EDGAR 10-K Filing

Company CIK: 717806
Filing Year: 2023
Filename: 717806_10-K_2023_0000950170-23-007191.json

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ITEM 1. BUSINESS
Item 1. Business.
First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its subsidiaries, the “Company”), is a bank holding company formed in 1983 registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancshares operates one banking subsidiary, First US Bank, an Alabama banking corporation (the “Bank”). Prior to its name change on October 11, 2016, Bancshares was known as United Security Bancshares, Inc. Bancshares and the Bank are headquartered in Birmingham, Alabama.
The Bank conducts a general commercial banking business and offers banking services such as demand, savings, individual retirement account and time deposits, personal and commercial loans, safe deposit box services and remote deposit capture. The Bank operates and serves its customers through 15 full-service banking offices located in Birmingham, Butler, Calera, Centreville, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama; Knoxville and Powell, Tennessee; and Rose Hill, Virginia; as well as loan production offices in Mobile, Alabama and the Chattanooga, Tennessee area. The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals. The Bank also performs indirect lending through third-party retailers and currently conducts this lending in 12 states, including Alabama, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. During the third quarter of 2021, the Company closed four banking offices located in Bucksville, Columbiana and south Tuscaloosa, Alabama, as well as Ewing, Virginia.
The Bank has two wholly owned subsidiaries: Acceptance Loan Company, Inc., an Alabama corporation (“ALC”), and FUSB Reinsurance, Inc., an Arizona corporation (“FUSB Reinsurance”). As used herein, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Bancshares, as well as the Bank, ALC, and FUSB Reinsurance, collectively.
The Bank owns all of the stock of ALC. ALC is a finance company headquartered in Mobile, Alabama. During the third quarter of 2021, ALC ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. ALC continues to service its remaining portfolio of loans from its headquarters in Mobile, Alabama.
FUSB Reinsurance was designed to reinsure or “underwrite” credit life and credit accident and health insurance policies sold to the Bank’s and ALC’s consumer loan customers. FUSB Reinsurance was responsible for the first level of risk on these policies up to a specified maximum amount, while the primary third-party insurer retained the remaining risk. While FUSB Reinsurance underwrote insurance contracts for both the Bank and ALC, in recent years, the majority of contracts were associated with ALC’s loans. Due to reduced contract volume, particularly following the cessation of business of ALC, during 2022, management of FUSB Reinsurance began procedures to terminate the entity’s activities. During 2022, FUSB Reinsurance ceased writing new insurance contracts, and reached an agreement with a third-party insurance provider to indemnify FUSB Reinsurance for all remaining liabilities associated with previously underwritten insurance policies. As of December 31, 2022, the remaining assets and liabilities of FUSB Reinsurance were transferred to the Bank, and it is anticipated that FUSB Reinsurance will be legally dissolved during 2023.
Strategy
Our strategy focuses on increasing franchise value by building and maintaining a strong and diversified balance sheet through continued loan and deposit growth that leverages our branch network, loan production offices, and digital market capabilities. We foster a culture that adheres to effective credit underwriting standards, pricing discipline, and expense control. Our longer-term growth strategy seeks to grow loan production offices to levels that support limited branching, expansion of our customer base through digital banking offerings, and consideration of acquisition opportunities to enter new markets.
Human Capital Resources
Bancshares has no employees, other than the executive officers discussed in the information incorporated by reference in Part III, Item 10 of this report. As of December 31, 2022, the Bank had 149 full-time equivalent employees, and ALC had six full-time equivalent employees. FUSB Reinsurance has no employees. None of our employees are party to a collective bargaining agreement. Management believes that the Company’s employee relations are good.
To facilitate talent attraction and retention, we strive to make the Company an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, health and welfare programs. Our talent acquisition team uses internal and external resources to recruit highly skilled and talented workers across our markets, and we encourage employee referrals for open positions.
As part of our compensation philosophy, we believe that we must offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include bonus opportunities, Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, vacation and paid time off, family and military leave, flexible work schedules and employee assistance programs.
The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health status; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.
We strive to maintain an inclusive workplace and seek to foster an environment where all of our employees can thrive through active engagement in the ongoing success of our organization. It is essential to our business that we continually attract and retain a talented workforce, and our practices are designed to promote diversity and fairness in the hiring process. We encourage a customer-focused orientation that meets the diverse needs of consumers and businesses in the communities in which we serve.
As of December 31, 2022, 77% of our workforce was comprised of females, and 20% of our workforce was comprised of individuals who are racially or ethnically diverse. Our Board of Directors includes three females and one racially or ethnically diverse member (representing 36% of Directors). Women and individuals who are racially or ethnically diverse represent 31% of our senior management team, which includes our executive officers.
Competition
We face strong competition in making loans, acquiring deposits and attracting customers for investment services. Competition among financial institutions is based on interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of the services rendered, the convenience of banking facilities and, in the case of loans to commercial borrowers, relative lending limits. We compete with numerous other financial services providers, including commercial banks, online banks, credit unions, finance companies, mutual funds, insurance companies, investment banking companies, brokerage firms and other financial intermediaries operating in Alabama and elsewhere. Many of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits than we do. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks.
The financial services industry is likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries.
Supervision and Regulation
General
We are extensively regulated under both federal and state law. These laws restrict permissible activities and investments and require compliance with various consumer protection provisions applicable to lending, deposit, brokerage and fiduciary activities. They also impose capital adequacy requirements and condition Bancshares’ ability to repurchase stock or to receive dividends from the Bank. Bancshares is subject to comprehensive examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and the Bank and its subsidiaries are subject to comprehensive examination and supervision by the Alabama State Banking Department (the “ASBD”) and the Federal Deposit Insurance Corporation (the “FDIC”). These regulatory agencies generally have broad discretion to impose restrictions and limitations on our operations. This supervisory framework could materially impact the conduct and profitability of our activities.
To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the text of such provisions. Proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal level. The likelihood and timing of any changes in these laws and regulations, as well as the impact that such changes may have on us, are difficult to ascertain. A change in applicable laws and regulations, or in the manner in which such laws or regulations are interpreted by regulatory agencies or courts, may have a material effect on our business, operations and earnings.
Regulation of Bancshares
Bancshares is registered as a bank holding company and is subject to regulation and supervision by the Federal Reserve. The BHCA requires a bank holding company to secure the approval of the Federal Reserve before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of any bank or thrift, or merges or consolidates with another bank or thrift holding company. Further, under the BHCA, the activities of a bank holding company and any nonbank subsidiary are limited to: (1) those activities that the Federal Reserve determines to be so closely related to banking as to be a proper incident thereto and (2) investments in companies not engaged in activities closely related to banking, subject to quantitative limitations on the value of such investments. Prior approval of the Federal Reserve may be required before engaging in certain activities. In making such determinations, the Federal Reserve is required to weigh the expected benefits to the public, such as greater convenience, increased competition and gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices.
There are a number of restrictions imposed on us by law and regulatory policy that are designed to minimize potential losses to the depositors of the Bank and the Deposit Insurance Fund maintained by the FDIC (as discussed in more detail below) if the Bank should become insolvent. For example, the Federal Reserve requires bank holding companies to serve as a source of financial strength to their subsidiary depository institutions and to commit resources to support such institutions in circumstances in which they might not otherwise do so. The Federal Reserve also has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
Any capital loan by Bancshares to the Bank is subordinate in right of payment to deposits and certain other indebtedness of the Bank. In addition, in the event of Bancshares’ bankruptcy, any commitment by Bancshares to a federal banking regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as a subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, then insured and uninsured depositors, along with the FDIC, will have priority of payment over unsecured, non-deposit creditors, including the institution’s holding company, with respect to any extensions of credit that they have made to such insured depository institution.
Regulation of the Bank
The operations and investments of the Bank are limited by federal and state statutes and regulations. The Bank is subject to supervision and regulation by the ASBD and the FDIC and to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that it may originate, and limits on the types of other activities in which the Bank may engage and the investments it may make.
The Bank is subject to federal laws that limit the amount of transactions between the Bank and its nonbank affiliates, including Bancshares, but excluding operating subsidiaries, such as ALC. Under these provisions, transactions by the Bank with nonbank affiliates (such as loans or investments) are generally limited to 10% of the Bank’s capital and surplus for all covered transactions with any one affiliate and 20% of capital and surplus for all covered transactions with all affiliates. Any extensions of credit to affiliates, with limited exceptions, must be secured by eligible collateral in specified amounts. The Bank is also prohibited from purchasing any “low quality” assets from an affiliate. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) imposed additional requirements on transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the length of time for which collateral requirements regarding covered transactions must be maintained.
The Dodd-Frank Act requires the banking agencies and the SEC to establish joint rules or guidelines for financial institutions with more than $1 billion in assets which prohibit incentive compensation arrangements that the agencies determine to encourage inappropriate risks by the institution. The banking agencies issued proposed rules in 2011 and issued guidance on sound incentive compensation policies. In 2016, the Federal Reserve and the Office of Comptroller of the Currency also proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping. As of December 31, 2022, these rules have not been implemented. With assets of approximately $995 million, we currently would not be subject to the rules as presently proposed but would become subject to the rules if our assets increased to $1 billion.
Lending Limits
Under Alabama law, the amount of loans that may be made by a bank in the aggregate to one person is limited. Alabama law provides that unsecured loans by a bank to one person may not exceed an amount equal to 10% of the capital and unimpaired surplus of the bank or 20% in the case of secured loans. For purposes of calculating these limits, loans to various business interests of the
borrower, including companies in which a substantial portion of the stock is owned or partnerships in which a person is a partner, must be aggregated with those made to the borrower individually. Loans secured by certain readily marketable collateral are exempt from these limitations, as are loans secured by deposits and certain government securities.
Commercial Real Estate Concentration Limits
In December 2006, the U.S. bank regulatory agencies issued guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” to address increased concentrations in commercial real estate (“CRE”) loans. The guidance describes the criteria the agencies will use as indicators to identify institutions potentially exposed to CRE concentration risk. An institution that has (i) experienced rapid growth in CRE lending, (ii) notable exposure to a specific type of CRE, (iii) total reported loans for construction, land development, and other land representing 100% or more of the institution’s capital, or (iv) total CRE loans representing 300% or more of the institution’s capital, and the outstanding balance of the institution’s CRE portfolio has increased by 50% or more in the prior 36 months, may be identified for further supervisory analysis of the level and nature of its CRE concentration risk.
