First US Bancshares (FUSB) 10-Q 2021 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

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

For the quarterly period ended March 31, 2021

OR

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

For the transition period fromto

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 May 7, 2021
Common Stock, $0.01 par value	6,213,641 shares

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

	PAGE
PART I.  FINANCIAL INFORMATION	4
ITEM  1. FINANCIAL STATEMENTS	4
Interim Condensed Consolidated Balance Sheets at March 31, 2021 (Unaudited) and December 31, 2020	4
Interim Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020 (Unaudited)	5
Interim Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020 (Unaudited)	6
Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2021 and 2020 (Unaudited)	7
Interim Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (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	38
ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50
ITEM  4. CONTROLS AND PROCEDURES	51
PART II. OTHER INFORMATION	52
ITEM  1. LEGAL PROCEEDINGS	52
ITEM  1A. RISK FACTORS	52
ITEM  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	52
ITEM  6. EXHIBITS	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, 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, 2020. Specifically, with respect to statements relating to the sufficiency of the allowance for loan and lease losses, loan demand, cash flows, interest costs, growth and earnings potential, expansion and the Company’s positioning to handle the challenges presented by COVID-19, 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 impact of the current COVID-19 pandemic on the Company’s business, the Company’s customers, the communities that the Company serves and the United States economy, including the impact of actions taken by governmental authorities to try to contain the virus and protect against it, through vaccinations and otherwise, or address the impact of the virus on the United States economy (including, without limitation, the Coronavirus Aid, Relief and Economic Security (CARES) Act and subsequent federal legislation) and the resulting effect on the Company’s operations, liquidity and capital position and on the financial condition of the Company’s borrowers and other customers; the 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; cybersecurity threats; and risks related to the Paycheck Protection Program. There can be no assurance that such factors or other factors will not affect the accuracy of such forward-looking statements.

3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	March 31,			December 31,
	2021			2020
	(Unaudited)
ASSETS
Cash and due from banks	$	13,322		$	12,235
Interest-bearing deposits in banks		112,545			82,180
Total cash and cash equivalents		125,867			94,415
Federal funds sold		84			85
Investment securities available-for-sale, at fair value		70,104			84,993
Investment securities held-to-maturity, at amortized cost		5,679			6,429
Federal Home Loan Bank stock, at cost		870			1,135
Loans, net of allowance for loan and lease losses of $7,475 and $7,470, respectively		659,230			638,374
Premises and equipment, net of accumulated depreciation of $24,041 and $23,774,    respectively		27,953			28,206
Cash surrender value of bank-owned life insurance		15,919			15,846
Accrued interest receivable		2,593			2,807
Goodwill and core deposit intangible, net		8,319			8,410
Other real estate owned		942			949
Other assets		8,975			8,862
Total assets	$	926,535		$	890,511
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing	$	164,659		$	151,935
Interest-bearing		653,384			630,277
Total deposits		818,043			782,212
Accrued interest expense		242			292
Other liabilities		10,316			11,312
Short-term borrowings		10,017			10,017
Total liabilities		838,618			803,833
Shareholders’ equity:
Common stock, par value $0.01 per share, 10,000,000 shares authorized; 7,634,281 and    7,596,351 shares issued, respectively; 6,213,641 and 6,176,556 shares outstanding,    respectively		75			75
Additional paid-in capital		13,889			13,786
Accumulated other comprehensive income (loss), net of tax		327			(52	)
Retained earnings		95,486			94,722
Less treasury stock: 1,420,640 and 1,419,795 shares at cost, respectively		(21,860	)		(21,853	)
Total shareholders’ equity		87,917			86,678
Total liabilities and shareholders’ equity	$	926,535		$	890,511

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
	March 31,
	2021		2020
	(Unaudited)
Interest income:
Interest and fees on loans	$	9,490	$	9,639
Interest on investment securities		355		758
Total interest income		9,845		10,397
Interest expense:
Interest on deposits		743		1,475
Interest on borrowings		38		36
Total interest expense		781		1,511
Net interest income		9,064		8,886
Provision for loan and lease losses		401		580
Net interest income after provision for loan and lease losses		8,663		8,306
Non-interest income:
Service and other charges on deposit accounts		266		434
Credit insurance income		105		153
Mortgage fees from secondary market		23		127
Lease income		209		212
Other income, net		348		371
Total non-interest income		951		1,297
Non-interest expense:
Salaries and employee benefits		4,914		5,136
Net occupancy and equipment		1,039		1,001
Computer services		465		417
Fees for professional services		357		278
Other expense		1,621		1,662
Total non-interest expense		8,396		8,494
Income before income taxes		1,218		1,109
Provision for income taxes		268		262
Net income	$	950	$	847
Basic net income per share	$	0.15	$	0.13
Diluted net income per share	$	0.14	$	0.13
Dividends per share	$	0.03	$	0.03

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

5

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

	Three Months Ended
	March 31,
	2021			2020
	(Unaudited)
Net income	$	950		$	847
Other comprehensive income (loss):
Unrealized holding (losses) gains on securities available-for-sale    arising during period, net of tax (benefit) expense of ($36) and $207, respectively		(106	)		622
Unrealized holding gains (losses) arising during the period on    effective cash flow hedge derivatives, net of tax expense (benefit)    of $161 and ($447), respectively		485			(1,339	)
Other comprehensive income (loss)		379			(717	)
Total comprehensive income	$	1,329		$	130

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

6

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

For the three months ended March 31, 2021 and 2020 (Unaudited)

	Common Stock Shares Outstanding			Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock, at Cost			Total Shareholders’ Equity
Balance, January 1, 2020		6,157,692		$	75	$	13,814	$	(46	)	$	92,755		$	(21,850	)	$	84,748
Net income		—			—		—		—			847			—			847
Net change in fair value of    securities available-for-sale,    net of tax		—			—		—		622			—			—			622
Net change in fair value of    derivative instruments, net    of tax		—			—		—		(1,339	)		—			—			(1,339	)
Dividends declared: $.03 per    share		—			—		—		—			(184	)		—			(184	)
Impact of stock-based    compensation plans, net		24,198			—		90		—			—			—			90
Treasury stock repurchases		(38,604	)		—		—		—			—			(452	)		(452	)
Balance, March 31, 2020		6,143,286		$	75	$	13,904	$	(763	)	$	93,418		$	(22,302	)	$	84,332
Balance, January 1, 2021		6,176,556		$	75	$	13,786	$	(52	)	$	94,722		$	(21,853	)	$	86,678
Net income		—			—		—		—			950			—			950
Net change in fair value of    securities available-for-sale,    net of tax		—			—		—		(106	)		—			—			(106	)
Net change in fair value of    derivative instruments, net    of tax		—			—		—		485			—			—			485
Dividends declared: $.03 per    share		—			—		—		—			(186	)		—			(186	)
Impact of stock-based    compensation plans, net		37,085			—		103		—			—			(7	)		96
Balance, March 31, 2021		6,213,641		$	75	$	13,889	$	327		$	95,486		$	(21,860	)	$	87,917

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)

	Three Months Ended
	March 31,
	2021			2020
	(Unaudited)
Cash flows from operating activities:
Net income	$	950		$	847
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		445			399
Provision for loan and lease losses		401			580
Deferred income tax provision		29			266
Stock-based compensation expense		103			90
Net amortization of securities		72			96
Amortization of intangible assets		91			110
Net loss on premises and equipment and other real estate		39			171
Changes in assets and liabilities:
Decrease in accrued interest receivable		214			97
Increase in other assets		(321	)		(299	)
Decrease in accrued interest expense		(50	)		(50	)
Decrease in other liabilities		(86	)		(1,308	)
Net cash provided by operating activities		1,887			999
Cash flows from investing activities:
Net decrease (increase) in federal funds sold		1			(5,000	)
Purchases of investment securities, available-for-sale		(3,512	)		(9,142	)
Proceeds from maturities and prepayments of investment securities, available-for-sale		18,199			7,365
Proceeds from maturities and prepayments of investment securities, held-to-maturity		738			787
Net decrease in Federal Home Loan Bank stock		265			2
Proceeds from the sale of premises and equipment and other real estate		279			190
Net (increase) decrease in loans		(21,921	)		5,699
Purchases of premises and equipment		(122	)		(233	)
Net cash used in investing activities		(6,073	)		(332	)
Cash flows from financing activities:
Net increase (decrease) in deposits		35,831			(1,067	)
Net increase in short-term borrowings		—			127
Net share-based compensation transactions		(7	)		—
Treasury stock repurchases		—			(452	)
Dividends paid		(186	)		(184	)
Net cash provided by (used in) financing activities		35,638			(1,576	)
Net increase (decrease) in cash and cash equivalents		31,452			(909	)
Cash and cash equivalents, beginning of period		94,415			57,030
Cash and cash equivalents, end of period	$	125,867		$	56,121
Supplemental disclosures:
Cash paid for:
Interest	$	830		$	1,561
Income taxes		—			147
Non-cash transactions:
Assets acquired in settlement of loans		400			335

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, 2021. 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, 2020.

Risks and Uncertainties

The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity and other economic activities have had, are currently having, and may for some time continue to have a destabilizing effect on financial markets and economic activity. The extent of the impact of COVID-19 on the Company’s operational and financial performance is currently uncertain, cannot be predicted and will depend on certain developments, including, among others, the spread of COVID-19 and its variants, vaccination efforts, the duration of the pandemic, its impact on our customers, employees and vendors, and the continued governmental, regulatory and private sector responses, which may be precautionary, to COVID-19.  

The Company’s business, financial condition and results of operations generally rely upon the ability of the Company’s borrowers to repay their loans, the value of collateral underlying those loans, and demand for loans and other products and services that the Company offers, which are highly dependent on the business environment in the Company’s primary markets and the United States economy as a whole.

In light of the changing economic outlook as a result of COVID-19, in March 2020, the Federal Reserve reduced the target federal funds rate by 150 basis points. The reduction in interest rates and other economic uncertainties that have arisen as a result primarily of the COVID-19 pandemic have negatively impacted net interest income, provisions for loan losses and noninterest income. Additional negative financial impacts could occur; however, the ultimate potential impact is not known at this time.

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, 2020.

Reclassification

Certain disclosures in the notes to the prior period consolidated financial statements have been reclassified to conform to the 2021 presentation. These reclassifications had no effect on the Company’s results of operations, financial position or net cash flow.

9

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

	Three Months Ended
	March 31,
	2021		2020
Basic shares		6,307,227		6,280,593
Dilutive shares		421,000		422,000
Diluted shares		6,728,227		6,702,593

	Three Months Ended
	March 31,
	2021		2020
	(Dollars in Thousands, Except Per Share Data)
Net income	$	950	$	847
Basic net income per share	$	0.15	$	0.13
Diluted net income per share	$	0.14	$	0.13

Comprehensive Income

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

Accounting Policies Recently Adopted

ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” Issued in December 2019, ASU 2019-12 seeks to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 became effective for the Company on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements.

Pending Accounting Pronouncements

ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.”  Issued in March 2020, ASU 2020-04 seeks to provide guidance, for a limited time, to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU 2020-04 was issued in response to concerns about the structural risks of interbank offered rates, and specifically, the risk that the London Interbank Offer Rate (LIBOR) will no longer be used. Regulators have begun reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. ASU 2020-04 provides temporary optional expedients to GAAP guidance on contract modifications, hedge accounting, and other transactions that reference LIBOR or another reference rate expected to be discontinued. As the guidance in ASU 2020-04 is intended to assist entities during the global market-wide reference rate transition period, it is in effect for a limited time, from March 12, 2020 through December 31, 2022. Management is currently evaluating the impact of the potential discontinuance of LIBOR, and a determination cannot be made at this time as to the impact that the amendments of ASU 2020-04 or the reference rate reform will have on the Company’s consolidated financial statements.

10

ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. As originally issued, ASU 2017-04 was effective prospectively for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. On October 16, 2019, the FASB approved a delay in the implementation of ASU 2017-04 by three years for smaller reporting companies, including the Company. 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 was effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019, with institutions required to apply the changes through a cumulative-effect adjustment to their retained earnings balance as of the beginning of the first reporting period in which the guidance is effective. On October 16, 2019, the FASB approved a delay in the implementation of ASU 2016-13 by three years for smaller reporting companies, including the Company. 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. The magnitude of any such one-time adjustment is not yet known.

3. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity as of March 31, 2021 and December 31, 2020 were as follows:

	Available-for-Sale
	March 31, 2021
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	25,801	$	745	$	(5	)	$	26,541
Commercial		36,217		723		(85	)		36,855
Obligations of states and political subdivisions		3,729		126		—			3,855
Corporate notes		2,713		59		—			2,772
U.S. Treasury securities		82		—		(1	)		81
Total	$	68,542	$	1,653	$	(91	)	$	70,104

11

	Held-to-Maturity
	March 31, 2021
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	3,644	$	79	$	—	$	3,723
Obligations of U.S. government-sponsored agencies		1,054		21		—		1,075
Obligations of states and political subdivisions		981		16		—		997
Total	$	5,679	$	116	$	—	$	5,795

	Available-for-Sale
	December 31, 2020
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	24,680	$	865	$	(8	)	$	25,537
Commercial		40,849		780		(142	)		41,487
Obligations of states and political subdivisions		4,971		137		—			5,108
Corporate notes		2,711		73		—			2,784
U.S. Treasury securities		10,078		—		(1	)		10,077
Total	$	83,289	$	1,855	$	(151	)	$	84,993

	Held-to-Maturity
	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	4,302	$	75	$	—	$	4,377
Obligations of U.S. government-sponsored agencies		1,120		34		—		1,154
Obligations of states and political subdivisions		1,007		21		—		1,028
Total	$	6,429	$	130	$	—	$	6,559

The scheduled maturities of investment securities available-for-sale and held-to-maturity as of March 31, 2021 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	$	89	$	89	$	402	$	409
Maturing after one to five years		6,759		6,943		360		363
Maturing after five to ten years		32,638		33,636		2,391		2,450
Maturing after ten years		29,056		29,436		2,526		2,573
Total	$	68,542	$	70,104	$	5,679	$	5,795

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.

12

The following tables reflect gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2021 and December 31, 2020. There were no investments held-to-maturity in an unrealized loss position as of March 31, 2021.

	Available-for-Sale
	March 31, 2021
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	196	$	—		$	952	$	(5	)
Commercial		—		—			3,282		(85	)
U.S. Treasury securities		81		(1	)		—		—
Total	$	277	$	(1	)	$	4,234	$	(90	)

	Available-for-Sale
	December 31, 2020
	Less than 12 Months					12 Months or More
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Residential	$	2,334	$	(1	)	$	1,019	$	(7	)
Commercial		2,630		(1	)		3,327		(141	)
U.S. Treasury securities		10,077		(1	)		—		—
Total	$	15,041	$	(3	)	$	4,346	$	(148	)

	Held-to-Maturity
	December 31, 2020
	Less than 12 Months				12 Months or More
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in Thousands)
Mortgage-backed securities:
Commercial	$	412	$	—	$	—	$	—
Total	$	412	$	—	$	—	$	—

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.

As of March 31, 2021, 10 debt securities had been in a loss position for more than 12 months, and four debt securities had been in a loss position for less than 12 months. As of December 31, 2020, nine debt securities had been in a loss position for more than 12 months, and 11 debt securities had been in a loss position for less than 12 months. As of both March 31, 2021 and December 31, 2020, 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. There was a substantial decrease in interest rates during the year ended December 31, 2020, including a 150-basis point reduction in the federal funds rate in March 2020. This resulted in significant increases in the fair value of debt securities and a corresponding decline in the number of securities in a loss position during 2020 and into the first quarter of 2021. Most of the securities in an unrealized loss position as of both March 31, 2021 and December 31, 2020 were 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 March 31, 2021 or December 31, 2020.

Investment securities with a carrying value of $55.7 million and $72.9 million as of March 31, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and for other purposes.

13

4. LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Portfolio Segments

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

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

Secured by 1-4 family residential properties – These loans include conventional mortgage loans on one-to-four family residential properties. These properties may serve as the borrower’s primary residence, vacation home or investment property. Also included in this portfolio are home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home.

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

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

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

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

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

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

As of March 31, 2021 and December 31, 2020, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:

	March 31, 2021
	Bank			ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	48,491		$	—	$	48,491
Secured by 1-4 family residential properties		79,090			3,259		82,349
Secured by multi-family residential properties		54,180			—		54,180
Secured by non-farm, non-residential properties		193,626			—		193,626
Commercial and industrial loans (1)		79,838			—		79,838
Consumer loans:
Direct consumer		6,153			20,845		26,998
Branch retail		—			31,075		31,075
Indirect sales		153,940			—		153,940
Total loans		615,318			55,179		670,497
Less: Unearned interest, fees and deferred cost		(186	)		3,978		3,792
Allowance for loan and lease losses		6,099			1,376		7,475
Net loans	$	609,405		$	49,825	$	659,230

14

	December 31, 2020
	Bank			ALC		Total
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	37,282		$	—	$	37,282
Secured by 1-4 family residential properties		85,271			3,585		88,856
Secured by multi-family residential properties		54,326			—		54,326
Secured by non-farm, non-residential properties		184,528			—		184,528
Commercial and industrial loans (1)		81,735			—		81,735
Consumer loans:
Direct consumer		6,344			23,444		29,788
Branch retail		—			32,094		32,094
Indirect sales		141,514			—		141,514
Total loans		591,000			59,123		650,123
Less: Unearned interest, fees and deferred cost		(213	)		4,492		4,279
Allowance for loan and lease losses		5,917			1,553		7,470
Net loans	$	585,296		$	53,078	$	638,374

(1) Includes equipment financing leases and PPP loans. As of March 31, 2021 and December 31, 2020, equipment finance leases totaled $6.7 million and $7.0 million, respectively, and PPP loans totaled $14.8 million and $11.9 million, respectively.

The Company makes commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 56.5% and 56.1% of the portfolio was concentrated in loans secured by real estate as of March 31, 2021 and December 31, 2020, respectively.

Loans with a carrying value of $59.0 million and $36.1 million were pledged as collateral to secure Federal Home Loan Bank (“FHLB”) borrowings or letters of credit as of March 31, 2021 and December 31, 2020, respectively.

Related Party Loans

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with unrelated parties. Management believes that such loans do not represent more than a normal risk of collectability, nor do they present other unfavorable features. The aggregate balances of such related party loans and commitments were $0.3 million and $0.4 million as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021, there were no new loans to these parties, and repayments by active related parties were $0.1 million. During the year ended December 31, 2020, there were no new loans to these parties, and repayments by active related parties were $0.5 million.

Allowance for Loan and Lease Losses

The following tables present changes in the allowance for loan and lease losses during the three months ended March 31, 2021 and 2020 and the related loan balances by loan type as of March 31, 2021 and 2020:

	As of and for the Three Months Ended March 31, 2021
	Construction, Land Development, and Other			1-4 Family			Real Estate Multi- Family			Non- Farm Non- Residential		Commercial and Industrial			Direct Consumer			Branch Retail			Indirect Sales			Total
	(Dollars in Thousands)
Allowance for loan and lease losses:
Beginning balance	$	393		$	639		$	577		$	1,566	$	1,008		$	1,202		$	373		$	1,712		$	7,470
Charge-offs		(21	)		(9	)		—			—		—			(348	)		(130	)		(117	)		(625	)
Recoveries		2			3			—			1		—			170			42			11			229
Provision		70			112			(36	)		437		(412	)		13			72			145			401
Ending balance	$	444		$	745		$	541		$	2,004	$	596		$	1,037		$	357		$	1,751		$	7,475
Ending balance of allowance attributable to    loans:
Individually evaluated for impairment	$	—		$	11		$	—		$	—	$	60		$	1		$	—		$	—		$	72
Collectively evaluated for impairment		444			734			541			2,004		536			1,036			357			1,751			7,403
Total allowance for loan and lease losses	$	444		$	745		$	541		$	2,004	$	596		$	1,037		$	357		$	1,751		$	7,475
Ending balance of loans receivable:
Individually evaluated for impairment	$	—		$	720		$	—		$	4,237	$	567		$	23		$	—		$	—		$	5,547
Collectively evaluated for impairment		48,491			81,468			54,180			189,389		79,271			26,975			31,075			153,940			664,789
Loans acquired with deteriorated credit quality		—			161			—			—		—			—			—			—			161
Total loans receivable	$	48,491		$	82,349		$	54,180		$	193,626	$	79,838		$	26,998		$	31,075		$	153,940		$	670,497

15

	As of and for the Three Months Ended March 31, 2020
	Construction, Land Development, and Other		1-4 Family			Real Estate Multi- Family		Non- Farm Non- Residential		Commercial and Industrial			Direct Consumer			Branch Retail			Indirect Sales		Total
	(Dollars in Thousands)
Allowance for loan and lease losses:
Beginning balance	$	197	$	466		$	422	$	964	$	1,377		$	1,625		$	395		$	316	$	5,762
Charge-offs		—		(20	)		—		—		—			(492	)		(142	)		—		(654	)
Recoveries		—		12			—		5		—			205			44			—		266
Provision		68		67			16		217		(612	)		169			142			513		580
Ending balance	$	265	$	525		$	438	$	1,186	$	765		$	1,507		$	439		$	829	$	5,954
Ending balance of allowance attributable to    loans:
Individually evaluated for impairment	$	—	$	14		$	—	$	—	$	63		$	3		$	—		$	—	$	80
Collectively evaluated for impairment		265		511			438		1,186		702			1,504			439			829		5,874
Total allowance for loan and lease losses	$	265	$	525		$	438	$	1,186	$	765		$	1,507		$	439		$	829	$	5,954
Ending balance of loans receivable:
Individually evaluated for impairment	$	—	$	789		$	—	$	2,754	$	63		$	26		$	—		$	—	$	3,632
Collectively evaluated for impairment		31,927		99,226			44,029		153,468		80,708			36,281			31,568			69,982		547,189
Loans acquired with deteriorated credit quality		—		171			—		—		—			—			—			—		171
Total loans receivable	$	31,927	$	100,186		$	44,029	$	156,222	$	80,771		$	36,307		$	31,568		$	69,982	$	550,992

Credit Quality Indicators

The Company utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, construction, land, multi-family real estate, other commercial real estate, and commercial and industrial loans are graded based on pre-determined risk metrics and categorized into one of nine risk grades. These risk grades can be summarized into categories described as pass, special mention, substandard, doubtful and loss, as described in further detail below.

• Pass (Risk Grades 1-5): Loans in this category include obligations in which the probability of default is considered low.

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

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

• Doubtful (Risk Grade 8): Loans classified as doubtful have all of the weaknesses found in substandard loans, with the added characteristic that the weaknesses make collection of debt in full, based on currently existing facts, conditions and values, highly questionable or improbable. Serious problems exist such that partial loss of principal is likely; however, because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Such pending factors may include proposed merger, acquisition or liquidation procedures, capital injection, perfection of liens on additional collateral and refinancing plans. Loans classified as doubtful may include loans to borrowers that have demonstrated a history of failing to live up to agreements. The Company did not have any loans classified as Doubtful (Risk Grade 8) as of March 31, 2021 or December 31, 2020.

• Loss (Risk Grade 9): Loans are classified in this category when borrowers are deemed incapable of repayment of unsecured debt. Loans to such borrowers are considered uncollectable and of such little value that continuance as active assets of the Company is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not prudent to defer writing off these assets, even though partial recovery may be realized in the future. The Company did not have any loans classified as Loss (Risk Grade 9) as of March 31, 2021 or December 31, 2020.

