		1.00	%		1.07	%
Nonperforming assets as a percentage of total assets		0.35	%		0.39	%		0.54	%		0.66	%		0.61	%

	Bank
	2019						2018
	June 30,			March 31,			December 31,			September 30,			June 30,
	(Dollars in Thousands)
Non-accrual loans	$	642		$	749		$	1,530		$	2,581		$	360
Other real estate owned		1,258			1,200			1,401			1,319			2,002
Total	$	1,900		$	1,949		$	2,931		$	3,900		$	2,362
Nonperforming assets as a percentage of loans and other real estate		0.46	%		0.48	%		0.70	%		0.93	%		0.91	%
Nonperforming assets as a percentage of total assets		0.24	%		0.24	%		0.37	%		0.48	%		0.37	%

	ALC
	2019						2018
	June 30,			March 31,			December 31,			September 30,			June 30,
	(Dollars in Thousands)
Non-accrual loans	$	837		$	1,115		$	1,229		$	1,201		$	1,353
Other real estate owned		—			22			104			170			179
Total	$	837		$	1,137		$	1,333		$	1,371		$	1,532
Nonperforming assets as a percentage of loans and other real estate		0.79	%		1.12	%		1.30	%		1.30	%		1.48	%
Nonperforming assets as a percentage of total assets		0.78	%		1.11	%		1.29	%		1.30	%		1.48	%

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Deposits

Total deposits decreased by 3.11% to $682.8 million as of June 30, 2019, from $704.7 million as of December 31, 2018. Core deposits, which exclude time deposits of $250 thousand or more, provide a relatively stable funding source that supports earning assets. Core deposits totaled $637.4 million, or 93.3% of total deposits, as of June 30, 2019, compared to $634.1 million, or 90.0% of total deposits, as of December 31, 2018.

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. 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 2019, these borrowings represented less than 0.1% of average interest-bearing liabilities, compared to 4.4% in the second quarter of 2018.

Shareholders’ Equity

The Company has historically placed significant emphasis on maintaining its strong capital base. As of June 30, 2019, shareholders’ equity totaled $83.7 million, or 10.8% of total assets, compared to $79.4 million, or 10.0% of total assets, as of December 31, 2018. 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, 2019 resulted primarily from growth in retained earnings and a decrease in accumulated other comprehensive loss associated with unrealized losses in the fair value of available-for-sale securities during the first half of 2019. The fair value of the available-for-sale portfolio fluctuates based primarily on changes in interest rates. Accordingly, the net unrealized losses during the first half of 2019 are not necessarily indicative of future performance of the portfolio.

Bancshares’ Board of Directors evaluates dividend payments based on the Company’s level of earnings and our desire to maintain a strong capital base, as well as regulatory requirements relating to the payment of dividends. During both of the three-month periods ended June 30, 2019 and 2018, Bancshares declared a dividend of $0.02 per common share, or approximately $0.1 million in aggregate amount.

As of both June 30, 2019 and December 31, 2018, the Company retained approximately $20.4 million in treasury stock. The Company initiated a share repurchase program in January 2006, under which the Company was authorized to repurchase up to 642,785 shares of Bancshares’ common stock before December 31, 2007. In December 2007, and in each year since, the Board of Directors has extended the expiration date of the share repurchase program for an additional year. Currently, the share repurchase program is set to expire on December 31, 2019. There are 242,303 shares available for repurchase under this program. No shares were repurchased under this program to date in 2019 or in 2018. Share repurchases under the program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate, subject to applicable regulatory requirements.