In December 2015, the U.S. bank regulatory agencies issued guidance titled “Statement on Prudent Risk Management for Commercial Real Estate Lending” to remind financial institutions of existing guidance on prudent risk management practices for CRE lending activity, including the 2006 guidance described above. In the 2015 guidance, the agencies noted their belief that financial institutions had eased CRE underwriting standards in recent years. The 2015 guidance went on to identify actions that financial institutions should take to protect themselves from CRE-related credit losses during difficult economic cycles. The 2015 guidance also indicated that the agencies would pay special attention in the future to potential risks associated with CRE lending.
Securities and Exchange Commission
Bancshares is under the jurisdiction of the Securities and Exchange Commission (“SEC”) for matters relating to the offer and sale of its securities and is subject to the SEC’s rules and regulations related to periodic reporting, reporting to shareholders, proxy solicitations and insider trading regulations.
Monetary Policy
Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The monetary policies of the Federal Reserve have a substantial effect on the operating results of commercial banks, including the Bank. The Federal Reserve has a significant impact on the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member banks’ deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.
Deposit Insurance
The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund maintained by the FDIC. As a result, the Bank is required to pay periodic assessments to maintain insurance coverage for its deposits. Under the FDIC’s assessment system for banks with less than $10 billion in assets, the assessment rate is determined based on a number of factors, including the Bank’s CAMELS (supervisory) rating, leverage ratio, net income, non-performing loan ratios, Other Real Estate Owned (OREO) ratios, core deposit ratios, one-year organic asset growth and a loan mix index.
The FDIC has authority to increase insurance assessments. A significant increase in insurance assessments would likely have an adverse effect on our operating expense, results of operations, and cash flows. Management cannot predict what insurance assessment rates will be in the future. Furthermore, deposit insurance may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Dividend Restrictions
Under Delaware law, dividends may be paid only out of the amount calculated as the present fair value of the total assets of the corporation, minus the present fair value of the total liabilities of the corporation, minus the capital of the corporation. In the event that there is no such amount, dividends may be paid out of the net profits of the corporation for the fiscal year in which the dividend is declared and/or the immediately preceding fiscal year. Dividends may not be paid, however, out of net profits of the corporation if the capital represented by the issued and outstanding stock of all classes having a preference on the distribution of assets is impaired. Further, the Federal Reserve permits bank holding companies to pay dividends only out of current earnings and only if future retained earnings would be consistent with the company’s capital, asset quality and financial condition.
Since it has no significant independent sources of income, Bancshares’ ability to pay dividends depends on its ability to receive dividends from the Bank. Under Alabama law, the Bank may not pay a dividend in excess of 90% of its net earnings unless its surplus is equal to at least 20% of capital. The Bank is also required by Alabama law to seek the approval of the Superintendent of the ASBD prior to the payment of dividends if the total of all dividends declared by the Bank in any calendar year will exceed the total of (1) the Bank’s net earnings for that year, plus (2) its retained net earnings for the preceding two years, less any required transfers to surplus. Alabama law defines net earnings as the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets, after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal, state and local taxes. The Bank must be able to satisfy the conditions described above in order to declare or pay a dividend to Bancshares without obtaining the prior approval of the Superintendent of the ASBD. In addition, the FDIC prohibits the payment of cash dividends if (1) as a result of such payment, the bank would be undercapitalized or (2) the bank is in default with respect to any assessment due to the FDIC, including a deposit insurance assessment. These restrictions could materially influence the Bank’s, and therefore Bancshares’, ability to pay dividends.
Capital Adequacy
In July 2013, the federal banking regulatory agencies adopted regulations to implement the framework developed by the Basel Committee on Banking Supervision (“Basel Committee”) for strengthening international capital and liquidity, known as “Basel III” (the “Basel III Rule”). The Basel III Rule provides risk-based capital guidelines designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks, to account for off-balance sheet exposures, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate risk-weights. The net amount of assets remaining after applying the risk-weights to the gross asset values represents the institution’s total risk-weighted assets (“RWA”). An institution’s total RWA are used to calculate its regulatory capital ratios. The Basel III Rule establishes minimum capital and leverage ratios that supervised financial institutions are required to maintain, while also providing countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under the Basel III Rule, banks must maintain a specified capital conservation buffer above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases and paying certain discretionary bonuses.
In December 2017, the Basel Committee published the last version of the Basel III accord, generally referred to as “Basel IV.” The Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive variability of risk-weighted assets, which will be accomplished by enhancing the robustness and risk sensitivity of the standardized approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios; constraining the use of internally modeled approaches; and complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised and robust capital floor. Leadership of the federal banking agencies who are tasked with implementing Basel IV has indicated that it is considering how to appropriately apply these revisions in the United States. Although it is uncertain at this time, some, if not all, of the Basel IV accord may be incorporated into the capital requirements framework applicable to Bancshares and the Bank.
Banking organizations must have appropriate capital planning processes, with proper oversight from the board of directors. Accordingly, pursuant to a separate, general supervisory letter from the Federal Reserve, bank holding companies are expected to conduct and document comprehensive capital adequacy analyses prior to the declaration of any dividends (on common stock, preferred stock, trust preferred securities or other Tier 1 capital instruments), capital redemptions or capital repurchases. Moreover, the federal banking agencies have adopted a joint agency policy statement, noting that the adequacy and effectiveness of a bank’s interest rate risk management process and the level of its interest rate exposures are critical factors in the evaluation of the bank’s capital adequacy.
In 2018, the U.S. Congress passed, and the President signed into law, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “Growth Act”) to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with total assets of less than $10 billion and for large banks with total assets of more than $50 billion. The Growth Act, among other things, requires the federal banking agencies to issue regulations allowing community bank organizations with total assets of less than $10 billion and limited amounts of certain assets and off-balance sheet exposures to access a simpler capital regime focused on a bank’s Tier 1 leverage capital levels rather than risk-based capital levels that are the focus of the capital rules issued under the Dodd-Frank Act implementing Basel III.
Among other changes, the Growth Act expands the definition of qualified mortgages that may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8% and 10% to replace the leverage and risk-based regulatory capital ratios. The Growth Act also includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures, and risk weights for certain high-risk commercial real estate loans. It is difficult to predict at this time when or how any
new standards under the Growth Act will ultimately be applied to us or what specific impact the Growth Act and the yet-to-be-written implementing rules and regulations will have on community banks.
Pursuant to the Growth Act, in October 2019, the federal banking agencies adopted regulations that exempt a qualifying community bank and its holding company that have Tier 1 leverage ratios of greater than 9% from the risk-based capital requirements of the capital rules issued under the Dodd-Frank Act. A qualifying community organization is a depository institution or its holding company that has less than $10 billion in average total consolidated assets; has off-balance-sheet exposures of 25% or less of total consolidated assets; has trading assets plus trading liabilities of 5% or less of total consolidated assets; and is not an advanced approaches banking organization. A qualifying community banking organization and its holding company that have chosen the proposed framework will not be required to calculate the existing risk-based and leverage capital requirements. A qualifying community banking organization will also be considered to have met the capital ratio requirements to be well capitalized for the agencies’ prompt corrective action rules provided it has a community bank leverage ratio greater than 9%.The new community bank leverage ratio framework first became available for banking organizations to use on March 31, 2020. A qualifying community banking organization may opt into and out of the framework by completing the associated reporting requirements on its call report. We presently do not anticipate opting into the framework.
Prompt Corrective Action
In addition to the required minimum capital levels described above, federal law establishes a system of “prompt corrective actions” that federal banking agencies are required to take, and certain actions that they have discretion to take, based on the capital category into which a federally regulated depository institution falls. Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution that is not adequately capitalized. Each institution is assigned to one of five categories based on its capital ratios: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Institutions categorized as “undercapitalized” or worse become subject to increasing levels of regulatory oversight and restrictions, which may include, among other things, limitations on growth and activities and payment of dividends.
As of December 31, 2022, the Bank was “well-capitalized” under the prompt corrective action rules. This classification is primarily for the purpose of applying the federal prompt corrective action provisions and is not intended to be, and should not be, interpreted as a representation of our overall financial condition or prospects.
Legislative and Regulatory Responses to the COVID-19 Pandemic
The COVID-19 pandemic created extensive disruptions to the global economy, to businesses, and to the lives of individuals throughout the world. There have been a number of regulatory actions intended to help mitigate the adverse economic impact of the COVID-19 pandemic on borrowers, including several mandates from the bank regulatory agencies, requiring financial institutions to work constructively with borrowers affected by the pandemic.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. Several provisions within the CARES Act led to action from the bank regulatory agencies and there were also separate provisions within the legislation that directly impacted financial institutions. Section 4022 of the CARES Act allows, until the date the national emergency declared by the President terminates, borrowers with federally-backed one-to-four family mortgage loans experiencing a financial hardship due to the pandemic to request forbearance, regardless of delinquency status, for up to 360 days. Section 4022 also prohibited servicers of federally-backed mortgage loans from initiating foreclosures during the 60-day period beginning March 18, 2020. The FHFA announced that the FNMA and FHLMC would extend this single-family moratorium on foreclosures and evictions through December 31, 2020 and then through March 31, 2021. In addition, under Section 4023 of the CARES Act, until the date the national emergency declared by the President terminates, borrowers with federally-backed multifamily mortgage loans whose payments were current as of February 1, 2020, but who have since experienced financial hardship due to COVID-19, may request a forbearance for up to 90 days. Borrowers receiving such forbearance may not evict or charge late fees to tenants for its duration. On December 23, 2020, the FHFA announced an extension of forbearance programs for qualifying multifamily properties through March 31, 2021. On January 30, 2023, the President announced his intent to end the national emergency related to the COVID-19 pandemic on May 11, 2023, but various regulatory and legislative actions may be expanded, extended and amended in the future.
The Paycheck Protection Program (“PPP”), originally established under the CARES Act and extended under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, authorized financial institutions to make federally-guaranteed loans to qualifying small businesses and non-profit organizations. These loans carried an interest rate of 1% per annum and a maturity of 2 years for loans originated prior to June 5, 2020 and 5 years for loans originated on or after June 5, 2020. The PPP provided that such loans may be forgiven if the borrowers met certain requirements with respect to maintaining employee headcount and payroll and the use of the loan proceeds after the loan was originated. The initial phase of the PPP, after being extended multiple times by Congress, expired on August 8, 2020. However, on January 11, 2021, the SBA reopened the PPP for First Draw PPP loans to small business and
non-profit organizations that did not receive a loan through the initial PPP phase. Further, on January 13, 2021, the SBA reopened the PPP for Second Draw PPP loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. The PPP ended on May 31, 2021, but additional governmental assistance programs may be implemented in the future.