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

16

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

	March 31, 2021
	Pass 1-5			Special Mention 6			Substandard 7			Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	47,929		$	557		$	5		$	48,491
Secured by multi-family residential properties		51,639			2,541			—			54,180
Secured by non-farm, non-residential properties		180,533			8,852			4,241			193,626
Commercial and industrial loans		78,025			131			1,682			79,838
Total	$	358,126		$	12,081		$	5,928		$	376,135
As a percentage of total loans		95.22	%		3.21	%		1.58	%		100.00	%

	March 31, 2021
	Performing			Nonperforming			Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	80,448		$	1,901		$	82,349
Consumer loans:
Direct consumer		26,844			154			26,998
Branch retail		31,026			49			31,075
Indirect sales		153,940			—			153,940
Total	$	292,258		$	2,104		$	294,362
As a percentage of total loans		99.29	%		0.71	%		100.00	%

The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31, 2020:

	December 31, 2020
	Pass 1-5			Special Mention 6			Substandard 7			Total
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	36,719		$	558		$	5		$	37,282
Secured by multi-family residential properties		54,326			—			—			54,326
Secured by non-farm, non-residential properties		170,338			8,572			5,618			184,528
Commercial and industrial loans		79,754			542			1,439			81,735
Total	$	341,137		$	9,672		$	7,062		$	357,871
As a percentage of total loans		95.33	%		2.70	%		1.97	%		100.00	%

	December 31, 2020
	Performing			Nonperforming			Total
	(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties	$	86,665		$	2,191		$	88,856
Consumer loans:
Direct consumer		29,679			109			29,788
Branch retail		31,816			278			32,094
Indirect sales		141,514			—			141,514
Total	$	289,674		$	2,578		$	292,252
As a percentage of total loans		99.12	%		0.88	%		100.00	%

17

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

	As of March 31, 2021
	30-59 Days Past Due			60-89 Days Past Due			90 Days Or Greater			Total Past Due			Current			Total Loans			Recorded Investment > 90 Days And Accruing
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development    and other land loans	$	—		$	—		$	—		$	—		$	48,491		$	48,491		$	—
Secured by 1-4 family residential    properties		940			449			72			1,461			80,888			82,349			—
Secured by multi-family residential    properties		—			—			—			—			54,180			54,180			—
Secured by non-farm, non-residential    properties		412			—			—			412			193,214			193,626			—
Commercial and industrial loans		73			—			782			855			78,983			79,838			—
Consumer loans:
Direct consumer		173			111			133			417			26,581			26,998			—
Branch retail		81			49			48			178			30,897			31,075			—
Indirect sales		87			24			179			290			153,650			153,940			—
Total	$	1,766		$	633		$	1,214		$	3,613		$	666,884		$	670,497		$	—
As a percentage of total loans		0.26	%		0.09	%		0.18	%		0.54	%		99.46	%		100.00	%

The following table provides an aging analysis of past due loans by class as of December 31, 2020:

	As of December 31, 2020
	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	$	—		$	—		$	—		$	—		$	37,282		$	37,282		$	—
Secured by 1-4 family residential    properties		799			244			72			1,115			87,741			88,856			—
Secured by multi-family residential    properties		—			—			—			—			54,326			54,326			—
Secured by non-farm, non-residential    properties		287			—			1,337			1,624			182,904			184,528			—
Commercial and industrial loans		683			561			—			1,244			80,491			81,735			—
Consumer loans:
Direct consumer		257			191			214			662			29,126			29,788			—
Branch retail		176			61			144			381			31,713			32,094			—
Indirect sales		234			39			49			322			141,192			141,514			—
Total	$	2,436		$	1,096		$	1,816		$	5,348		$	644,775		$	650,123		$	—
As a percentage of total loans		0.37	%		0.17	%		0.28	%		0.82	%		99.18	%		100.00	%

18

The following table provides an analysis of non-accruing loans by class as of March 31, 2021 and December 31, 2020:

	Loans on Non-Accrual Status
	March 31, 2021		December 31, 2020
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans	$	5	$	12
Secured by 1-4 family residential properties		1,055		1,248
Secured by multi-family residential properties		—		—
Secured by non-farm, non-residential properties		1		1,340
Commercial and industrial loans		1,085		74
Consumer loans:
Direct consumer		136		219
Branch retail		49		144
Indirect sales		178		49
Total loans	$	2,509	$	3,086

COVID-19 Loan Deferments and Risk Identification

In accordance with section 4013 of the Coronavirus Aid, Relief and Economic Security (CARES) Act and interpretive guidance from banking regulators, the Company implemented initiatives to provide short-term payment relief to borrowers who were negatively impacted by COVID-19. As of March 31, 2021, loans that continued to be in pandemic-related deferment totaled $1.2 million, compared to $8.1 million as of December 31, 2020.

In addition, at the onset of the pandemic, management identified certain categories of loans that it believed to be at “high-risk” of potential default or credit loss due to the COVID-19 pandemic. The “high-risk” category, which includes loans collateralized by hotels/motels and dine-in restaurants, decreased to $12.1 million, or 1.8% of the loan portfolio, as of March 31, 2021, compared to $13.5 million, or 2.1% of the loan portfolio, as of December 31, 2020.  

The spread of COVID-19 has created a global public health crisis that has resulted in widespread volatility and deterioration in household, business, economic and market conditions. Although loans in deferment status and loans in the “high-risk” category have decreased, the Company will continue to closely monitor the impact of changing economic circumstances on the Company’s loan portfolio.

Paycheck Protection Program

Sections 1102 and 1106 of the CARES Act added a new loan program administered by the Small Business Administration (“SBA”) entitled the Paycheck Protection Program (“PPP”). The PPP is intended to provide economic relief to small businesses throughout the United States that have been adversely impacted by COVID-19. PPP loans are 100% guaranteed by the SBA and are forgivable in whole, or in part, if the proceeds are used by the borrower for payroll and other permitted purposes in accordance with the requirements of the PPP (as discussed in greater detail below). If not forgiven in whole or in part, the loans carry a fixed interest rate of 1.00% per annum with payments deferred for 24 weeks from the date of the loan, plus another 10 months after the 24-week period. As compensation for originating a PPP loan, the Company receives lender processing fees from the SBA ranging from 1% to 5% of the original loan balance, depending on the size of the loan. Processing fees, net of origination costs, are deferred and amortized over the contractual life of the loan as interest income. Upon forgiveness of a loan by the SBA, any unrecognized net deferred fees will be recognized as interest income in that period.

PPP loans were initially originated for a term of two years; however, a June 5, 2020 amendment to the CARES Act (i) provided for a five-year minimum loan term for loans originated beginning on that date and (ii) permitted lenders and borrowers to amend loans previously issued under two-year terms to terms of five to ten years if mutually agreed upon by both the lender and the borrower. As of March 31, 2021, 154 PPP loans with an aggregate principal balance of $14.8 million remained outstanding. Of this amount, $9.6 million of the loans were originated under two-year terms, while $5.2 million of the loans were originated under five-year terms.

A borrower is eligible for forgiveness of principal and accrued interest on its PPP loan to the extent that the proceeds were used to cover eligible payroll costs, interest costs, rent and utility costs over a period of between eight and twenty-four weeks after the loan is made, as long as the borrower retains its employees and their compensation levels. The SBA began processing forgiveness payments during the fourth quarter of 2020. As of March 31, 2021, 76 of the Company’s borrowers had received PPP loan forgiveness. Amortized PPP loan fees, which are recognized in interest and fees on loans, totaled approximately $93 thousand for the three months ended March 31, 2021 and $161 thousand for the year ended December 31, 2020. As of March 31, 2021, the Company had approximately $387 thousand in remaining net deferred SBA PPP loan fees.

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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 March 31, 2021 and December 31, 2020, there were $0.1 million of impaired loans with no related allowance recorded at ALC. Impaired loans, or portions thereof, are charged off when deemed uncollectable.

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

	March 31, 2021
	Carrying Amount		Unpaid Principal Balance		Related Allowances
	(Dollars in Thousands)
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		863		863		—
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		4,237		4,237		—
Commercial and industrial		508		508		—
Direct consumer		—		—		—
Total loans with no related allowance recorded	$	5,608	$	5,608	$	—
Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		18		18		11
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		—		—		—
Commercial and industrial		59		59		60
Direct consumer		23		23		1
Total loans with an allowance recorded	$	100	$	100	$	72
Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		881		881		11
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		4,237		4,237		—
Commercial and industrial		567		567		60
Direct consumer		23		23		1
Total impaired loans	$	5,708	$	5,708	$	72

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As of December 31, 2020, the carrying amount of the Company’s impaired loans consisted of the following:  

	December 31, 2020
	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		885		885		—
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		5,594		5,594		—
Commercial and industrial		530		530		—
Direct consumer		—		—		—
Total loans with no related allowance recorded	$	7,009	$	7,009	$	—
Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		18		18		12
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		—		—		—
Commercial and industrial		60		60		61
Direct consumer		24		24		1
Total loans with an allowance recorded	$	102	$	102	$	74
Total impaired loans
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		903		903		12
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		5,594		5,594		—
Commercial and industrial		590		590		61
Direct consumer		24		24		1
Total impaired loans	$	7,111	$	7,111	$	74

The average net investment in impaired loans and interest income recognized and received on impaired loans during the three months ended March 31, 2021 and the year ended December 31, 2020 were as follows:

	Three Months Ended March 31, 2021
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		911		2		2
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		4,270		101		68
Commercial and industrial		477		22		21
Direct consumer		23		1		1
Total	$	5,681	$	126	$	92

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	Year Ended December 31, 2020
	Average Recorded Investment		Interest Income Recognized		Interest Income Received
	(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans	$	—	$	—	$	—
Secured by 1-4 family residential properties		923		10		10
Secured by multi-family residential properties		—		—		—
Secured by non-farm, non-residential properties		2,467		28		28
Commercial and industrial		118		7		7
Direct consumer		25		1		2
Total	$	3,533	$	46	$	47

Loans on which the accrual of interest has been discontinued amounted to $2.5 million and $3.1 million as of March 31, 2021 and December 31, 2020. If interest on those loans had been accrued, there would have been $28 thousand and $161 thousand of interest accrued for the periods ended March 31, 2021 and December 31, 2020, respectively. Interest income related to these loans for the three months ended March 31, 2021 and the year ended December 31, 2020 was $5 thousand and $42 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 three-month period ended March 31, 2021 or the year ended December 31, 2020. Restructured loans may involve loans remaining on non-accrual, moving to non-accrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Non-accrual restructured loans are included with all other non-accrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, then the loan remains on non-accrual. The Company did not have any non-accruing loans that were previously restructured and that remained on non-accrual status as of both March 31, 2021 and December 31, 2020. For both the three months ended March 31, 2021 and the year ended December 31, 2020, 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 March 31, 2021 and December 31, 2020, the number of loans remaining in each loan category that the Company had previously modified in a troubled debt restructuring, as well as the pre- and post-modification principal balance as of each date.

	March 31, 2021						December 31, 2020
	Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance		Number of Loans		Pre- Modification Outstanding Principal Balance		Post- Modification Principal Balance
	(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land    loans		1	$	107	$	—		1	$	107	$	—
Secured by 1-4 family residential properties		2		59		12		2		59		12
Commercial loans		2		116		37		2		116		39
Total		5	$	282	$	49		5	$	282	$	51

As of March 31, 2021 and December 31, 2020, 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 and lease losses resulting from the modifications.

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All loans with a principal balance of $0.5 million or more that have been modified in a troubled debt restructuring are considered impaired and evaluated individually for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, are considered in the determination of an appropriate level of allowance for loan and lease losses. This evaluation resulted in an allowance for loan and lease losses attributable to such restructured loans of $1 thousand as of both March 31, 2021 and December 31, 2020.

5. OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS

Other Real Estate Owned

Other real estate and certain other assets acquired in foreclosure are reported at the net realizable value of the property, less estimated costs to sell. The following table summarizes foreclosed property activity as of the three months ended March 31, 2021 and 2020:

	March 31, 2021			March 31, 2020
	(Dollars in Thousands)
Beginning balance	$	949		$	1,078
Additions (1)		—			18
Sales proceeds		—			(37	)
Gross gains		—			5
Gross losses		—			—
Net gains		—			5
Impairment		(7	)		(10	)
Ending balance	$	942		$	1,054

(1) Additions to other real estate owned (“OREO”) include transfers from loans, other assets 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 $21 thousand and $0.1 million as of March 31, 2021 and 2020, 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 March 31, 2021 and held $0.1 million of these loans as of March 31, 2020.