As of June 30, 2019 and December 31, 2018, a total of 119,519 and 116,766 shares of stock, respectively, were deferred in connection with Bancshares’ Non-Employee Directors’ Deferred Compensation Plan. The plan permits non-employee directors to invest their directors’ fees and to receive the adjusted value of the deferred amounts in cash or shares of Bancshares common stock. All deferred fees, whether in the form of cash or shares of Bancshares common stock, are reflected as compensation expense in the period earned. The Company classifies all deferred directors’ fees allocated to be paid in shares of stock as equity surplus. The Company may use issued shares or 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) principal payments and maturities 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 $153.8 million as of June 30, 2019 and $75.2 million as of December 31, 2018. Investment securities forecasted to mature or reprice in one year or less were estimated to be $9.2 million and $8.1 million of the investment portfolio as of June 30, 2019 and December 31, 2018, respectively.

Although some securities in the investment portfolio have legal final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. As of June 30, 2019, the investment securities portfolio had an estimated average life of 2.5 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 both June 30, 2019 and December 31, 2018, the Company did not have any outstanding borrowings under FHLB advances. The Company had up to $238.5 million and $282.2 million in remaining unused credit from the FHLB (subject to available collateral) as of June 30, 2019 and December 31, 2018, respectively. In addition, the Company had $72.0 million and $72.2 million in unused established federal funds lines as of June 30, 2019 and December 31, 2018, respectively.

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary purpose of managing interest rate risk is to invest capital effectively and preserve the value created by 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, 2018 for additional disclosures related to market risk.

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, 2019, 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, 2019, 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 in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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, 2018 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 2019:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (2)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Programs (2)
April 1 – April 30		1,644	$	10.30		—		242,303
May 1 – May 31		—	$	—		—		242,303
June 1 – June 30		1,517	$	9.45		—		242,303
Total		3,161	$	9.89		—		242,303

(1) 3,161 shares were purchased in open-market transactions by an independent trustee for Bancshares’ 401(k) Plan during the second quarter of 2019.

(2) On December 19, 2018, the Board of Directors extended the share repurchase program previously approved by the Board on January 19, 2006. Under the repurchase program, Bancshares is authorized to repurchase up to 642,785 shares of common stock before December 31, 2019, of which 242,303 shares remain available.

ITEM 5. OTHER INFORMATION

On May 2, 2019, the shareholders of Bancshares approved an amendment (the “Amendment”) to the 2013 Incentive Plan (the “Incentive Plan”) to increase the number of shares of common stock available under the Incentive Plan by 450,000 to 1,050,000. The Amendment was approved by Bancshares’ Board of Directors (the “Board”) in February 2019, subject to shareholder approval at the 2019 Annual Meeting of Shareholders.

The Incentive Plan initially became effective in March 2013 and is administered by the Compensation Committee of the Board (the “Compensation Committee”). A number of award types are available under the Incentive Plan, including incentive stock options, nonqualified stock options, stock appreciation rights and restricted awards. Persons eligible to participate in the Incentive Plan include all employees, directors and consultants of the Company and such other individuals designated by the Compensation Committee who are reasonably expected to become employees, directors and consultants upon the receipt of awards under the Incentive Plan.

The Compensation Committee has the authority to, subject to the terms of the Incentive Plan, the Compensation Committee’s charter and applicable laws, among other things, determine when awards are to be granted under the Incentive Plan, determine the participants to whom awards shall be granted and prescribe the terms and conditions of such awards.

The above description of the Incentive Plan is a summary only and is qualified in its entirety by reference to the complete text of the Incentive Plan, as amended, which is included as Exhibit 10.1 to this report and incorporated herein by reference.

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ITEM 6. EXHIBITS

Exhibit No.	Description
3.1	Certificate of Incorporation of United Security Bancshares, Inc. (incorporated by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 12, 1999).
3.1A	Certificate of Amendment to the Certificate of Incorporation of United Security Bancshares, Inc., effective as of October 11, 2016 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 000-14549), filed on October 11, 2016).
3.2	Bylaws of First US Bancshares, Inc., effective as of October 11, 2016 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K (File No. 000-14549), filed on October 11, 2016).
*10.1	First US Bancshares, Inc. 2013 Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on May 10, 2019).
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, 2019.

*Indicates a management contract or compensatory plan or arrangement.

53

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 7, 2019

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)

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