In addition, the federal bank regulatory agencies issued several interim final rules throughout the course of 2020 to neutralize the regulatory capital and liquidity effects for banks that participate in the Federal Reserve liquidity facilities. The interim final rule issued on April 9, 2020, clarified that a zero percent risk weight applies to loans covered by the PPP for capital purposes and the interim final rule issued on May 15, 2020, permitted depository institutions to choose to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the supplementary leverage ratio. These interim final rules were finalized on September 29, 2020.
On March 11 2021, the American Rescue Plan Act of 2021 (the “ARP Act”) was enacted, implementing a $1.9 trillion package of stimulus and relief proposals. Among other things, the ARP Act provided (i) additional funding for the PPP program and an expansion of the program for the benefit of certain nonprofits, (ii) funding for the SBA to make targeted grants for restaurants and similar establishments, (iii) direct cash payments of up to $1,400 to individuals, subject to income provisions, (iv) an increase in the maximum annual Child Tax Credit, subject to income limitation provisions, (v) $300 a week in expanded unemployment insurance lasting through September 6, 2021 and made $10,200 in unemployment benefits tax free for households, subject to income limitation provisions, (vi) tax relief making any student loan forgiveness incurred between December 31, 2020, and January 1, 2026 non-taxable income, and (vii) funding to support state and local governments; K-12 schools and higher education; the Centers for Disease Control; public transit; rental assistance; child care; and airline industry workers.
Community Reinvestment Act
The Community Reinvestment Act (the “CRA”) requires the federal banking regulatory agencies to assess all financial institutions that they regulate to determine whether these institutions are meeting the credit needs of the communities that they serve, including their assessment area(s) (as established for these purposes in accordance with applicable regulations based principally on the location of the institution’s branch offices). Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “unsatisfactory.” An institution’s record in meeting the requirements of the CRA is made publicly available and is taken into consideration in connection with any applications that it files with federal regulators to engage in certain activities, including approval of branches or other deposit facilities, mergers and acquisitions, office relocations or expansions into non-banking activities. The Bank received a “satisfactory” rating in its most recent CRA evaluation.
Anti-Money Laundering Laws
Under various federal laws, including the Currency and Foreign Transactions Reporting Act (also known as the “Bank Secrecy Act”), as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. These laws also mandate that financial institutions establish anti-money laundering programs meeting certain standards and require the federal banking regulators to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.
The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act, was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the U.S. Department of the Treasury to promulgate priorities for anti-money laundering and countering the financing of terrorism policy; requires the development of standards for testing technology and internal processes for Bank Secrecy Act compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain Bank Secrecy Act violations; and expands Bank Secrecy Act whistleblower incentives and protections. Many of the statutory provisions in the AMLA will require additional rulemakings, reports and other measures, and the impact of the AMLA will depend on, among other things, rulemaking and implementation guidance. In June 2021, the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury, issued the priorities for anti-money laundering and countering the financing of terrorism policy required under the AMLA. The priorities include: corruption, cybercrime, terrorist financing, fraud, transnational crime, drug trafficking, human trafficking and proliferation financing.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) comprehensively revised the laws affecting corporate governance, auditing, executive compensation and corporate reporting for entities with equity or debt securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Among other things, Sarbanes-Oxley and its implementing regulations
established new membership requirements and additional responsibilities for audit committees, imposed restrictions on the relationships between public companies and their outside auditors (including restrictions on the types of non-audit services that auditors may provide), imposed additional responsibilities for public companies’ external financial statements on the chief executive officer and chief financial officer, and expanded the disclosure requirements for corporate insiders. The requirements are intended to allow stockholders to more easily and efficiently monitor the performance of companies and directors. We and our Board of Directors have, as appropriate, adopted or modified our policies and practices in order to comply with these regulatory requirements and to enhance our corporate governance practices.
As required by Sarbanes-Oxley, we have adopted a Code of Business Conduct and Ethics applicable to our Board, executives and employees. This Code of Business Conduct can be found on our website at http://www.fusb.com under the tabs “About - Investor Relations - FUSB Policies.”
Privacy of Customer Information
The Financial Services Modernization Act of 1999 (also known as the “Gramm-Leach-Bliley Act” or the “GLBA”) and the implementing regulations issued by federal banking regulatory agencies require financial institutions to adopt policies and procedures regarding the disclosure of nonpublic personal information about their customers to non-affiliated third parties. In general, financial institutions are required to explain to customers their policies and procedures regarding the disclosure of such nonpublic personal information, and, unless otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided in their policies and procedures. Specifically, the GLBA established certain information security guidelines that require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to develop, implement, and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.
Cybersecurity
The Cybersecurity Information Sharing Act of 2015 (“CISA”) was intended to improve cybersecurity in the United States by enhanced sharing of information about security threats among the U.S. government and private sector entities, including financial institutions. CISA also authorizes companies to monitor their own systems notwithstanding any other provision of law and allows companies to carry out cybersecurity defensive measures on their own systems. The law includes liability protections for companies that share cyber threat information with third parties so long as such sharing activity is conducted in accordance with CISA.
In October 2016, the federal bank regulatory agencies issued an Advance Notice of Proposed Rulemaking regarding enhanced cyber risk management standards which would apply to a wide range of large financial institutions and their third-party service providers, including Bancshares and the Bank. The proposed standards would expand existing cybersecurity regulations and guidance to focus on cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience, and situational awareness. In addition, the proposal contemplates more stringent standards for institutions with systems that are critical to the financial sector.
The federal banking regulators regularly issue guidance regarding cybersecurity intended to enhance cyber risk management standards among financial institutions. A financial institution is expected to establish multiple lines of defense and to ensure its risk management processes address the risk posed by potential threats to the institution. A financial institution’s management is expected to maintain sufficient processes to effectively respond and recover the institution’s operations after a cyber-attack. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations if a critical service provider of the institution falls victim to this type of cyber-attack.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of state-level activity in those areas to continue and are continually monitoring developments in the states in which our customers are located.
In March 2021, Virginia adopted the Consumer Data Protection Act (the “VCDPA”), which imposes certain restrictions and requirements on businesses that collect consumer data for at least 100,000 consumers in Virginia. The Bank currently has fewer than 100,000 customers in Virginia but may become subject to the VCDPA if its customer base grows above that level. The Company could face enforcement actions by the Virginia Attorney General and penalties for noncompliance with the VCDPA.
In November 2021, the U.S. federal bank regulatory agencies adopted a rule regarding notification requirements for banking organizations related to significant computer security incidents. Under the final rule, a bank holding company, such as the Company, and an FDIC-supervised insured depository institution, such as the Bank, are required to notify the Federal Reserve or FDIC, respectively, within 36 hours of incidents that have materially disrupted or degraded, or are reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer base, jeopardize the viability of key
operations of the banking organization, or impact the stability of the financial sector. Service providers are required under the rule to notify any affected bank client it provides services to as soon as possible when it determines it has experienced a computer-security incident that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, covered services provided by that entity to the bank for four or more hours.
In March 2022, the SEC proposed amendments to its rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies that are subject to the reporting requirements of the Exchange Act. Specifically, the proposed amendments require current reporting about material cybersecurity incidents, periodic disclosures about a registrant’s policies and procedures to identify and manage cybersecurity risk, management’s role in implementing cybersecurity policies and procedures, and the board of directors’ cybersecurity expertise, if any, and its oversight of cybersecurity risk. Additionally, the proposed rules would require registrants to provide updates about previously reported cybersecurity incidents in their periodic reports.
Regulation of Lending Practices
Our lending practices are subject to a number of federal and state laws, as supplemented by the rules and regulations of the various agencies charged with the responsibility of implementing these laws. These include, among others, the following:
•Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
•Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communities that it serves;
•Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other specified factors in extending credit;
•Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections and certain credit and other disclosures;
•Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies;
•Real Estate Settlement Procedures Act, requiring certain disclosures concerning loan closing costs and escrows, and governing transfers of loan servicing and the amounts of escrows in connection with loans secured by one-to-four family residential properties; and
•Rules and regulations established by the National Flood Insurance Program.
In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”), an independent bureau with broad authority to regulate the consumer finance industry, including regulated financial institutions, non-banks and others involved in extending credit to consumers. The CFPB has authority through rulemaking, orders, policy statements, guidance and enforcement actions to administer and enforce federal consumer financial laws. Although the CFPB has the power to interpret, administer and enforce federal consumer financial laws, the Dodd-Frank Act provides that the federal banking regulatory agencies continue to have examination and enforcement powers over the financial institutions that they supervise relating to the matters within the jurisdiction of the CFPB if the supervised institutions have less than $10 billion in assets. Even so, the CFPB has adopted a number of rules that impact our lending practices, including, among other things, (1) requiring financial institutions to make a “reasonable and good faith determination” that a consumer has a “reasonable ability” to repay a residential mortgage loan before making such a loan, (2) requiring sponsors of asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities (and generally prohibiting sponsors from transferring or hedging that credit risk), and (3) imposing a number of new and enhanced requirements on the mortgage servicing industry, including rules regarding communications with borrowers, maintenance of customer account records, procedures for responding to written borrower requests and complaints of errors, servicing delinquent loans, and conducting foreclosure proceedings, among other measures.
Regulation of Deposit Operations
Our deposit operations are subject to federal laws applicable to depository accounts, including, among others, the following:
•Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
•Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts;
•Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
•Rules and regulations of the various agencies charged with the responsibility of implementing these laws.
Federal Home Loan Bank Membership
The Bank is a member of the Federal Home Loan Bank of Atlanta (“FHLBA”). Each member of the FHLBA is required to maintain a minimum investment in the Class B stock of the FHLBA. The Board of Directors of the FHLBA can increase the minimum investment requirements if it concludes that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because the extent of any obligation to increase the level of investment in the FHLBA depends entirely on the occurrence of a future event, we are unable to determine the extent of future required potential payments to the FHLBA at this time. Additionally, in the event that a member financial institution fails, the right of the FHLBA to seek repayment of funds loaned to that institution will take priority over the rights of all other creditors.