Repossessed Assets

In addition to the other real estate and other assets acquired in foreclosure, the Company also acquires assets through the repossession of the underlying collateral of loans in default. The following table summarizes repossessed asset activity as of the three months ended March 31, 2021 and 2020:

	March 31, 2021			March 31, 2020
	(Dollars in Thousands)
Beginning balance	$	245		$	256
Transfers from loans		400			317
Sales proceeds		(262	)		(153	)
Gross gains		—			—
Gross losses		(45	)		(166	)
Net losses		(45	)		(166	)
Impairment		—			—
Ending balance	$	338		$	254

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

6. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company recorded $7.4 million of goodwill as a result of its acquisition of The Peoples Bank (“TPB”) in 2018. Goodwill impairment was neither indicated nor recorded during the three months ended March 31, 2021 or the year ended December 31, 2020.

Goodwill is tested for impairment annually, or more often if circumstances warrant. If, as a result of impairment testing, it is determined that the implied fair value of goodwill is lower than its carrying amount, impairment is indicated, and goodwill must be written down to its implied

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fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements. Goodwill totaled $7.4 million as of both March 31, 2021 and December 31, 2020.

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 March 31, 2021 were as follows:

	March 31, 2021
	(Dollars in Thousands)
Goodwill	$	7,435
Core deposit intangible:
Gross carrying amount		2,048
Accumulated amortization		(1,164	)
Core deposit intangible, net		884
Total	$	8,319

The Company’s estimated remaining amortization expense on intangibles as of March 31, 2021 was as follows:

	Amortization Expense
	(Dollars in Thousands)
2021		250
2022		268
2023		195
2024		122
2025		49
Total	$	884

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

7. BORROWINGS

Short-Term Borrowings

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

• Federal funds purchased, which represent unsecured lines of credit that generally mature within one to four days, are available to the Bank through arrangements with correspondent banks and the Federal Reserve. As of both March 31, 2021 and December 31, 2020, there were no federal funds purchased outstanding.

• Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The Bank monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements as of both March 31, 2021 and December 31, 2020 totaled $17 thousand.

• Short-term FHLB advances are secured borrowings available to the Bank as an alternative funding source. As of both March 31, 2021 and December 31, 2020, the Bank had $10.0 million in outstanding FHLB advances with original maturities of less than one year.

Long-Term Borrowings

The Company may use FHLB advances with original maturities of more than one year as an alternative to funding sources with similar maturities, such as certificates of deposit or other deposit programs. These advances generally offer more attractive rates than other mid-term financing options. They are also flexible, allowing the Company to quickly obtain the necessary maturities and rates that best suit its overall asset/liability strategy. FHLB advances with an original maturity of more than one year are classified as long-term. As of both March 31, 2021 and December 31, 2020, the Company did not have any long-term FHLB advances outstanding.

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Available Credit

As an additional funding source, the Company has available unused lines of credit with correspondent banks, the Federal Reserve and the FHLB. Certain of these funding sources are subject to underlying collateral. As of March 31, 2021 and December 31, 2020, the Company’s available unused lines of credit consisted of the following:

Available Lines of Credit	Collateral Requirements	March 31, 2021	December 31, 2020
Correspondent banks	None	$44.8 million	$44.8 million
Federal Reserve (discount window)	Subject to collateral	$1.4 million	$1.6 million
FHLB advances (1)	Subject to collateral	$217.1 million	$225.8 million

(1) These amounts represent the total remaining credit the Company has from the FHLB, but this credit can only be utilized to the extent that underlying collateral exists. Assets pledged (including loans and investment securities) associated with FHLB advances and letters of credit totaled $59.0 million and $36.1 million as of March 31, 2021 and December 31, 2020, respectively. The Company’s collateral exposure with the FHLB in the form of advances and letters of credit was $40.0 million and $20.0 million as of March 31, 2021 and December 31, 2020, respectively, leaving an excess of collateral of $19.0 million and $16.1 million available to utilize for additional credit as of the respective dates.

8. INCOME TAXES

The provision for income taxes was $0.3 million for both of the three-month periods ended March 31, 2021 and 2020. The Company’s effective tax rate was 22.0% and 23.6%, 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 $1.8 million and $2.0 million as of March 31, 2021 and December 31, 2020, 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.

9. DEFERRED COMPENSATION PLANS

The Company has entered into supplemental retirement compensation benefits agreements with certain directors and former executive officers. The measurement of the liability under these agreements includes estimates involving life expectancy, length of time before retirement and the expected returns on the bank-owned life insurance policies used to fund those agreements. Should these estimates prove to be materially wrong, the cost of these agreements could change accordingly. The related deferred compensation obligation to these directors and executive officers included in other liabilities was $3.3 million as of both March 31, 2021 and December 31, 2020.

Non-employee directors may elect to defer payment of all or any portion of their Bancshares and Bank director fees under Bancshares’ Non-Employee Directors’ Deferred Compensation Plan (the “Deferral Plan”). The Deferral Plan permits non-employee directors to invest their directors’ fees and to receive the adjusted value of the deferred amounts in cash and/or shares of Bancshares’ common stock. Neither Bancshares nor the Bank makes any contribution to participants’ accounts under the Deferral Plan. As of March 31, 2021 and December 31, 2020, a total of 114,257 and 111,419 shares of Bancshares common stock, respectively, were deferred in connection with the Deferral Plan. All deferred fees, whether in the form of cash or shares of Bancshares common stock, are reflected as compensation expense in the period earned. The Company classifies all deferred directors’ fees allocated to be paid in shares as equity additional paid-in capital. The Company may use issued shares or shares of treasury stock to satisfy these obligations when due.

10. 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 three-month periods ended March 31, 2021 and 2020.

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.

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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. The Company did not grant any stock option awards during the three months ended March 31, 2021.

	2020
Risk-free interest rate		1.24	%
Expected term (in years)		7.5
Expected stock price volatility		28.9	%
Dividend yield		1.25	%
Fair value of stock option		3.34

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

	Three Months Ended
	March 31, 2021					March 31, 2020
	Number of Shares		Average Exercise Price			Number of Shares		Average Exercise Price
Options:
Outstanding, beginning of period		421,000	$	9.79	��		412,800	$	9.72
Granted		—		—			10,200		11.95
Exercised		—		—			666		10.75
Expired		—		—			—		—
Forfeited		—		—			334		10.75
Options outstanding, end of period		421,000	$	9.79			422,000	$	9.77
Options exercisable, end of period		396,095	$	9.74			352,517	$	9.58

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 zero as of March 31, 2021 and 2020, respectively.

Restricted Stock

During the three months ended March 31, 2021 and 2020, respectively, 37,930 shares and 24,160 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.

11. 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 13 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 income and expense, as well as the reporting location in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020:

	Location in the Condensed	Three Months Ended
	Consolidated Statements of Operations	March 31, 2021		March 31, 2020
		(Dollars in Thousands)
Operating lease expense (1)	Net occupancy and equipment	$	209	$	211
Operating lease income (2)	Lease income	$	209	$	212

⁽¹⁾ Includes short-term lease costs. For the three-month periods ended March 31, 2021 and 2020, short-term lease costs were nominal in amount.

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

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The following table provides supplemental lease information for operating leases on the Condensed Consolidated Balance Sheet as of March 31, 2021:

	Location in the Condensed
	Consolidated Balance Sheet	March 31, 2021
		(Dollars in Thousands)
Operating lease right-of-use assets	Other assets	$	2,913
Operating lease liabilities	Other liabilities	$	2,973
Weighted-average remaining lease term (in years)			5.74
Weighted-average discount rate			3.08	%

The following table provides supplemental lease information for the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020:

	Three Months Ended
	March 31, 2021		March 31, 2020
	(Dollars in Thousands)
Cash paid for amounts included in the measurement of    lease liabilities:
Operating cash flows from operating leases	$	176	$	188

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 March 31, 2021:

	Minimum Rental Payments
	(Dollars in Thousands)
2021	$	504
2022		607
2023		472
2024		438
2025		339
2026 and thereafter		937
Total future minimum lease payments	$	3,297
Less: Imputed interest		324
Total operating lease liabilities	$	2,973

12. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of certain balance sheet assets and liabilities. In the normal course of business, the Company also uses derivative financial instruments to add stability to interest income or expense and to manage its exposure to movements in interest rates. The Company does not use derivatives for trading or speculative purposes and only enters into transactions that have a qualifying hedge relationship. The Company’s hedging strategies involving interest rate derivatives are classified as either cash flow hedges or fair value hedges, depending upon the rate characteristic of the hedged item.

Cash Flow Hedges

The Bank has entered into forward interest rate swap contracts on certain variable-rate money market deposit accounts (indexed to the Federal Funds effective rate’s daily weighted average). The money market account balances are expected to exceed the notional amount for the duration of the hedges and the rates on these deposits are anticipated to move closely with changes in one-month LIBOR, or a comparable benchmark interest rate. The Bank has also entered into a forward interest rate swap contract on a variable-rate FHLB advance (indexed to one-month LIBOR) that will be renewed on a monthly basis and will remain outstanding until the hedge expiration. These interest rate swaps were designated as derivative instruments in cash flow hedges with the objective of converting the floating interest payments to a fixed rate. Under the swap arrangements, the Bank pays a fixed interest rate and receives a variable interest rate based on one-month LIBOR, or a comparable benchmark interest rate, on the notional amount, with monthly net settlements. There were no gains or losses reclassified from other comprehensive income (loss) for cash flow hedges for the three months ended March 31, 2021 and 2020.

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Fair Value Hedges

The Bank has entered into forward interest rate swap contracts on fixed rate commercial real estate loans. The interest rate swaps were designated as derivative instruments in fair value hedges with the objective of effectively converting pools of fixed rate assets to variable rate throughout the hedge durations. Under the swap arrangements, the Bank pays a fixed interest rate and receives a variable interest rate based on one-month LIBOR, or a comparable benchmark interest rate, on the notional amount, with monthly net settlements. The Bank recognized no gains or losses on the fair value hedges for the three months ended March 31, 2021 and 2020.

Presentation

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

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

	As of March 31, 2021					As of December 31, 2020
	Notional		Estimated Fair Value			Notional		Estimated Fair Value
	Amount		Gain (Loss) (1)			Amount		Gain (Loss) (1)
	(Dollars in Thousands)
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate swaps related to fixed rate commercial real estate loans	$	20,000	$	(574	)	$	20,000	$	(837	)
Total fair value hedges				(574	)				(837	)
Cash flow hedges:
Interest rate swaps related to variable-rate money market deposit accounts		20,000		(832	)		20,000		(1,337	)
Interest rate swaps related to FHLB advances		10,000		(295	)		10,000		(436	)
Total cash flow hedges				(1,127	)				(1,773	)
Total hedges designated as hedging instruments, net			$	(1,701	)			$	(2,610	)

⁽¹⁾ Derivatives in a gain position are recorded as other assets and derivatives in a loss position are recorded as other liabilities on the consolidated balance sheets.

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

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

Location in the Condensed Consolidated Balance Sheet in Which the Hedged	Carrying Amount of the Hedged Assets		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
Item is Included	March 31, 2021
	(Dollars in Thousands)
Loans and leases, net of allowance for loan and    lease losses (1)	$	45,907	$	(574	)

⁽¹⁾ These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. As of March 31, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $45.3 million, the cumulative basis adjustments associated with these hedging relationships was $0.6 million, and the amounts of the designated hedged items were $20 million.

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The following table presents the effect of hedging derivative instruments on the Company’s Consolidated Statements of Income.

	Location in the Condensed	Three Months Ended
	Consolidated Statements of Operations	March 31, 2021			March 31, 2020
		(Dollars in Thousands)
Interest income	Interest and fees on loans	$	(61	)	$	9
Interest expense	Interest on deposits		31			(6	)
Interest expense	Interest on short-term borrowings		81			11
	Net interest income (expense)	$	(173	)	$	4

13. SEGMENT REPORTING

Under ASC Topic 280, Segment Reporting, certain information is disclosed for the two reportable operating segments of Bancshares: the Bank and ALC. The reportable segments were determined using the internal management reporting system. These segments comprise Bancshares’ and the Bank’s significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2020. 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 March 31, 2021:
Net interest income	$	7,088	$	1,973	$	3		$	—		$	9,064
Provision for loan and lease losses		305		96		—			—			401
Total non-interest income		824		150		1,296			(1,319	)		951
Total non-interest expense		6,277		1,838		409			(128	)		8,396
Income before income taxes		1,330		189		890			(1,191	)		1,218
Provision for income taxes		284		48		(64	)		—			268
Net income	$	1,046	$	141	$	954		$	(1,191	)	$	950
Other significant items:
Total assets	$	929,571	$	52,393	$	93,259		$	(148,688	)	$	926,535
Total investment securities		75,702		—		81			—			75,783
Total loans, net		653,688		49,825		—			(44,283	)		659,230
Goodwill and core deposit intangible, net		8,319		—		—			—			8,319
Investment in subsidiaries		—		—		87,345			(87,345	)		—
Fixed asset additions		118		4		—			—			122
Depreciation and amortization expense		421		24		—			—			445
Total interest income from external customers		7,442		2,403		—			—			9,845
Total interest income from affiliates		430		—		2			(432	)		—

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						All
	Bank			ALC		Other			Eliminations			Consolidated
	(Dollars in Thousands)
As of and for the three months ended March 31, 2020:
Net interest income	$	6,480		$	2,400	$	6		$	—		$	8,886
Provision for loan and lease losses		248			332		—			—			580
Total non-interest income		1,094			237		1,234			(1,268	)		1,297
Total non-interest expense		6,156			2,169		356			(187	)		8,494
Income before income taxes		1,170			136		884			(1,081	)		1,109
Provision for income taxes		274			51		(63	)		—			262
Net income	$	896		$	85	$	947		$	(1,081	)	$	847
Other significant items:
Total assets	$	791,302		$	61,503	$	89,897		$	(154,137	)	$	788,565
Total investment securities		109,998			—		81			—			110,079
Total loans, net		535,188			58,074		—			(53,577	)		539,685
Goodwill and core deposit intangible, net		8,715			—		—			—			8,715
Investment in subsidiaries		—			—		83,680			(83,680	)		—
Fixed asset additions		219			14		—			—			233
Depreciation and amortization expense		366			33		—			—			399
Total interest income from external customers		7,257	��		3,140		—			—			10,397
Total interest income from affiliates		740			—		6			(746	)		—

14. OTHER OPERATING INCOME AND EXPENSE

Other Operating Income

Other operating income for the three months ended March 31, 2021 and 2020 consisted of the following:

	Three Months Ended
	March 31,
	2021		2020
	(Dollars in Thousands, Except Per Share Data)
Bank-owned life insurance	$	108	$	108
Auto Club revenue		19		35
ATM fee income		136		100
Wire transfer fees		14		13
Gain on sales of premises and equipment and other assets		71		115
Other income	$	348	$	371

All of the Company’s revenue that is subject to ASU 2014-09, Revenue from Contracts with Customers, codified at 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 the three-month periods ended March 31, 2021 and 2020 was $0.5 million and $0.7 million, respectively. 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 March 31, 2021.

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Other Operating Expense

Other operating expense for the three months ended March 31, 2021 and 2020 consisted of the following:

	Three Months Ended
	March 31,
	2021		2020
	(Dollars in Thousands, Except Per Share Data)
Postage, stationery and supplies	$	215	$	214
Telephone/data communication		232		223
Advertising and marketing		29		44
Travel and business development		28		126
Collection and recoveries		46		85
Other services		64		91
Insurance expense		163		162
FDIC insurance and state assessments		153		80
Loss on sales of premises and equipment and other assets		32		166
Core deposit intangible amortization		91		110
Other real estate/foreclosure expense, net		7		19
Other expense		561		342
Total	$	1,621	$	1,662

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:

	March 31, 2021		December 31, 2020
	(Dollars in Thousands)
Standby letters of credit	$	—	$	180
Standby performance letters of credit	$	580	$	580
Commitments to extend credit	$	139,842	$	118,699

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 March 31, 2021 and December 31, 2020, 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

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accruals. Self-insurance accruals totaled $0.2 million as of both March 31, 2021 and December 31, 2020. 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.

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 three months ended March 31, 2021 or the year ended December 31, 2020.

Fair Value Measurements on a Recurring Basis

Securities Available-for-Sale

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include exchange-traded equities. Level 2 securities include U.S. Treasury and agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Interest Rate Derivative Agreements

Interest rate derivative agreements are used by the Company to mitigate risk associated with changes in interest rates. The fair value of these agreements is based on information obtained from third-party financial institutions. This information is periodically evaluated by the Company and, as necessary, corroborated against other third-party valuations. The Company classifies these derivative assets within Level 2 of the valuation hierarchy.

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The following tables present assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020.

	Fair Value Measurements as of March 31, 2021 Using
	Totals At March 31, 2021		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Investment securities, available-for-sale
Mortgage-backed securities:
Residential	$	26,541	$	—	$	26,541	$	—
Commercial		36,855		—		36,855		—
Obligations of states and political subdivisions		3,855		—		3,855		—
Corporate notes		2,772		—		2,772		—
U.S. Treasury securities		81		—		81		—
Other liabilities - derivatives		1,701		—		1,701		—

	Fair Value Measurements as of December 31, 2020 Using
	Totals At December 31, 2020		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	$	25,537	$	—	$	25,537	$	—
Commercial		41,487		—		41,487		—
Obligations of states and political subdivisions		5,108		—		5,108		—
Corporate notes		2,784		—		2,784		—
U.S. Treasury securities		10,077		—		10,077		—
Other liabilities - derivatives		2,610		—		2,610		—

Fair Value Measurements on a Non-recurring Basis

Impaired Loans

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

OREO and Other Assets Held-for-Sale

OREO consists of properties obtained through foreclosure or in satisfaction of loans and is recorded at net realizable value, less estimated cost to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically significant unobservable inputs for determining fair value.

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As of March 31, 2021 and December 31, 2020, included within OREO were certain assets that were formerly included as premises and equipment but have been removed from service, and as of the balance sheet date, were designated as assets to be disposed of by sale. These include assets associated with branches of the Bank that have been closed. When an asset is designated as held-for-sale, the Company ceases depreciation of the asset, and the asset is recorded at the lower of its carrying amount or fair value less estimated cost to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically unobservable inputs for determining fair value.

The following table presents the balances of impaired loans, OREO and other assets held-for-sale measured at fair value on a non-recurring basis as of March 31, 2021 and December 31, 2020:

	Fair Value Measurements as of March 31, 2021 Using
	Totals At March 31, 2021		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Impaired loans	$	28	$	—	$	—	$	28
OREO and other assets held-for-sale		942		—		—		942

	Fair Value Measurements as of December 31, 2020 Using
	Totals At December 31, 2020		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	$	28	$	—	$	—	$	28
OREO and other assets held-for-sale		949		—		—	$	949

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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 March 31, 2021. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input and the weighted average within the range utilized as of March 31, 2021 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 March 31, 2021		Valuation Technique	Unobservable Input	Quantitative Range of Unobservable Inputs (Weighted Average)
	(Dollars in Thousands)
Non-recurring fair value measurements:
Impaired loans	$	28	Multiple data points, including discount to appraised value of collateral based on recent market activity	Appraisal comparability adjustment (discount)	9%-10%	(9.5%)
OREO and other assets held-for-sale	$	942	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal comparability adjustment (discount)	9%-10%	(9.5%)

Impaired Loans

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

OREO

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

Other Assets Held-for-Sale

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

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Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash, due from banks and federal funds sold: The carrying amount of cash, due from banks and federal funds sold approximates fair value.

Federal Home Loan Bank stock: Based on the redemption provision of the FHLB, the stock has no quoted market value and is carried at cost.

Investment securities: Fair values of investment securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments.

Derivative instruments: The fair value of derivative instruments is based on information obtained from a third-party financial institution. This information is periodically evaluated by the Company and, as necessary, corroborated against other third-party information.

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

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

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

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

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

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

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

The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of March 31, 2021 and December 31, 2020 were as follows:

	March 31, 2021
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	125,867	$	125,867	$	125,867	$	—	$	—
Investment securities available-for-sale		70,104		70,104		—		70,104		—
Investment securities held-to-maturity		5,679		5,795		—		5,795		—
Federal funds sold		84		84		—		84		—
Federal Home Loan Bank stock		870		870		—		—		870
Loans, net of allowance for loan and lease losses		659,230		666,431		—		—		666,431
Liabilities:
Deposits		818,043		819,341		—		819,341		—
Short-term borrowings		10,017		10,017		—		10,017		—
Other liabilities - derivatives		1,701		1,701		—		1,701		—

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	December 31, 2020
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	94,415	$	94,415	$	94,415	$	—	$	—
Investment securities available-for-sale		84,993		84,993		—		84,993		—
Investment securities held-to-maturity		6,429		6,559		—		6,559		—
Federal funds sold		85		85		—		85		—
Federal Home Loan Bank stock		1,135		1,135		—		—		1,135
Loans, net of allowance for loan and lease losses		638,374		650,107		—		—		650,107
Liabilities:
Deposits		782,212		784,574		—		784,574		—
Short-term borrowings		10,017		10,017		—		10,017		—
Other liabilities - derivatives		2,610		2,610		—		2,610		—

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

DESCRIPTION OF THE BUSINESS

First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its subsidiaries, the “Company”), is a bank holding company with its principal offices in Birmingham, Alabama. Bancshares operates one commercial banking subsidiary, First US Bank (the “Bank”). As of March 31, 2021, the Bank operated and served its customers through 19 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, the Bank operates loan production offices in Mobile, Alabama and the Chattanooga, Tennessee area. The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals. The Bank also performs indirect lending through third-party retailers and currently conducts this lending in 11 states, including Alabama, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia.

The Bank owns all of the stock of Acceptance Loan Company, Inc., an Alabama corporation (“ALC”). ALC is a finance company headquartered in Mobile, Alabama that performs both indirect lending and conventional consumer finance lending through a branch network. ALC’s branch network serves customers through 20 offices located in Alabama and southeast Mississippi. The Bank serves as the primary funding source for ALC’s operations.

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

Delivery of the best possible financial services to customers remains an overall operational focus of the Company. The Company recognizes that attention to detail and responsiveness to customers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 265 full-time equivalent employees (as of March 31, 2021), to ensure customer satisfaction and convenience.

The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with estimates. These estimates are necessary to comply with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and general banking practices. These estimates include accounting for the allowance for loan and lease losses, the right-of-use asset and lease liability, the value of other real estate owned and certain collateral-dependent loans, consideration related to goodwill impairment testing and deferred tax asset valuation. A description of these estimates, which significantly affect the determination of the Company’s consolidated financial position, results of operations and cash flows, is set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2020.

The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of March 31, 2021 to December 31, 2020, while comparing income and expense for the three-month periods ended March 31, 2021 and 2020.

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

This information should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2020. 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.

RECENT MARKET CONDITIONS: COVID-19 PANDEMIC

The COVID-19 pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity and other economic activities have had, are currently having, and may for some time continue to have a destabilizing effect on financial markets and economic activity. The extent of the impact of COVID-19 on the Company’s operational and financial performance is currently uncertain, cannot be predicted and will depend on certain developments, including, among others, the spread of COVID-19 and its variants, vaccination efforts, the duration of the pandemic, its impact on our customers, employees and vendors, and the continued governmental, regulatory and private sector responses, which may be precautionary, to COVID-19.

The Company’s business, financial condition and results of operations generally rely upon the ability of the Company’s borrowers to repay their loans, the value of collateral underlying those loans, and demand for loans and other products and services that the Company offers, which are highly dependent on the business environment in the Company’s primary markets and the United States economy as a whole.