Climate-Related Regulation and Risk Management
In recent years, the federal banking agencies have increased their focus on climate-related risks impacting the operations of banks, the communities they serve and the broader financial system. Accordingly, the agencies have begun to enhance their supervisory expectations regarding the climate risk management practices of larger banking organizations, including by encouraging such banks to: ensure that management of climate-related risk exposures has been incorporated into existing governance structures; evaluate the potential impact of climate-related risks on the bank’s financial condition, operations and business objectives as part of its strategic planning process; account for the effects of climate change in stress testing scenarios and systemic risk assessments; revise expectations for credit portfolio concentrations based on climate-related factors; consider investments in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change; evaluate the impact of climate change on the bank’s borrowers and consider possible changes to underwriting criteria to account for climate-related risks to mortgaged properties; incorporate climate-related financial risk into the bank’s internal reporting, monitoring and escalation processes; and prepare for the transition risks to the bank associated with the adjustment to a low-carbon economy and related changes in laws, regulations, governmental policies, technology, and consumer behavior and expectations.
On October 21, 2021, the Financial Stability Oversight Council published a report identifying climate-related financial risks as an “emerging threat” to financial stability. On December 16, 2021, the Office of the Comptroller of the Currency (the “OCC”) issued proposed principles for climate-related financial risk management for national banks with more than $100 billion in total assets. Although these risk management principles, if adopted as proposed, would not apply to the Bank directly based upon our current size, the OCC has indicated that all banks, regardless of their size, may have material exposures to climate-related financial and other risks that require prudent management. The federal banking agencies, either independently or on an interagency basis, are expected to adopt a more formal climate risk management framework for larger banking organizations in the coming months. As climate-related supervisory guidance is formalized, and relevant risk areas and corresponding control expectations are further refined, we may be required to expend significant capital and incur compliance, operating, maintenance and remediation costs in order to conform to such requirements.
Website Information
The Bank’s website address is https://www.fusb.com. Bancshares does not maintain a separate website. Bancshares makes available free of charge on or through the Bank’s website, under the tabs “Investors - SEC filings,” its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with the SEC. These reports are also available on the SEC’s website, https://www.sec.gov. Bancshares will provide paper copies of these reports to shareholders free of charge upon written request. Bancshares is not including the information contained on or available through the Bank’s website as a part of, or incorporating such information into, this Annual Report on Form 10-K.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Making or continuing an investment in our common stock involves certain risks that you should carefully consider. The risks and uncertainties described below are not the only risks that may have a material adverse effect on us. Additional risks and uncertainties also could adversely affect our business, consolidated financial condition, results of operations and cash flows. If any of the following risks actually occurs, our business, financial condition or results of operations could be negatively affected, the market
price of your common stock could decline, and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf.
Risks Related to Credit and Liquidity
If loan losses are greater than anticipated, our earnings may be adversely affected.
As a lender, we are exposed to the risk that customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans. Our credit risk with respect to our real estate and construction loan portfolio relates principally to the creditworthiness of individuals and the value of the real estate serving as security for the repayment of loans, and the credit risk with respect to our commercial and consumer loan portfolio relates principally to the general creditworthiness of businesses and individuals within the local markets in which we operate. We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for potential loan losses based on a number of factors. We believe that our allowance for loan losses is adequate. However, if estimates, assumptions or judgments used in calculating this allowance are incorrect, the allowance for loan losses may not be sufficient to cover our actual loan losses. Deterioration of economic conditions affecting borrowers, new information regarding existing loans, inaccurate management assumptions, identification of additional problem loans and other factors, both within and outside of our control, may result in higher levels of nonperforming assets and charge-offs and loan losses in excess of our current allowance for loan losses, requiring us to make material additions to our allowance for loan losses, which could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions. In addition, banking regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further charge-offs if the regulators’ judgments are different than those of our management. Material additions to the allowance could materially decrease our net income.
Our business is subject to liquidity risk, which could disrupt our ability to meet financial obligations.
Liquidity risk refers to the ability of the Company to ensure that sufficient cash flow and liquid assets are available to satisfy current and future financial obligations, including demand for loans and deposit withdrawals, funding operating costs and other corporate purposes. Liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ or when assets cannot be liquidated at fair market value as needed. The Company obtains funding through deposits and various short-term and long-term wholesale borrowings, including federal funds purchased and securities sold under repurchase agreements, the Federal Reserve Discount Window and Federal Home Loan Bank (FHLB) advances. Any restriction or disruption of the Company’s ability to obtain funding from these or other sources could have a negative effect on the Company’s ability to satisfy its current and future financial obligations, which could materially affect the Company’s condition or results of operations.
Risks Related to Our Market and Industry
Our business and operations may be materially adversely affected by national and local market economic conditions.
Our business and operations, which primarily consist of banking activities, including lending money to customers in the form of loans and borrowing money from customers in the form of deposits, are sensitive to general business and economic conditions in the United States generally, and in our local markets in particular. If economic conditions in the United States or any of our local markets weaken, our growth and profitability from our operations could be constrained. Economic activity generally improved during 2022 as COVID-19 cases declined across the United States and restrictions were lifted; however, economic concerns remain due to ongoing uncertainty regarding the long-term effectiveness of the COVID-19 vaccine. In addition, the impact of the COVID-19 pandemic continues to influence the economy through ongoing supply chain shortages, workforce displacement, heightened volatility in the financial markets, and increased economic risks in certain industries. The current economic environment is characterized by high inflation levels and interest rates that have increased rapidly since March 2022. These conditions impact our ability to attract deposits and to generate attractive earnings through our loan and investment portfolios. All of these factors can individually or in the aggregate be detrimental to our business, and the interplay between these factors can be complex and unpredictable. Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of delinquencies, defaults and charge-offs, additional provisions for loan losses, a decline in the value of our collateral, and an overall material adverse effect on the quality of our loan portfolio. Additionally, national financial markets may be adversely affected by sustained high levels of inflation, and the current or anticipated impact of military conflict, including the current conflict between Russia and Ukraine, terrorism or other geopolitical events.
The economic conditions in our local markets may be different from the economic conditions in the United States as a whole. Our success depends to a certain extent on the general economic conditions of the geographic markets that we serve in Alabama,
Tennessee and Virginia. Local economic conditions in these areas have a significant impact on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the southeastern United States in general or any one or more of these local markets could negatively impact the financial results of our banking operations and have a negative effect on our profitability.
The banking industry is highly competitive, which could result in loss of market share and adversely affect our business.
We encounter strong competition in making loans, acquiring deposits and attracting customers for investment services. We compete with commercial banks, online banks, credit unions, finance companies, mutual funds, insurance companies, investment banking companies, brokerage firms and other financial intermediaries operating in our markets and elsewhere in various segments of the financial services market. Many of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits than we do. In addition, many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks, and, as a result, may be able to offer certain products and services at a lower cost than we are able to offer, which could adversely affect our business.
Rapid and significant changes in market interest rates may adversely affect our performance.
Most of our assets and liabilities are monetary in nature and are therefore subject to significant risks from changes in interest rates. Our profitability depends to a large extent on net interest income, and changes in interest rates can impact our net interest income as well as the valuation of our assets and liabilities. Our consolidated results of operations are affected by changes in interest rates and our ability to manage interest rate risks. Changes in market interest rates, changes in the relationships between short-term and long-term market interest rates and changes in the relationships between different interest rate indices can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. These differences could result in an increase in interest expense relative to interest income or a decrease in our interest rate spread. For a more detailed discussion of these risks and our management strategies for these risks, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our net interest margin depends on many factors that are partly or completely out of our control, including competition, federal economic monetary and fiscal policies and general economic conditions. Despite the implementation of strategies to manage interest rate risks, changes in interest rates may have a material adverse impact on our profitability.
The performance of our investment portfolio is subject to fluctuations due to changes in interest rates and market conditions.
Changes in interest rates can negatively affect the performance of most of our investments. Interest rate volatility can reduce gains or create losses in our investment portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fluctuations in interest rates affect returns on, and the market value of, investment securities. The fair market value of the securities in our portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. The potential effect of these factors is heightened due to the current conditions in the financial markets and economic conditions generally.
Changes in the policies of monetary authorities and other government action could adversely affect our profitability.
Our consolidated results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in United States government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, we cannot predict future changes in interest rates, deposit levels, loan demand or our business and earnings. Furthermore, the actions of the United States government and other governments in responding to such conditions may result in currency fluctuations, exchange controls, market disruption and other adverse effects.
Uncertainty relating to the LIBOR calculation process and the phasing out of LIBOR may adversely affect our results of operations.
The United Kingdom’s Financial Conduct Authority and ICE Benchmark Administration (“IBA”), the administrators of LIBOR, have announced that the publication of the most commonly used U.S. dollar London Interbank Offered Rate (“LIBOR”) settings will cease to be published or cease to be representative after June 30, 2023. The publication of all other LIBOR settings ceased to be published as of December 31, 2021. Given consumer protection, litigation, and reputational risks, the bank regulatory agencies indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they would examine bank practices accordingly. The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace U.S. dollar LIBOR with a benchmark rate based on the Secured Overnight
Financing Rate (“SOFR”) for contracts governed by U.S. law that have no or ineffective fallbacks, and in December 2022, the Federal Reserve Board adopted related implementing rules.
As of December 31, 2021, we no longer originate new loans or their products using any LIBOR index. As of December 31, 2022, approximately $66.5 million of our outstanding loans, and, in addition, certain derivative contracts, borrowings and other financial instruments have attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR has resulted in and could continue to result in added costs and employee efforts and could present additional risk. We are subject to litigation and reputational risks if we are unable to renegotiate and amend existing contracts with counterparties that are dependent on LIBOR, including contracts that do not have fallback language. We may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with contract counterparties over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results of operations.
At this time, it is impossible to predict the effect of alternative rates, including SOFR, on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio and may impact the availability and cost of hedging instruments and borrowings.
Risks Related to Privacy and Technology
Technological changes in the banking and financial services industries may negatively impact our results of operations and our ability to compete.
The banking and financial services industries are undergoing rapid changes, with frequent introductions of new technology-driven products and services. In addition to enhancing the level of service provided to customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. To remain competitive, financial institutions must continuously evaluate changing customer preferences with respect to emerging technologies and develop plans to address such changes in the most cost-effective manner possible. Our future success will depend, in part, on our ability to use technology to offer products and services that provide convenience to customers and create additional efficiencies in operations, and our failure to do so could negatively impact our business. Additionally, our competitors may have greater resources to invest in technological improvements than we do, and we may not be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete.