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In light of the changing economic outlook as a result of COVID-19, the Federal Reserve reduced the target federal funds rate by 150 basis points. These reductions in interest rates and other economic uncertainties that have arisen as a result primarily of the COVID-19 pandemic have and are likely to continue to negatively impact net interest income, provisions for loan losses and noninterest income. Additional negative financial impacts could occur; however, the ultimate potential impact is not known at this time.

Response to the COVID-19 Pandemic and the CARES Act

Loan Deferments and Credit Risk Identification

In accordance with section 4013 of the Coronavirus Aid, Relief and Economic Security (CARES) Act and interpretive guidance from banking regulators, in 2020, the Company implemented initiatives to provide short-term payment relief to borrowers who were negatively impacted by COVID-19. As of March 31, 2021, loans that continued to be in pandemic-related deferment totaled $1.2 million, compared to $8.1 million as of December 31, 2020, $18.4 million as of September 30, 2020 and $95.2 million as of June 30, 2020. Management believes that the decrease in deferred loans over the past three quarters is indicative of the strength of the credit quality within the portfolio.

In addition, at the onset of the pandemic, management identified certain categories of loans that it believed to be at “high-risk” of potential default or credit loss due to the COVID-19 pandemic. The “high-risk” category, which includes loans collateralized by hotels/motels and dine-in restaurants, decreased to $12.1 million, or 1.8% of the loan portfolio, as of March 31, 2021 compared to $13.5 million, or 2.1% of the loan portfolio, as of December 31, 2020.  

The spread of COVID-19 has created a global public health crisis that has resulted in widespread volatility and deterioration in household, business, economic and market conditions. Although loans in deferment status and loans in the “high-risk” category have decreased, the Company will continue to closely monitor the impact of changing economic circumstances on the Company’s loan portfolio.

Paycheck Protection Program

Sections 1102 and 1106 of the CARES Act added a new loan program administered by the Small Business Administration (“SBA”) entitled the Paycheck Protection Program (“PPP”). The PPP is intended to provide economic relief to small businesses throughout the United States that have been adversely impacted by COVID-19. PPP loans are 100% guaranteed by the SBA and are forgivable in whole, or in part, if the proceeds are used by the borrower for payroll and other permitted purposes in accordance with the requirements of the PPP (as discussed in greater detail below). If not forgiven in whole or in part, the loans carry a fixed interest rate of 1.00% per annum with payments deferred for 24 weeks from the date of the loan, plus another 10 months after the 24-week period. As compensation for originating a PPP loan, the Company receives lender processing fees from the SBA ranging from 1% to 5% of the original loan balance, depending on the size of the loan. Processing fees, net of origination costs, are deferred and amortized over the contractual life of the loan as interest income. Upon forgiveness of a loan by the SBA, any unrecognized net deferred fees will be recognized as interest income in that period.

PPP loans were initially originated for a term of two years; however, a June 5, 2020 amendment to the CARES Act (i) provided for a five-year minimum loan term for loans originated beginning on that date and (ii) permitted lenders and borrowers to amend loans previously issued under two-year terms to terms of five to ten years if mutually agreed upon by both the lender and the borrower. As of March 31, 2021, 154 PPP loans with an aggregate principal balance of $14.8 million remained outstanding. Of this amount, $9.6 million of the loans were originated under two-year terms, while $5.2 million of the loans were originated under five-year terms.

A borrower is eligible for forgiveness of principal and accrued interest on its PPP loan to the extent that the proceeds were used to cover eligible payroll costs, interest costs, rent and utility costs over a period of between eight and twenty-four weeks after the loan is made, as long as the borrower retains its employees and their compensation levels. The SBA began processing forgiveness payments during the fourth quarter of 2020. As of March 31, 2021, 76 of the Company’s borrowers had received PPP loan forgiveness. Amortized PPP loan fees, which are recognized in interest and fees on loans, totaled approximately $93 thousand for the three months ended March 31, 2021 and $161 thousand for the year ended December 31, 2020. As of March 31, 2021, the Company had approximately $387 thousand in remaining net deferred SBA PPP loan fees.

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EXECUTIVE OVERVIEW

First Quarter 2021 Earnings Highlights

The Company earned net income of $950 thousand, or $0.14 per diluted common share, during the three months ended March 31, 2021, compared to $847 thousand, or $0.13 per diluted common share, for the three months ended March 31, 2020.

Summarized condensed consolidated statements of operations are included below for the three-month periods ended March 31, 2021 and 2020, respectively.

	Three Months Ended
	March 31,		March 31,
	2021		2020
	(Dollars in Thousands)
Interest income	$	9,845	$	10,397
Interest expense		781		1,511
Net interest income		9,064		8,886
Provision for loan and lease losses		401		580
Net interest income after provision for loan and lease losses		8,663		8,306
Non-interest income		951		1,297
Non-interest expense		8,396		8,494
Income before income taxes		1,218		1,109
Provision for income taxes		268		262
Net income	$	950	$	847

The following discussion summarizes the most significant activity that drove changes in the Company’s net income during the three months ended March 31, 2021, as compared to the three months ended March 31, 2020.

Net Interest Income

Net interest income increased $0.2 million comparing the first quarter of 2021 to the first quarter of 2020. Although average total loans increased $104.8 million comparing the three months ended March 31, 2021 to the three months ended March 31, 2020, interest income decreased $0.5 million comparing the two periods. The decrease in interest income is primarily due to margin compression, which has remained a challenge for the Company due in part to the interest rate environment that has persisted since the onset of the COVID-19 pandemic. In response to the interest rate environment, management has continued to reprice deposit liabilities at lower rates upon maturity. Due to these repricing efforts, annualized average total funding costs decreased to 0.39% for the first quarter of 2021, compared to 0.87% for the first quarter of 2020, which resulted in a reduction in interest expense of $0.7 million comparing the first quarter of 2021 to the first quarter of 2020.

Management expects the current lower interest rate environment, coupled with substantial growth in investable cash balances, to continue to put pressure on net interest income and margin. Accordingly, the Company will remain focused on deploying investable cash balances into loans that meet the Company’s established credit standards, while at the same time seeking to reduce interest expense through continued liability repricing.  

Provision for Loan and Lease Losses

The provision for loan and lease losses was $0.4 million during the first quarter of 2021, compared to $0.6 million during the first quarter of 2020. The decrease in provisioning comparing the periods was due in part to improvement in the credit quality of the loan portfolio resulting from reductions in ALC’s consumer-related portfolio. As of March 31, 2021, total loans at ALC, which contain the highest charge-off rates in the Company’s loan portfolio, were reduced by $9.9 million compared to March 31, 2020. The loan volume reductions at ALC led to lower credit losses, but also contributed to margin compression as the mix of higher interest-earning loans decreased relative to the earlier quarters.

In addition to changes in the credit quality mix of the Company’s loan portfolio, the overall economic outlook in the markets served by the Company continued to improve during the first quarter of 2021 compared to the prior fiscal year, including reductions in COVID-19-related deferments. Although a measure of economic uncertainty continues to exist, management believes that the allowance, which was calculated under an incurred loss model, was sufficient to absorb losses in the Company’s loan portfolio based on circumstances existing as of March 31, 2021. The Company will continue to closely monitor the impact of changing economic circumstances on the Company’s loan portfolio. In accordance with relevant accounting guidance for smaller reporting companies, the Company has not yet adopted the Current Expected Credit Loss (CECL) accounting model for the calculation of credit losses and is currently evaluating the impact that adopting CECL will have on the Company’s financial statements. Due to its classification as a smaller reporting company by the Securities and Exchange Commission, the Company is not required to implement the CECL model until January 1, 2023; however, early adoption is permissible.

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Non-interest Income

Non-interest income totaled $1.0 million and $1.3 million for the three-month periods ended March 31, 2021 and 2020, respectively. The decreases resulted primarily from reductions in service charges and related fees on the Bank’s deposit accounts, as well as reductions in secondary market mortgage revenues. The decrease in service charges is consistent with changes in deposit customer behaviors since the onset of the pandemic. The reduction in secondary market mortgage fees resulted from the discontinuance of the Bank’s mortgage division that became effective in the fourth quarter of 2020. Although the discontinuance resulted in a reduction in non-interest income, non-interest expense, primarily salaries and benefits, was reduced commensurately.

Non-interest Expense

Non-interest expense decreased $0.1 million comparing the first quarter of 2021 to the first quarter of 2020 due primarily to reductions in salaries and employee benefits. A portion of the expense reduction was associated with the discontinuation of the secondary mortgage marketing division.

Provision for Income Taxes

The Company’s effective tax rate was 22.0% for the three months ended March 31, 2021, a reduction from 23.6% for the three months ended March 31, 2020.

Balance Sheet Management

The Company’s asset base increased during the first quarter of 2021. As of March 31, 2021, assets totaled $926.5 million, compared to $890.5 million as of December 31, 2020.  The discussion below presents significant balance sheet components comparing March 31, 2021 to December 31, 2020.

Loans and Credit Quality

Total loans increased by $20.4 million as of March 31, 2021 compared to December 31, 2020. The increase was distributed primarily between real estate lending and indirect lending, which netted growth of $13.7 million and $12.4 million, respectively. Growth in real estate lending was split between construction and non-residential real estate, partially offset by a reduction in single family residential lending. Growth in the indirect portfolio continued to be focused on consumer loans secured by collateral that includes recreational vehicles, campers, boats, horse trailers and cargo trailers. The Company does not originate auto loans in its indirect portfolio.

Aside from indirect lending, other consumer loan categories decreased during the first quarter of 2021. The direct consumer and branch retail categories, which consist primarily of loans at ALC, decreased by a total of $3.8 million during the first quarter of 2021. The Bank’s commercial and industrial (“C&I”) portfolio also decreased during the period by $4.8 million. However, the Bank continued to participate in the PPP program, which contributed $2.9 million in loan growth during the first quarter of 2021, which partially offset reductions in C&I.

Non-performing assets, including loans in non-accrual status and other real estate owned (OREO), decreased to $3.5 million as of March 31, 2021, compared to $4.0 million as of December 31, 2020. As a percentage of total assets, non-performing assets improved to 0.37% as of March 31, 2021, compared to 0.45% as of December 31, 2020.

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. As of March 31, 2021, the investment securities portfolio totaled $75.8 million, compared to $91.4 million as of December 31, 2020. Management monitors its liquidity position, including forecasted expectations related to loan growth, when making determinations about whether to re-invest in the securities portfolio.

Deposits and Borrowings

Deposits totaled $818.0 million as of March 31, 2021, compared to $782.2 million as of December 31, 2020. The deposit growth reflected the impact of the pandemic on both business and consumer deposit holders, including preferences for liquidity, loan payment deferments, tax payment deferments, government stimulus receipts and generally lower consumer spending. Of the total increase in deposits, $12.7 million represented non-interest-bearing deposits, while $23.1 million were interest-bearing.

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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, Federal Home Loan Bank (“FHLB”) advances and brokered deposits.

During the first quarter of 2021, 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 March 31, 2021, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 11.42%. Its total capital ratio was 12.50%, and its Tier 1 leverage ratio was 8.73%.

Cash Dividend

The Company declared a cash dividend of $0.03 per share on its common stock in the first quarter of 2021, which is consistent with the Company’s dividend declaration for each quarter of 2020.

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RESULTS OF OPERATIONS

Net Interest Income

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

The following tables show the average balances of each principal category of assets, liabilities and shareholders’ equity for the three-month periods ended March 31, 2021 and 2020. 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
	March 31, 2021							March 31, 2020
	Average Balance		Interest		Annualized Yield/ Rate %			Average Balance		Interest		Annualized Yield/ Rate %
	(Dollars in Thousands)
ASSETS
Interest-earning assets:
Total loans (Note A)	$	652,886	$	9,490		5.89	%	$	548,107	$	9,639		7.07	%
Taxable investment securities		83,151		306		1.49	%		104,123		531		2.05	%
Tax-exempt investment securities		3,522		16		1.84	%		1,191		10		3.38	%
Federal Home Loan Bank stock		1,106		9		3.30	%		1,137		14		4.95	%
Federal funds sold		84		—		0.00	%		12,663		42		1.33	%
Interest-bearing deposits in banks		95,303		24		0.10	%		52,026		161		1.24	%
Total interest-earning assets		836,052		9,845		4.78	%		719,247		10,397		5.81	%
Non-interest-earning assets:
Other assets		68,838							73,405
Total	$	904,890						$	792,652
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits	$	225,152	$	139		0.25	%	$	169,424	$	175		0.42	%
Savings deposits		174,678		145		0.34	%		165,419		313		0.76	%
Time deposits		238,659		459		0.78	%		238,234		987		1.67	%
Total interest-bearing deposits (Note B)		638,489		743		0.47	%		573,077		1,475		1.04	%
Borrowings		10,016		38		1.54	%		10,121		36		1.43	%
Total interest-bearing liabilities		648,505		781		0.49	%		583,198		1,511		1.04	%
Non-interest-bearing liabilities:
Demand deposits		159,208							114,239
Other liabilities		9,720							10,494
Shareholders’ equity		87,457							84,721
Total	$	904,890						$	792,652
Net interest income (Note C)			$	9,064						$	8,886
Net interest margin						4.40	%						4.97	%

Note A	—	For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. These loans averaged $2.5 million and $3.7 million for the three months ended March 31, 2021 and 2020, respectively.
Note B	—	The annualized rate on total average funding costs, including total average interest-bearing liabilities and average non-interest-bearing demand deposits, was 0.39% and 0.87% for the three-month periods ended March 31, 2021 and 2020, respectively.
Note C	—	Loan fees are included in the interest amounts presented. Loan fees totaled $0.5 million for both of the three-month periods ended March 31, 2021 and 2020.

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

	Three Months Ended March 31, 2021									Three Months Ended March 31, 2020
	Compared to									Compared to
	Three Months Ended March 31, 2020									Three Months Ended March 31, 2019
	Increase (Decrease)									Increase (Decrease)
	Due to Change In:									Due to Change In:
	Volume			Average Rate			Net			Volume			Average Rate			Net
	(Dollars in Thousands)
Interest earned on:
Total loans	$	1,843		$	(1,992	)	$	(149	)	$	681		$	(715	)	$	(34	)
Taxable investment securities		(107	)		(118	)		(225	)		(237	)		(26	)		(263	)
Tax-exempt investment securities		20			(14	)		6			(7	)		2			(5	)
Federal Home Loan Bank stock		—			(5	)		(5	)		7			(4	)		3
Federal funds sold		(42	)		—			(42	)		34			(36	)		(2	)
Interest-bearing deposits in banks		134			(271	)		(137	)		20			(135	)		(115	)
Total interest-earning assets		1,848			(2,400	)		(552	)		498			(914	)		(416	)
Interest expense on:
Demand deposits		58			(94	)		(36	)		—			(31	)		(31	)
Savings deposits		18			(186	)		(168	)		(10	)		(138	)		(148	)
Time deposits		2			(530	)		(528	)		(63	)		77			14
Borrowings		—			2			2			—			36			36
Total interest-bearing liabilities		78			(808	)		(730	)		(73	)		(56	)		(129	)
Increase (decrease) in net interest income	$	1,770		$	(1,592	)	$	178		$	571		$	(858	)	$	(287	)

Net interest margin was reduced by 57 basis points to 4.40% during the first quarter of 2021, compared to 4.97% during the first quarter of 2020. The reduction in net interest margin primarily resulted from the prevailing low interest rate environment and our asset-sensitive balance sheet. Since August 2019, the federal funds rate has been reduced by 225 basis points, including decreases totaling 150 basis points in March 2020 in response to the COVID-19 pandemic. Net interest margin was also affected by the decrease in higher interest-earning ALC consumer loans.

The Company’s average loan balance increased by $104.8 million comparing the first quarter of 2021 to the first quarter of 2020. However, as a result of declining yields, interest earned on loans decreased $149 thousand comparing the two periods. The growth in average loans over the course of 2020 was funded through growth in deposits combined with maturities, sales and pay-downs in the Company’s investment portfolio. The average balance of the investment portfolio (taxable and tax-exempt combined) was reduced by $18.6 million comparing the three months ended March 31, 2021 to the three months ended March 31, 2020. Based on this volume reduction, coupled with the reduced interest rate environment, interest earned on the investment portfolio declined by $0.2 million comparing the two periods.

The COVID-19 pandemic has reduced economic activity and increased liquidity for deposit customers, consequently increasing the Company’s cash balances during 2020 and the first quarter of 2021. In the current environment, the excess cash balances earn low yields, which has put downward pressure on net interest margin. Interest earned on excess cash balances (including federal funds sold and interest-bearing deposits in banks) decreased by $0.2 million comparing the three months ended March 31, 2021 and 2020, due primarily to the decrease in the federal funds rate.

In the current interest rate environment, management expects to further reduce interest expense as interest-bearing liabilities continue to reprice; however, economic uncertainty remains due to the COVID-19 pandemic. We expect that growth in net loan volume with loans of sufficient credit quality will enhance net income, particularly as resources are shifted from lower earning excess cash balances and federal funds sold into loan assets. However, there continues to be competitive pressure to generate loans of sufficient credit quality. Management is maintaining vigilance in the deployment of strategies to effectively manage risks associated with interest rate fluctuations. However, net interest income could continue to experience downward pressure as a result of the interest rate environment, as well as increased competition for quality loan and deposit funding opportunities.  

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Provision for Loan and Lease Losses

The provision for loan and lease losses was $0.4 million for the three months ended March 31, 2021, compared to $0.6 million for the three months ended March 31, 2020. The decrease in provisioning comparing the periods was due in part to improvement in the credit quality of the loan portfolio resulting from reductions in ALC’s consumer-related portfolio. As of March 31, 2021, total loans at ALC, which contain the highest charge-off rates in the Company’s loan portfolio, were reduced by $9.9 million compared to March 31, 2020, which led to lower credit losses. However, due to increased provisioning throughout 2020 as a result of economic uncertainty and loan growth, the allowance as a percentage of total loans increased to 1.15% (excluding PPP loans, which are guaranteed by the SBA) as of March 31, 2021, compared to 1.09% as of March 31, 2020.

Management believes that the allowance for loan and lease losses as of March 31, 2021, which was calculated under an incurred loss model, was sufficient to absorb losses in the Company’s loan portfolio based on circumstances existing as of the balance sheet date. However, the economic environment as a result of the COVID-19 pandemic continues to contain a significant level of uncertainty. Management will continue to closely monitor circumstances associated with the Company’s loan portfolio, and should economic circumstances deteriorate further, additional loan loss provisioning may be required. In accordance with relevant accounting guidance for smaller reporting companies, the Company has not yet adopted the Current Expected Credit Loss (CECL) accounting model for the calculation of credit losses and is currently evaluating the impact that adopting CECL will have on the Company’s financial statements. Due to its classification as a smaller reporting company by the Securities and Exchange Commission, the Company is not required to implement the CECL model until January 1, 2023; however, early adoption is permissible.

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 March 31,
	2021		2020		$ Change			% Change
	(Dollars in Thousands)
Service charges and other fees on    deposit accounts	$	266	$	434	$	(168	)		(38.7	)%
Credit insurance commissions and fees		105		153		(48	)		(31.4	)%
Bank-owned life insurance		108		108		—			—
Mortgage fees from secondary market		23		127		(104	)		(81.9	)%
Lease income		209		212		(3	)		(1.4	)%
Other income		240		263		(23	)		(8.7	)%
Total non-interest income	$	951	$	1,297	$	(346	)		(26.7	)%

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; gains on the sale of premises and equipment and other assets; 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. Non-interest income decreased by $0.3 million comparing the first quarter of 2021 to the first quarter of 2020. The decrease resulted primarily from reductions in service charges and related fees on the Bank’s deposit accounts, as well as reductions in secondary market mortgage revenues. The decrease in service charges is consistent with changes in deposit customer behaviors since the onset of the COVID-19 pandemic. The reduction in secondary market mortgage fees resulted from the discontinuance of the Bank’s mortgage division that became effective in the fourth quarter of 2020. Although the discontinuance resulted in a reduction in non-interest income, non-interest expense, primarily salaries and benefits, was reduced commensurately.

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 income is expected to remain below historic levels in the near-term due to the decline in economic activities resulting from the COVID-19 pandemic, as well as the discontinuance of the mortgage division.

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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 March 31,
	2021		2020		$ Change			% Change
	(Dollars in Thousands)
Salaries and employee benefits	$	4,914	$	5,136	$	(222	)		(4.3	)%
Net occupancy and equipment expense		1,039		1,001		38			3.8	%
Computer services		465		417		48			11.5	%
Insurance expense and assessments		316		242		74			30.6	%
Fees for professional services		357		278		79			28.4	%
Postage, stationery and supplies		215		214		1			0.5	%
Telephone/data communications		232		223		9			4.0	%
Other real estate/foreclosure expense, net		7		19		(12	)		(63.2	)%
Other expense		851		964		(113	)		(11.7	)%
Total non-interest expense	$	8,396	$	8,494	$	(98	)		(1.2	)%

Non-interest expense decreased $0.1 million comparing the first quarter of 2021 to the first quarter of 2020 due primarily to reductions in salaries and employee benefits. A portion of the expense reduction was associated with the discontinuation of the secondary mortgage marketing division beginning in the fourth quarter of 2020. 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 $0.3 million for both of the three-month periods ended March 31, 2021 and 2020. The Company’s effective tax rate was 22.0% and 23.6%, respectively, for the same periods.

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

BALANCE SHEET ANALYSIS

Investment Securities

The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering the duration, composition and/or balance of the portfolio. The expected average life of securities in the investment portfolio was 2.6 years and 2.2 years as of March 31, 2021 and December 31, 2020, respectively.

Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income, a separate component of shareholders’ equity. As of March 31, 2021, available-for-sale securities totaled $70.1 million, or 92.5% of the total investment portfolio, compared to $85.0 million, or 93.0% of the total investment portfolio, as of December 31, 2020. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, corporate bonds and obligations of state and political subdivisions.

Held-to-maturity securities are recorded at amortized cost and represent securities that the Company both intends and has the ability to hold to maturity. As of March 31, 2021, held-to-maturity securities totaled $5.7 million, or 7.5% of the total investment portfolio, compared to $6.4 million, or 7.0% of the total investment portfolio, as of December 31, 2020. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies and obligations of states and political subdivisions.

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Loans and Allowance for Loan and Lease Losses

The tables below summarize loan balances by portfolio category at the end of each of the most recent five quarters as of March 31, 2021:

	Quarter Ended
	2021		2020
	March 31,		December 31,		September 30,		June 30,		March 31,
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	48,491	$	37,282	$	35,472	$	31,384	$	31,927
Secured by 1-4 family residential properties		82,349		88,856		95,147		93,010		100,186
Secured by multi-family residential properties		54,180		54,326		49,197		48,807		44,029
Secured by non-farm, non-residential properties		193,626		184,528		183,754		160,683		156,222
Commercial and industrial loans, including PPP loans		79,838		81,735		86,898		87,771		80,771
Consumer loans:
Direct consumer		26,998		29,788		30,048		33,299		36,307
Branch retail		31,075		32,094		33,145		33,000		31,568
Indirect sales		153,940		141,514		125,369		89,932		69,982
Total loans	$	670,497	$	650,123	$	639,030	$	577,886	$	550,992
Less unearned interest, fees and deferred cost		3,792		4,279		4,240		5,401		5,353
Allowance for loan and lease losses		7,475		7,470		7,185		6,423		5,954
Net loans	$	659,230	$	638,374	$	627,605	$	566,062	$	539,685

The tables below summarize changes in the allowance for loan and lease losses for each of the most recent five quarters as of March 31, 2021:

	Quarter Ended
	2021			2020
	March 31,			December 31,			September 30,			June 30,			March 31,
	(Dollars in Thousands)
Balance at beginning of period	$	7,470		$	7,185		$	6,423		$	5,954		$	5,762
Charge-offs:
Real estate loans:
Construction, land development and other land loans		(21	)		—			—			—			—
Secured by 1-4 family residential properties		(9	)		(9	)		(10	)		(22	)		(20	)
Secured by multi-family residential properties		—			—			—			—			—
Secured by non-farm, non-residential properties		—			—			—			—			—
Commercial and industrial loans, including PPP loans		—			—			—			—			—
Consumer loans:
Direct consumer		(348	)		(274	)		(385	)		(470	)		(492	)
Branch retail		(130	)		(95	)		(58	)		(79	)		(142	)
Indirect sales		(117	)		(49	)		(65	)		(38	)		—
Total charge-offs		(625	)		(427	)		(518	)		(609	)		(654	)
Recoveries		229			243			234			228			266
Net charge-offs		(396	)		(184	)		(284	)		(381	)		(388	)
Provision for loan and lease losses		401			469			1,046			850			580
Ending balance	$	7,475		$	7,470		$	7,185		$	6,423		$	5,954
Ending balance as a percentage of loans (1)		1.12	%		1.16	%		1.13	%		1.12	%		1.09	%
Net charge-offs as a percentage of average loans		0.25	%		0.11	%		0.19	%		0.27	%		0.28	%

⁽¹⁾ The allowance for loan and lease losses as a percentage of loans excluding PPP loans, which are guaranteed by the SBA, was 1.15% as of March 31, 2021, 1.18% as of December 31, 2020, 1.16% as of September 30, 2020 and 1.15% as of June 30, 2020.