Our information systems may experience a failure or interruption.
We rely heavily on communications and information systems to conduct our business. Any failure or interruption in the operation of these systems could impair or prevent the effective operation of our customer relationship management, general ledger, deposit, lending or other functions. While we have policies and procedures designed to prevent or limit the effect of a failure or interruption in the operation of our information systems, there can be no assurance that any such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures or interruptions impacting our information systems could damage our reputation, result in a loss of customer business, and expose us to additional regulatory scrutiny, civil litigation and possible financial liability, any of which could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.
We use information technology in our operations and offer online banking services to our customers, and unauthorized access to our customers’ confidential or proprietary information as a result of a cyber-attack or otherwise could expose us to reputational harm and litigation and adversely affect our ability to attract and retain customers.
Information security risks for financial institutions have generally increased in recent years, in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists and other external parties. We are under continuous threat of loss due to hacking and cyber-attacks, especially as we continue to expand customer capabilities to utilize the internet and other remote channels to transact business. Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide internet banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. Therefore, the secure processing, transmission and storage of information in connection with our online banking services are critical elements of our operations. However, our network could be vulnerable to unauthorized access, computer viruses and other malware, phishing schemes or other security failures. In addition, our customers may use personal smartphones, tablet PCs or other mobile devices that are beyond our control systems in order to access our products and services. Our technologies, systems and networks, and our customers’ devices, may become the target of
cyber-attacks, electronic fraud or information security breaches that could result in the unauthorized release, gathering, monitoring, use, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations. As cyber threats continue to evolve, we may be required to spend significant capital and other resources to protect against these threats or to alleviate or investigate problems caused by such threats. To the extent that our activities or the activities of our customers involve the processing, storage or transmission of confidential customer information, any breaches or unauthorized access to such information could present significant regulatory costs and expose us to litigation and other possible liabilities. Any inability to prevent these types of security threats could also cause existing customers to lose confidence in our systems and could adversely affect our reputation and ability to generate deposits. In addition, we may not have adequate insurance coverage to compensate for losses from a cyber threat event. In February 2022, the New York State Department of Financial Services issued a warning that the Russian invasion of Ukraine significantly elevates the cyber risk for the U.S. financial sector. While we have not experienced any material losses relating to cyber-attacks or other information security breaches to date, we may suffer such losses in the future. The occurrence of any cyber-attack or information security breach could result in potential legal liability, reputational harm, damage to our competitive position, additional compliance costs, and the disruption of our operations, all of which could adversely affect our business, consolidated financial condition, results of operations and cash flows.
We depend on outside third parties for the processing and handling of our records and data, which exposes us to additional risk for cybersecurity breaches and regulatory action.
We rely on software and internet-based platforms developed by third-party vendors to process various transactions. In some cases, we have contracted with third parties to run their proprietary software on our behalf. These systems include, but are not limited to, general ledger, payroll, employee benefits, loan and deposit processing and securities portfolio accounting. If these third-party service providers experience difficulties, are subject to cybersecurity breaches or terminate their services, and we are unable to replace them with other service providers on a timely basis, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, consolidated financial condition and results of operations could be adversely affected. While we perform a review of controls instituted by the applicable vendors over these programs in accordance with industry standards and perform our own testing of user controls, we must rely on the continued maintenance of controls by these third-party vendors, including safeguards over the security of customer data. In addition, we maintain, or contract with third parties to maintain, daily backups of key processing outputs in the event of a failure on the part of any of these systems. Nonetheless, we may incur a temporary disruption in our ability to conduct business or process transactions, or damage to our reputation, if the third-party vendor fails to adequately maintain internal controls or institute necessary changes to systems. Such a disruption or breach of security could have a material adverse effect on our business.
In addition, federal regulators have issued guidance outlining their expectations for third-party service provider oversight and monitoring by financial institutions. Any failure to adequately oversee the actions of our third-party service providers could result in regulatory actions against us, which could adversely affect our business, consolidated financial condition, results of operations and cash flows.
Risks Related to Legal, Reputational and Compliance Matters
We are subject to extensive governmental regulation, and the costs of complying with such regulation could have an adverse impact on our operations.
The financial services industry is extensively regulated and supervised under both federal and state law. We are subject to the supervision and regulation of the Federal Reserve, the FDIC and the ASBD. These regulations are intended primarily to protect depositors, the public and the FDIC’s Deposit Insurance Fund, rather than shareholders. Additionally, we are subject to supervision, regulation and examination by other regulatory authorities, such as the SEC and state securities and insurance regulators. If, as a result of an examination, the Federal Reserve, the FDIC or the ASBD were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to require us to remediate any such adverse examination findings. We are also subject to changes in federal and state laws, as well as regulations and governmental policies, income tax laws and accounting principles. Regulations affecting banks and other financial institutions are undergoing continuous change, and the ultimate effect of such changes cannot be predicted. Regulations and laws may be modified at any time, and new legislation may be enacted that could affect us. We cannot assure you that any changes in regulations or new laws will not adversely affect our performance or consolidated results of operations. Our regulatory framework is discussed in greater detail under “Item 1. Business - Supervision and Regulation.”
We are subject to laws regarding the privacy, information security and protection of personal information, and any violation of these laws or unauthorized disclosure of such information could damage our reputation and otherwise adversely affect our operations and financial condition.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal data, such as personally identifiable information about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act, which, among other things: (1) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (2) requires us to provide certain disclosures to customers about our information collection, sharing and security practices and to afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (3) requires us to develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and state legislatures have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to unauthorized persons, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under applicable laws and regulations. Concerns about the effectiveness of our measures to safeguard personal information could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our business, consolidated financial condition, results of operations and cash flows.
Our FDIC deposit insurance premiums and assessments may increase and thereby adversely affect our financial results.
The Bank’s deposits are insured by the FDIC up to legal limits, and, accordingly, the Bank is subject to periodic insurance assessments by the FDIC. The Bank’s regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. Numerous bank failures during the financial crisis and increases in the statutory deposit insurance limits increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund. The FDIC has authority to increase insurance assessments, and any significant increase in insurance assessments would likely have an adverse effect on us.
We face a risk of noncompliance and enforcement action under the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act of 1970, the USA PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. Our federal and state banking regulators, the Financial Crimes Enforcement Network and other government agencies are authorized to impose significant civil money penalties for violations of anti-money laundering requirements. We are also subject to increased scrutiny with respect to our compliance with the regulations issued and enforced by the Office of Foreign Assets Control. If our program is deemed deficient, we could be subject to liability, including fines, civil money penalties and other regulatory actions, which may include restrictions on our business operations and our ability to pay dividends, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have significant reputational consequences for us. Any of these circumstances could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.
Bancshares’ liquidity is subject to various regulatory restrictions applicable to its subsidiaries.
There are various regulatory restrictions on the ability of Bancshares’ subsidiaries to pay dividends or to make other payments to Bancshares. In addition, Bancshares’ right to participate in any distribution of assets of any of its subsidiaries upon a subsidiary’s liquidation or otherwise will be subject to the prior claims of creditors of that subsidiary, except to the extent that any of Bancshares’ claims as a creditor of such subsidiary may be recognized.
The internal controls that we have implemented to mitigate risks inherent to the business of banking might fail or be circumvented.
Management regularly reviews and updates our internal controls and procedures that are designed to manage the various risks in our business, including credit risk, operational risk, financial risk, compliance risk and interest rate risk. No system of controls, however well-designed and operated, can provide absolute assurance that the objectives of the system will be met. If such a system fails or is circumvented, there could be a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.
Changes in tax laws and interpretations and tax challenges may adversely affect our financial results.
The enactment of federal tax reform has had, and is expected to continue to have, far reaching and significant effects on us, our customers and the United States economy. Further, the income tax treatment of corporations may at any time be clarified and/or modified through legislation, administration or judicial changes or interpretations. These changes or interpretations could adversely affect us, either directly or as a result of the effects on our customers.
In the course of our business, we are sometimes subject to challenges from taxing authorities, including the Internal Revenue Service, individual states and municipalities, regarding amounts due. These challenges may result in adjustments to the timing or amount of taxable income or deductions or allocation of income among tax jurisdictions, all of which may require a greater provisioning for taxes or otherwise negatively affect our financial results.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact the Company’s business.
Political and social attention to the issue of climate change has increased in recent years. Federal and state legislatures and regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. The federal banking agencies, including the OCC, have emphasized that climate-related risks are faced by banking organizations of all types and sizes and are in the process of enhancing supervisory expectations regarding banks’ risk management practices. In December 2021, the OCC published proposed principles for climate risk management by banking organizations with more than $100 billion in assets. The OCC also has appointed its first ever Climate Change Risk Officer and established an internal climate risk implementation committee in order to assist with these initiatives and to support the agency’s efforts to enhance its supervision of climate change risk management. Similar and even more expansive initiatives are expected, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. To the extent that these initiatives lead to the promulgation of new regulations or supervisory guidance applicable to the Company or the Bank, we would likely experience increased compliance costs and other compliance-related risks. The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact the Company’s financial condition and results of operations.
Risks Related to Strategic Planning
We intend to engage in acquisitions of other banking institutions from time to time. These acquisitions may not produce revenue or earnings enhancements or cost savings at levels, or within time frames, originally anticipated and may result in unforeseen integration difficulties.
We regularly evaluate opportunities to strengthen our current market position through acquisitions, subject to regulatory approval. Such transactions could, individually or in the aggregate, have a material effect on our operating results and financial condition, including short and long-term liquidity. Our acquisition activities could be material to our business. These activities could require us to use a substantial amount of cash or other liquid assets and/or incur debt. In addition, if goodwill recorded in connection with acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized. Our acquisition activities could involve a number of additional risks, including the risks of:
•incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating the terms of potential transactions, resulting in our attention being diverted from the operation of our existing business;
•using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;
•being potentially exposed to unknown or contingent liabilities of banks and businesses we acquire;
•changes in asset quality and credit risk as a result of the transaction;
•being required to expend time and expense to integrate the operations and personnel of the combined businesses;
•experiencing higher operating expenses relative to operating income from the new operations;
•creating an adverse short-term effect on our results of operations;
•losing key team members and customers as a result of an acquisition that is poorly received; and
•incurring significant problems relating to the conversion of the financial and customer data of the entity being acquired into our financial and customer product systems.
Depending on the condition of any institutions or assets that are acquired, any acquisition may, at least in the near term, materially adversely affect our capital and earnings and, if not successfully integrated following the acquisition, may continue to have such effects.