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Nonperforming Assets

Nonperforming assets at the end of the five most recent quarters as of March 31, 2021 were as follows:

	Quarter Ended
	2021			2020
	March 31,			December 31,			September 30,			June 30,			March 31,
	(Dollars in Thousands)
Non-accrual loans	$	2,509		$	3,086		$	3,053		$	3,415		$	3,695
Other real estate owned		942			949			985			1,003			1,054
Total	$	3,451		$	4,035		$	4,038		$	4,418		$	4,749
Nonperforming assets as a percentage of total assets		0.37	%		0.45	%		0.47	%		0.52	%		0.60	%

Allocation of Allowance for Loan and Lease Losses

While no portion of the allowance for loan and lease losses is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, the following table shows an allocation of the allowance for loan and lease losses as of March 31, 2021 and December 31, 2020:

	March 31, 2021								December 31, 2020
	Allocation Allowance		Percent of Allowance in Each Category to Total Allowance			Percent of Loans in Each Category to Total Loans			Allocation Allowance		Percent of Allowance in Each Category to Total Allowance			Percent of Loans in Each Category to Total Loans
	(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans	$	444		5.9	%		7.2	%	$	393		5.3	%		5.7	%
Secured by 1-4 family residential properties		745		10.0	%		12.3	%		639		8.5	%		13.7	%
Secured by multi-family residential properties		541		7.2	%		8.1	%		577		7.7	%		8.4	%
Secured by non-farm, non-residential properties		2,004		26.8	%		28.9	%		1,566		21.0	%		28.4	%
Commercial and industrial loans, including PPP loans		596		8.0	%		11.9	%		1,008		13.5	%		12.5	%
Consumer loans:
Direct consumer		1,037		13.9	%		4.0	%		1,202		16.1	%		4.6	%
Branch retail		357		4.8	%		4.6	%		373		5.0	%		4.9	%
Indirect sales		1,751		23.4	%		23.0	%		1,712		22.9	%		21.8	%
Total loans	$	7,475		100.0	%		100.0	%	$	7,470		100.0	%		100.0	%

Deposits

Total deposits increased by 4.6% to $818.0 million as of March 31, 2021, from $782.2 million as of December 31, 2020. Core deposits, which exclude time deposits of $250 thousand or more, provide a relatively stable funding source that supports earning assets. Core deposits increased to $758.3 million, or 92.7% of total deposits, as of March 31, 2021, compared to $726.9 million, or 92.9% of total deposits, as of December 31, 2020.

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 the Company’s primary source 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.

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Average Daily Amount of Deposits and Rates

The average daily amount of deposits and rates paid on such deposits are summarized for the periods indicated in the following table:

	Three Months Ended					Three Months Ended
	March 31, 2021					March 31, 2020
	Average Amount		Rate			Average Amount		Rate
	(Dollars in Thousands)
Non-interest-bearing demand deposit accounts	$	159,208		—		$	114,239		—
Interest-bearing demand deposit accounts		225,152		0.25	%		169,424		0.42	%
Savings deposits		174,678		0.34	%		165,419		0.76	%
Time deposits		238,659		0.78	%		238,234		1.67	%
Total deposits	$	797,697		0.38	%	$	687,316		0.86	%
Total interest-bearing deposits	$	638,489		0.47	%	$	573,077		1.04	%

Other Interest-Bearing Liabilities

Other interest-bearing liabilities consist of federal funds purchased, securities sold under agreements to repurchase and FHLB advances. This category continues to be utilized as an alternative source of funds. During the first quarter of 2021, these borrowings represented 1.5% of average interest-bearing liabilities, compared to 1.7% in the first quarter of 2020.

Shareholders’ Equity

The Company has historically placed significant emphasis on maintaining its strong capital base and continues to do so. As of March 31, 2021, shareholders’ equity totaled $87.9 million, or 9.5% of total assets, compared to $86.7 million, or 9.7% of total assets, as of December 31, 2020. 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. Growth in retained earnings during the three months ended March 31, 2021 was supplemented by an increase in additional paid-in capital, as well as an increase in accumulated other comprehensive income associated with increases in the fair value of cash flow hedges during the three months ended March 31, 2021. The fair value of the cash flow hedges fluctuates based on changes in interest rates. Accordingly, the negative fair value of the hedges during the three months ended March 31, 2021 is 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 the 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 March 31, 2021 and 2020, Bancshares declared a dividend of $0.03 per common share, or approximately $0.2 million in aggregate amount.

As of both March 31, 2021 and December 31, 2020, the Company retained approximately $21.9 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 extended the expiration date of the share repurchase program for an additional year. There were 54,961 shares available for repurchase under this program as of March 31, 2021. During the quarter ended March 31, 2021, there were no shares repurchased under this program. During the year ended December 31, 2020, 38,604 shares were repurchased under this program at a weighted average price of $11.70 per share, or $0.5 million in total. On April 28, 2021, the Company’s board of directors authorized the Company to repurchase an additional 1,000,000 shares under the repurchase program. Share repurchases under the program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate, subject to applicable regulatory requirements. The Company’s board of directors also extended the expiration of the repurchase program to December 31, 2022. The repurchase program does not obligate the Company to acquire any particular number of shares and may be suspended at any time at the Company’s discretion.

As of March 31, 2021 and December 31, 2020, a total of 114,257 and 111,419 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 additional paid-in capital. The Company may use issued shares or shares of treasury stock to satisfy these obligations when due.

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LIQUIDITY AND CAPITAL RESOURCES

The asset portion of the balance sheet provides liquidity primarily from the following sources: (1) excess cash and interest-bearing deposits in banks, (2) federal funds sold, (3) principal payments and maturities of loans and (4) principal payments and maturities from the investment portfolio. Loans maturing or repricing in one year or less amounted to $117.4 million as of March 31, 2021 and $105.3 million as of December 31, 2020. Investment securities forecasted to mature or reprice in one year or less were estimated to be $8.6 million and $11.3 million of the investment portfolio as of March 31, 2021 and December 31, 2020, respectively.

Although some securities in the investment portfolio have legal final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. The investment securities portfolio had an estimated average life of 2.6 years and 2.2 years as of March 31, 2021 and December 31, 2020, respectively. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.

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

As of both March 31, 2021 and December 31, 2020, the Company had $10.0 million of outstanding borrowings under FHLB advances. The Company had up to $217.1 million and $225.8 million in remaining unused credit from the FHLB (subject to available collateral) as of March 31, 2021 and December 31, 2020, respectively. In addition, the Company had $46.2 million and $46.4 million in unused established federal funds lines as of March 31, 2021 and December 31, 2020, respectively.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Financial simulation models are the primary tools used by the Asset/Liability Committee of the Bank’s board of directors to measure interest rate exposure. Using a wide range of scenarios, management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. In these simulations, assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of the Company’s balance sheet resulting from both strategic plans and customer behavior. Simulation models also incorporate management’s assumptions regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates.

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

On a monthly basis, management simulates how changes in short- and long-term interest rates will impact future profitability, as reflected by changes in the Bank’s net interest margin and net interest income. The tables below depict how, as of March 31, 2021, pre-tax net interest margin and net interest income are forecasted to change over timeframes of six months, one year, two years and five years under the four listed interest rate scenarios. The interest rate scenarios contemplate immediate and parallel shifts in short- and long-term interest rates.

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

	6 Months			1 Year			2 Years			5 Years
+1%		11			12			14			23
+2%		18			18			23			40
-1%		(4	)		(8	)		(14	)		(26	)
-2%		(8	)		(13	)		(20	)		(33	)

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

	6 Months			1 Year			2 Years			5 Years
+1%	$	532		$	1,084		$	2,682		$	10,809
+2%		839			1,645			4,195			18,437
-1%		(197	)		(720	)		(2,637	)		(12,106	)
-2%		(385	)		(1,189	)		(3,801	)		(15,230	)

Assessing Long-Term Interest Rate Risk – Market Value of Equity and Estimating Modified Durations for Assets and Liabilities

On a monthly basis, management calculates how changes in interest rates would impact the market value of the Company’s assets and liabilities. The process is similar to assessing short-term risk but emphasizes and is measured over a longer period, approximately five to seven years, 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 in terms of changes in the present value of the Company’s assets and liabilities.

The table below is a summary of estimated market value changes in the Company’s assets, liabilities and equity as of March 31, 2021, for the four listed scenarios.

	+1%			+2%			-1%			-2%
	(Dollars in Thousands)
Change in market value of assets	$	(16,795	)	$	(33,657	)	$	8,312		$	11,032
Change in market value of liabilities		(22,243	)		(39,946	)		24,183			24,770
Net change in market value of equity		5,448			6,289			(15,871	)		(13,738	)
Beginning market value of equity		121,166			122,963			118,906			118,846
Resulting market value of equity	$	126,614		$	129,252		$	103,035		$	105,108

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 March 31, 2021, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based on that evaluation, Bancshares’ management concluded, as of March 31, 2021, that Bancshares’ disclosure controls and procedures were effective at the reasonable assurance level to ensure that the information required to be disclosed in Bancshares’ periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

A list of factors that could materially affect the Company’s business, financial condition and/or operating results is included in Part I, Item 1A, “Risk Factors” in Bancshares’ Annual Report on Form 10-K as of and for the year ended December 31, 2020. There have been no material changes to such risk factors. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

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

The following table sets forth purchases made by or on behalf of Bancshares or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of Bancshares’ common stock during the first quarter of 2021:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs (2)		Maximum Number of Shares that May Yet Be Purchased Under the Programs (2)
January 1 – January 31		—	$	—		—		54,961
February 1 – February 28		5,814	$	9.20		—		54,961
March 1 – March 31		1,151	$	9.33		—		54,961
Total		6,965	$	9.22		—		54,961

(1) 6,965 shares were purchased in open-market transactions by an independent trustee for Bancshares’ 401(k) Plan during the first quarter of 2021.

(2) On December 16, 2020, the Board of Directors extended the share repurchase program initially approved by the Board on January 19, 2006, which authorized the repurchase of up to 642,785 shares of common stock. As of March 31, 2021, Bancshares was authorized to repurchase up to 54,961 shares of common stock prior to the expiration date of December 31, 2021.

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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. Non-Employee Director Fee Schedule.
10.2	2021 Cash Incentive Program (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-14549), filed on February 26, 2021).
10.3	Amended and Restated Change in Control Agreement dated February 22, 2021, entered into by and among First US Bancshares, Inc., First US Bank, Acceptance Loan Company, Inc. and William C. Mitchell (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 000-14549), filed on February 26, 2021).
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 March 31, 2021.

________________

*Filed herewith

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SIGNATURES

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

FIRST US BANCSHARES, INC.

DATE: May 11, 2021

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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