Generally, any acquisition of target financial institutions, banking centers or other banking assets by us may require approval by, and cooperation from, a number of governmental regulatory agencies, possibly including the Federal Reserve and the FDIC, as well as state banking regulators. Such regulators could deny our application based on their regulatory criteria or other considerations, which could restrict our growth, or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be required to sell banking centers as a condition to receiving regulatory approvals, and such a condition may not be acceptable to us or may reduce the benefit of any acquisition.
We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with pending or potential acquisitions. Our inability to overcome these risks could have an adverse effect on levels of reported net income, return on equity and return on assets and the ability to achieve our business strategy and maintain market value.
We may not be able to maintain consistent growth, earnings or profitability.
There can be no assurance that we will be able to continue to grow and to remain profitable in future periods, or, if profitable, that our overall earnings will remain consistent with our prior results of operations or increase in the future. Our growth in recent years has been driven by a number of factors, including strong growth in our indirect lending portfolio and demand in the commercial and real estate loan markets in certain of the communities that we serve. A downturn in economic conditions in our markets, heightened competition from other financial services providers, an inability to retain or grow our core deposit base, regulatory and legislative considerations, and failure to attract and retain high-performing talent, among other factors, could limit our ability to grow our assets or increase our profitability to the same extent as in recent periods. Sustainable growth requires that we manage our risks by following prudent loan underwriting standards, balancing loan and deposit growth without materially increasing interest rate risk or compressing our net interest margin, maintaining adequate capital, hiring and retaining qualified employees and successfully implementing our strategic initiatives. A failure to sustain our recent rate of growth or adequately manage the factors that have contributed to our growth or successfully enter new markets could have a material adverse effect on our earnings and profitability and, therefore on our business, consolidated financial condition, results of operations and cash flows.
General Risks
We cannot guarantee that we will pay dividends in the future.
Dividends from the Bank are Bancshares’ primary source of funds for the payment of dividends to its shareholders, and there are various legal and regulatory limits regarding the extent to which the Bank may pay dividends or otherwise supply funds to Bancshares. The ability of both the Bank and Bancshares to pay dividends will continue to be subject to and limited by the results of operations of the Bank and by certain legal and regulatory restrictions. Further, any lenders making loans to Bancshares or the Bank may impose financial covenants that may be more restrictive than the legal and regulatory requirements with respect to the payment of dividends. There can be no assurance as to whether or when Bancshares may pay dividends to its shareholders.
Extreme weather could cause a disruption in our operations, which could have an adverse impact on our profitability.
Some of our operations are located in areas near the Gulf of Mexico, a region that is susceptible to hurricanes and other forms of extreme weather. Such weather events could disrupt our operations and have a material adverse effect on our overall results of operations. Further, a hurricane, tornado or other extreme weather event in any of our market areas could adversely impact the ability of borrowers to timely repay their loans and may adversely impact the value of collateral that we hold.
Securities issued by us, including our common stock, are not insured.
Securities issued by us, including our common stock, are not savings or deposit accounts or other obligations of any bank and are not insured by the Deposit Insurance Fund maintained by the FDIC or by any other governmental agency or instrumentality, or any private insurer, and are subject to investment risk, including the possible loss of principal.
Future issuances of additional securities by us could result in dilution of your ownership.
We may decide from time to time to issue additional securities in order to raise capital, support growth or fund acquisitions. Further, we may issue stock options or other stock grants to retain and motivate employees. Such issuances of securities by us would dilute the respective ownership interests of our shareholders.
Our common stock price could be volatile, which could result in losses for individual shareholders.
The market price of our common stock may be subject to significant fluctuations in response to a variety of factors, including, but not limited to:
•general economic, business and political conditions;
•changing market conditions in the broader stock market in general, or in the financial services industry in particular;
•monetary and fiscal policies, laws and regulations and other activities of the government, agencies and similar organizations;
•actual or anticipated variations in our operating results, financial condition or asset quality;
•our failure to meet analyst predictions and projections;
•collectability of loans;
•cost and other effects of legal and administrative cases and proceedings, claims, settlements and judgments;
•additions or departures of key personnel;
•trades of large blocks of our stock;
•announcements of innovations or new services by us or our competitors;
•future sales of our common stock or other securities; and
•other events or factors, many of which are beyond our control.
Due to these factors, you may not be able to sell your stock at or above the price you paid for it, which could result in substantial losses.
Our performance and results of operations depend in part on the soundness of other financial institutions.
Our ability to engage in routine investment and banking transactions, as well as the quality and value of our investments in equity securities and obligations of other financial institutions, could be adversely affected by the actions, financial condition and profitability of such other financial institutions with which we transact, including, without limitation, the FHLBA and our correspondent banks. Financial services institutions are interrelated as a result of shared credits, trading, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses of depositor, creditor or counterparty confidence in certain institutions, and could lead to losses or defaults by other institutions. Any defaults by, or failures of, the institutions with whom we transact could adversely affect our debt and equity holdings in such other institutions, our participation interests in loans originated by other institutions, and our business, including our liquidity, consolidated financial condition and earnings.
Liquidity risks could affect our operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the repayment or sale of loans and other sources could have a substantial negative effect on our liquidity. Our funding sources include federal funds, purchased securities sold under repurchase agreements, core and non-core deposits, and short- and long-term debt. We maintain a portfolio of securities that can be used as a source of liquidity. Other sources of liquidity are available should they be needed, such as through our
acquisition of additional non-core deposits. Bancshares may be able, depending on market conditions, to issue and sell debt securities and preferred or common equity securities in public or private transactions. Our access to funding sources in amounts adequate to finance or capitalize our activities or on acceptable terms could be impaired by factors that affect us specifically or the financial services industry or economy in general, such as further disruption in the financial markets, negative views and expectations about the prospects for the financial services industry, deterioration within the credit markets, or the financial condition, liquidity or profitability of the financial institutions with which we transact.
We depend on the services of our management team and board of directors, and the unexpected loss of key officers or directors may adversely affect our operations.
A departure of any of our executive officers, other key personnel or directors could adversely affect our operations. The community involvement of our executive officers and directors and our directors’ diverse and extensive business relationships are important to our success. A material change in the composition of our management team or board of directors could cause our business to suffer.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
With the exception of its offices located in Knoxville and Powell, Tennessee, which are leased, the Bank owns all of its offices, including its executive offices, without encumbrances. ALC owns a commercial building in Jackson, Alabama, and leases additional office space in its Mobile, Alabama headquarters location. Bancshares does not separately own any property, and to the extent that its activities require the use of physical office facilities, such activities are conducted at the offices of the Bank. We believe that our properties are sufficient for our operations at the current time.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
We are party to certain ordinary course litigation, and we intend to vigorously defend ourselves in all such litigation. In the opinion of management, based on a review and consultation with our legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on our consolidated financial statements or results of operation.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Bancshares’ common stock is listed on the Nasdaq Capital Market under the symbol “FUSB.” Prior to our name change on October 11, 2016, our common stock was listed on the Nasdaq Capital Market under the symbol “USBI.” As of March 8, 2023, there were approximately 652 record holders of Bancshares’ common stock (excluding any participants in any clearing agency and “street name” holders).
Bancshares declared total dividends of $0.14 per common share and $0.12 per common share during the years ended December 31, 2022 and 2021, respectively. Bancshares expects to continue to pay comparable cash dividends in the future, subject to the results of operations of Bancshares and the Bank, legal and regulatory requirements and potential limitations imposed by financial covenants with third parties. See note 15, "Shareholders' Equity", in the consolidated financial statements for additional information on dividend restrictions.
Share Repurchases
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 fourth quarter of 2022.
Issuer Purchases of Equity Securities
Period
Total
Number of
Shares
Purchased (1)
Average
Price
Paid per
Share
Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs (2)
Maximum Number of
Shares that May
Yet Be Purchased
Under the Programs (2)
October 1-31, 2022
-
$
-
-
596,813
November 1-30, 2022
$
8.43
-
596,813
December 1-31, 2022
$
8.97
-
596,813
Total
$
8.44
-
596,813
(1)918 shares were purchased in open-market transactions by an independent trustee for Bancshares' 401(k) Plan during the fourth quarter of 2022.
(2)All shares have been repurchased to date pursuant to Bancshares’ publicly announced share repurchase program, which was initially approved by the Board of Directors on January 19, 2006 and authorized the repurchase of up to 642,785 shares of common stock. On each of December 18, 2019 and April 28, 2021, the Board approved the repurchase of additional shares of common stock under the share repurchase program, and the Board has periodically extended the expiration date of the program, most recently to December 31, 2023. As of December 31, 2022, Bancshares was authorized to repurchase up to 596,813 shares of common stock under the share repurchase program.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding securities authorized for issuance under our equity compensation plans is incorporated by reference to Item 12 of this Annual Report on Form 10-K.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
You should read the following discussion of our financial condition and results of operations in conjunction with the “Selected Financial Data” and our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2022. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, and our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed under Item 1A “Risk Factors” and elsewhere in this Annual Report.
Selected Financial Data
The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the consolidated financial statements and related notes, appearing elsewhere herein.
Year Ended December 31,
(Dollars in Thousands, except Per Share Amounts)
Results of Operations:
Interest income
$
41,197
$
39,921
$
40,377
$
43,588
$
37,138
Interest expense
4,256
2,950
4,611
6,646
4,350
Net interest income
36,941
36,971
35,766
36,942
32,788
Provision for loan and lease losses
3,308
2,010
2,945
2,714
2,622
Non-interest income
3,451
3,521
5,010
5,366
5,610
Non-interest expense
28,072
32,756
34,299
33,782
32,385
Income before income taxes
9,012
5,726
3,532
5,812
3,391
Provision for income taxes
2,148
1,275
1,246
Net income
$
6,864
$
4,451
$
2,707
$
4,566
$
2,490
Per Share Data:
Basic net income per share
$
1.13
$
0.70
$
0.43
$
0.71
$
0.40
Diluted net income per share
$
1.06
$
0.66
$
0.40
$
0.67
$
0.37
Dividends per share
$
0.14
$
0.12
$
0.12
$
0.09
$
0.08
Common stock price - High
$
12.00
$
12.50
$
12.00
$
11.93
$
13.62
Common stock price - Low
$
6.46
$
7.54
$
5.18
$
7.60
$
7.60
Period end price per share
$
8.68
$
10.57
$
9.02
$
11.61
$
7.95
Period end shares outstanding (in thousands)
5,812
6,172
6,177
6,158
6,298
Period-End Balance Sheet:
Total assets
$
994,667
$
958,302
$
890,511
$
788,738
$
791,939
Loans, net of allowance for loan and lease losses
764,451
700,030
638,374
545,243
514,867
Allowance for loan and lease losses
9,422
8,320
7,470
5,762
5,055
Investment securities, net
132,657
134,319
91,422
108,356
153,949
Total deposits
870,025
838,126
782,212
683,662
704,725
Short-term borrowings
20,038
10,046
10,017
10,025
Long-term borrowings
10,726
10,653
-
-
-
Total shareholders’ equity
85,135
90,064
86,678
84,748
79,437
Book value
14.65
14.59
14.03
13.76
12.61
Performance Ratios:
Loans to deposits
87.9
%
83.5
%
81.6
%
79.8
%
73.1
%
Net interest margin
4.07
%
4.23
%
4.69
%
5.18
%
5.27
%
Return on average assets
0.70
%
0.47
%
0.32
%
0.58
%
0.36
%
Return on average equity
7.99
%
5.01
%
3.17
%
5.51
%
3.26
%
Asset Quality:
Allowance for loan and lease losses as % of loans
1.22
%
1.17
%
1.16
%
1.05
%
0.97
%
Nonperforming assets as % of loans and other real estate
0.30
%
0.59
%
0.62
%
0.87
%
0.82
%
Nonperforming assets as % of total assets
0.24
%
0.43
%
0.45
%
0.61
%
0.54
%
Net charge-offs as a % of average loans
0.30
%
0.16
%
0.21
%
0.38
%
0.57
%
Capital Adequacy:
Common equity tier 1 risk-based capital ratio
11.07
%
11.36
%
11.78
%
12.78
%
12.62
%
Tier 1 risk-based capital ratio
11.07
%
11.36
%
11.78
%
12.78
%
12.62
%
Total risk-based capital ratio
12.19
%
12.44
%
12.92
%
13.77
%
13.53
%
Tier 1 leverage ratio
9.39
%
9.17
%
8.98
%
9.61
%
8.96
%
DESCRIPTION OF THE BUSINESS
First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its subsidiaries, the “Company”), is a bank holding company formed in 1983 registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancshares operates one banking subsidiary, First US Bank, an Alabama banking corporation (the “Bank”). Prior to its name change on October 11, 2016, Bancshares was known as United Security Bancshares, Inc. Bancshares and the Bank are headquartered in Birmingham, Alabama.
The Bank conducts a general commercial banking business and offers banking services such as demand, savings, individual retirement account and time deposits, personal and commercial loans, safe deposit box services and remote deposit capture. The Bank operates and serves its customers through 15 full-service banking offices located in Birmingham, Butler, Calera, Centreville, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama; Knoxville and Powell, Tennessee; and Rose Hill, Virginia; as well as loan production offices in Mobile, Alabama and the Chattanooga, Tennessee area. The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals. The Bank also performs indirect lending through third-party retailers and currently conducts this lending in 12 states, including Alabama, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. During the third quarter of 2021, the Company closed four banking offices located in Bucksville, Columbiana and south Tuscaloosa, Alabama, as well as Ewing, Virginia.
The Bank has two wholly owned subsidiaries: Acceptance Loan Company, Inc., an Alabama corporation (“ALC”), and FUSB Reinsurance, Inc., an Arizona corporation (“FUSB Reinsurance”). As used herein, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Bancshares, as well as the Bank, ALC, and FUSB Reinsurance, collectively.
The Bank owns all of the stock of ALC. ALC is a finance company headquartered in Mobile, Alabama. During the third quarter of 2021, ALC ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. ALC continues to service its remaining portfolio of loans from its headquarters in Mobile, Alabama.
FUSB Reinsurance was designed to reinsure or “underwrite” credit life and credit accident and health insurance policies sold to the Bank’s and ALC’s consumer loan customers. FUSB Reinsurance was responsible for the first level of risk on these policies up to a specified maximum amount, while the primary third-party insurer retained the remaining risk. While FUSB Reinsurance underwrote insurance contracts for both the Bank and ALC, in recent years, the majority of contracts were associated with ALC’s loans. Due to reduced contract volume, particularly following the cessation of business of ALC, during 2022, management of FUSB Reinsurance began procedures to terminate the entity’s activities. During 2022, FUSB Reinsurance ceased writing new insurance contracts, and reached an agreement with a third-party insurance provider to indemnify FUSB Reinsurance for all remaining liabilities associated with previously underwritten insurance policies. As of December 31, 2022, the remaining assets and liabilities of FUSB Reinsurance were transferred to the Bank, and it is anticipated that FUSB Reinsurance will be legally dissolved during 2023.
The following discussion and financial information are presented to aid in an understanding of the Company’s consolidated financial position, changes in financial position, results of operations and cash flows and should be read in conjunction with the consolidated financial statements and notes thereto included herein. The emphasis of the discussion is on the years 2022 and 2021. All yields and ratios presented and discussed herein are recorded and presented on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated.
RECENT MARKET CONDITIONS
During 2022, certain economic conditions benefited from declining COVID-19 cases and the related lifting of COVID-19 restrictions throughout the United States. However, economic uncertainty remains with respect to the long-term effectiveness of efforts to reduce the impact of COVID-19 both globally and domestically. In addition, during 2022, economic uncertainty emerged from geopolitical developments surrounding the invasion of Ukraine by Russia and further COVID-19 lockdowns in China. Furthermore, inflation reached 40-year highs during 2022 in the United States, and market rates of interest rose significantly after a prolonged period at historical lows. In March 2022, the Federal Reserve Board (FRB) raised the target federal funds rate for the first time in over three years, and between March 16, 2022 and February 1, 2023 increased the federal funds rate by a total of 450 basis points. Further increases are expected in 2023 as the FRB continues its efforts to reduce inflation.
As interest rates increase, competitive pressures on both loan and deposit pricing have increased and are expected to remain at a heightened level. The pace and magnitude of changes in interest rates, and the impact that such changes will have on the Company’s operating results, cannot be fully predicted. During this still-ongoing and still-volatile transition period, the yield curve has flattened and often becomes inverted. Unusual yield curve effects, including inversion, may continue. Further, if the rate of inflation persists or accelerates, the Company’s operations could be impacted by, among other things, accelerating cost of goods and services, including
the cost of salaries and benefits. Additionally, the Company’s borrowers could be negatively impacted by rising expense levels, leading to deterioration of credit quality and/or reductions in the Company’s lending activities. The higher interest rate environment has also led to unrealized losses in the Company’s investment portfolio which consists primarily of fixed rate instruments.
CRITICAL ACCOUNTING ESTIMATES
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. The estimates include accounting for the allowance for loan losses, goodwill and other intangible assets, other real estate owned, valuation of deferred tax assets and fair value measurements.
Allowance for Loan and Lease Losses
The Company maintains the allowance for loan and lease losses at a level deemed adequate by management to absorb probable losses from loans and leases in the portfolio at the balance sheet date. In determining the adequacy of the allowance for loan and lease losses, management considers numerous factors, including, but not limited to, management’s estimate of: (a) loan and lease loss experience; (b) the financial condition and liquidity of certain loan customers; and (c) collateral values of property securing certain loans and leases. Because these factors and others involve the use of management’s estimation and judgment, the allowance for loan and lease losses is inherently subject to adjustment at future dates. Unfavorable changes in the factors used by management to determine the adequacy of the allowance, including increased loan or lease delinquencies and subsequent charge-offs, or the availability of new information could require additional provisions in excess of normal provisions to the allowance for loan and lease losses in future periods. No allowance for loan and lease losses is carried over or established at acquisition for purchased loans acquired in business combinations. Loans acquired in business combinations that are deemed impaired at acquisition, purchased credit impaired (“PCI”) loans, are grouped into pools and evaluated separately from the non-PCI portfolio. The estimated cash flows to be collected on PCI loans are discounted at a market rate of interest. Subsequent to the acquisition of PCI loans, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities and other factors that are reflective of current market conditions. Subsequent decreases in expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows will generally result in a reversal of the provision for loan losses to the extent of prior charges. Changes in the estimates and assumptions are possible and may have a material impact on our allowance, and as a result, on our consolidated financial statements or results of operations. There can be no assurance that loan and lease losses in future periods will not exceed the allowance for loan and lease losses or that additions to the allowances will not be required. See “Summary of Loan Loss Experience” for additional analysis of the activity in the allowance for loan and lease losses.
Due to its classification as a smaller reporting company by the Securities and Exchange Commission, as of December 31, 2022, the Company was not required to adopt, and had not adopted, the Current Expected Credit Loss (CECL) model to account for credit losses. Effective January 1, 2023, the Company adopted the CECL accounting model, and recorded a transition adjustment that increased loan loss reserves by approximately $2.4 million. Of this amount, approximately $0.7 million, or 29%, was associated with ALC’s run-off loan portfolio, while the remainder was associated with the Bank’s loan portfolio. In accordance with CECL transition accounting guidance, the transition adjustment was recorded directly to retained earnings during the first quarter of 2023 and will not impact current period earnings.
Goodwill and Other Intangible Assets
Goodwill arises from business combinations and is generally determined as the excess of cost over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is determined to have an indefinite useful life and is not amortized, but is tested for impairment at least annually or more frequently if events or circumstances exist that indicate that a goodwill impairment test should be performed. The Company performs its annual goodwill impairment test as of October 1. Impairment exists when a reporting unit’s carrying amount of goodwill exceeds its implied fair value. In testing goodwill for impairment, U.S. GAAP permits the Company to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In this qualitative assessment, the Company evaluates events and circumstances that may include, but are not limited to, the general economic environment, banking industry and market conditions, the overall financial performance of the Company, the performance of the Company’s common stock, the key financial performance metrics of the Company’s reporting units and events affecting the reporting units to determine if it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. If the quantitative impairment test is required or the decision to bypass the qualitative assessment is elected, the Company performs the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. A recognized impairment loss cannot be reversed in future periods even if the fair value of the reporting unit subsequently recovers. Goodwill impairment was neither indicated nor recorded during the years ended December 31, 2022 or 2021. As of October 1, 2022, the date of our most recent impairment test, the Bank reporting unit had a fair value that was in excess of its carrying value. Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations.
Other intangible assets consist of core deposit intangible assets arising from acquisitions. Core deposit intangible assets have definite useful lives and are amortized on an accelerated basis over their estimated useful lives. The Company’s core deposit intangibles have estimated useful lives of seven years. Intangible assets are evaluated for impairment whenever events or circumstances exist that indicate that the carrying amount should be reevaluated. As of December 31, 2022, the Company had $0.4 million in other intangible assets, and there was no indication of impairment.
Other Real Estate Owned
Other real estate owned (“OREO”) consists of properties obtained through foreclosure or in satisfaction of loans, as well as closed Bank and ALC branches. It is reported at the net realizable value of the property, less estimated costs 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.
Deferred Tax Asset Valuation
Income tax expense and current and deferred tax assets and liabilities reflect management’s best estimate of current and future taxes to be paid. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, which will result in taxable or deductible amounts in the future. Deferred tax assets may also arise from the carryforward of operating loss or tax credit carryforwards as allowed by applicable federal or state tax jurisdictions. In addition, there may be transactions and calculations for which the ultimate tax outcomes are uncertain and the Company’s tax returns are subject to audit by various tax authorities. Although we believe that estimates related to income taxes are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in the consolidated financial statements. In evaluating the ability to recover deferred tax assets in the tax jurisdictions from which they arise, management considers all available positive and negative evidence, including the Company’s historical earnings and, in particular, the results of recent operations, expected reversals of temporary differences, the ability to utilize tax planning strategies and the expiration dates of any operating loss and tax credit carryforwards. A valuation allowance is recognized for a deferred tax asset if, based on the weight of all available evidence, it is more likely than not that some portion of or the entire deferred tax asset will not be realized. The assumptions about the amount of future taxable income require the use of significant judgment and are consistent with the plans and estimates that management uses in the underlying business. At this time, management considers it to be more likely than not that the Company will have sufficient taxable income in the future to allow all deferred tax assets to be realized. Accordingly, a valuation allowance was not established for deferred tax assets as of either December 31, 2022 or 2021.
Fair Value Measurements
Portions of the Company’s assets and liabilities are carried at fair value, with changes in fair value recorded either in earnings or accumulated other comprehensive income (loss). These assets and liabilities include securities available-for-sale, impaired loans and derivative instruments. Additionally, other real estate and certain other assets acquired in foreclosure are reported at the lower of the recorded investment or fair value of the property, less estimated cost to sell. 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. While management uses judgment when determining the price at which willing market participants would transact when there has been a significant decrease in the volume or level of activity for the asset or liability in relation to “normal” market activity, management’s objective is to determine the point within the range of fair value estimates that is most representative of a sale to a third party under current market conditions. The value to the Company if the asset or liability were held to maturity is not included in the fair value estimates.
A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Fair value is measured based on a variety of inputs that the Company utilizes. Fair value may be based on quoted market prices for identical assets or liabilities traded in active markets (Level 1 valuations). If market prices are not available, the Company may use quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 valuations). Where observable market data is not available, the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but that are observable based on Company-specific data (Level 3 valuations). These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. The valuation of financial instruments when quoted market prices are not available (Levels 2 and 3) may require significant management judgment to assess assumptions and observable inputs. Detailed information regarding fair value measurements can be found in Note 21, "Fair Value of Financial Instruments," in the consolidated financial statements contained herein.
Other Significant Accounting Policies
Other significant accounting policies, not involving the same level of measurable uncertainties as those discussed above, are nevertheless important to an understanding of the consolidated financial statements. Policies related to the right of use asset and lease liability, revenue recognition, investment securities and long-lived assets require difficult judgments on complex matters that are often subject to multiple and recent changes in the authoritative guidance. Certain of these matters are among topics currently under
re-examination by accounting standard setters and regulators. Specific conclusions have not been reached by these standard setters, and outcomes cannot be predicted with confidence. See Note 2, “Summary of Significant Accounting Policies,” in the consolidated financial statements, which discusses accounting policies that we have selected from acceptable alternatives.
EXECUTIVE OVERVIEW
Update on Strategic Initiatives
Beginning in 2021, the Company initiated certain strategic initiatives designed to improve the Company’s operating efficiency, focus the Company’s loan growth activities, and fortify asset quality. The discussion below provides an update as of December 31, 2022 regarding these ongoing strategic initiatives.
Cessation of Business at ALC
On September 3, 2021, ALC ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. As of December 31, 2022, ALC employed six full-time equivalent employees that continued to collect payments on loans through ALC’s Mobile, Alabama headquarters office. The objectives of this initiative included the simplification of the Company’s business processes, reduction of non-interest expense, and improvement of the Company’s asset quality. The timing of the Company’s ability to achieve each of these objectives will be different with some objectives being achieved relatively quickly after execution of the initiative, while others will take more time as ALC’s loan portfolio continues to pay down. For example, a significant reduction of non-interest expense was achieved beginning in the fourth quarter of 2021 and continuing in 2022 due to the reduction of personnel, termination of branch leases, and reduction of technology and other overhead expenses. For the year ended December 31, 2022, non-interest expense at ALC totaled $1.8 million, compared to $6.6 million for the year ended December 31, 2021.
Though the initiative resulted in significant non-interest expense reductions relatively early in its execution, it has also resulted in increased expense related to loan loss provisioning. As a result of branch closures, charge-offs associated with ALC loans have increased since the inception of the initiative compared to periods immediately prior to the closures. Net charge-offs at ALC totaled $1.9 million for the year ended December 31, 2022, compared to $0.8 million for the year ended December 31, 2021. The increased charge-offs at ALC in 2022 resulted in part from the closure of ALC’s branches, and in part from worsening economic conditions in 2022, including elevated inflation levels and rising interest rates, that have impacted ALC’s borrowers. The combination of increased charge-off levels and worsening economic conditions resulted in additional loan loss provisions at ALC in 2022 compared to 2021. For the year ended December 31, 2022, loan loss provision expense specific to ALC’s loans totaled $2.0 million, compared to $0.5 million for the year ended December 31, 2021. The reduction of loans at ALC is expected to continue to improve the Company’s asset quality over time and result in reduced charge-off levels. ALC’s loans, and in particular its direct consumer portfolio, have historically had the Company’s highest level of credit losses. Approximately 85.5% and 66.1% of the Company’s total net charge-offs were associated with ALC’s loan portfolio during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, ALC's remaining loans, net of unearned interest and fees, totaled $20.2 million, compared to $40.8 million as of December 31, 2021.
While the ALC cessation of business strategy is expected to provide ongoing expense reductions, interest income earned on ALC’s loans will also continue to decline in future periods as the loans pay down. For the year ended December 31, 2022, interest income earned on ALC’s loans totaled $4.7 million, compared to $9.0 million for the year ended December 31, 2021. Accordingly, the Company’s focus remains on continued loan growth in other areas of the Bank’s portfolio, as well as efforts to continue to simplify the Company’s ongoing operations and further reduce expenses.
Organizational Efforts
In January 2022, management reorganized the Bank’s retail banking, technology and deposit operations functions under a single organizational structure. Under this structure, management expects to further improve the efficiency of its retail banking operation, while also improving the promotion and deployment of the Bank’s digital products and services. The Company continues to evaluate opportunities throughout the organization to improve its processes and simplify business models.
Financial Highlights
For the year ended December 31, 2022, the Company earned net income of $6.9 million, or $1.06 per diluted common share, compared to net income of $4.5 million, or $0.66 per diluted common share, for the year ended December 31, 2021. Earnings improvement in 2022, compared to 2021, was driven primarily by reductions in non-interest expense resulting from the strategic initiatives that were initiated by the Company beginning in 2021 and, in particular, the ALC cessation of business initiative. The Company’s total non-interest expense was reduced by $4.7 million, or 14.3%, comparing 2022 to 2021.
Summarized condensed consolidated statements of operations are included below for the years ended December 31, 2022 and 2021, respectively.
Year Ended December 31,
(Dollars in Thousands)
Interest income
$
41,197
$
39,921
Interest expense
4,256
2,950
Net interest income
36,941
36,971
Provision for loan losses
3,308
2,010
Net interest income after provision for loan losses
33,633
34,961
Non-interest income
3,451
3,521
Non-interest expense
28,072
32,756
Income before income taxes
9,012
5,726
Provision for income taxes
2,148
1,275
Net income
$
6,864
$
4,451
Basic net income per share
$
1.13
$
0.70
Diluted net income per share
$
1.06
$
0.66
Dividends per share
$
0.14
$
0.12
The discussion that follows summarizes the most significant activity that impacted changes in the Company’s operations during 2022 as compared to 2021, as well as significant changes in the Company’s balance sheet comparing December 31, 2022 to December 31, 2021.
Net Interest Income and Margin
Net interest income decreased by $30 thousand comparing the year ended December 31, 2022 to the year ended December 31, 2021. A decrease in net interest income was anticipated by management in 2022 due to the reduction in ALC’s higher yielding loans compared to 2021. As a result of the ALC cessation of business strategy, interest and fees on ALC loans decreased by $4.3 million during the year ended December 31, 2022, compared to the year ended December 31, 2021. In addition, due to the rising interest rate environment, the Company’s interest expense increased by $1.3 million, comparing 2022 to 2021. However, the year-over-year reduction in interest income on ALC loans, combined with the increase in interest expense, was mostly offset by an increase of $5.6 million in interest and fee income attributable to the Bank’s other interest-earning asset categories. Revenue growth in these categories was primarily attributable to growth in average balances of loans, and to a lesser extent, improved yields on the Company’s securities investments and cash and cash equivalent balances.
As ALC’s loan portfolio continues to pay down, there will be continued reduction in interest and fees attributable to ALC’s loans. These reductions are expected to put downward pressure on total loan yield and net interest margin in the future. As a result of the changing mix of loans, combined with increased interest expense, the Company’s net interest margin decreased to 4.07% during the year ended December 31, 2022, compared to 4.23% for the year ended December 31, 2021. However, as discussed in the section above entitled “Update on Strategic Initiatives,” while revenue associated with ALC’s loans will continue to decrease, management also expects continued reduction in non-interest expense as ALC’s operations wind down, as well as further reductions in provision for loan losses as ALC’s loans continue to decrease.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $3.3 million for the year ended December 31, 2022, compared to $2.0 million during the year ended December 31, 2021. The increase in provision expense in 2022 compared to 2021 reflected both an increase in charge-offs associated with ALC’s loan portfolio, as well as qualitative adjustments applied to the portfolio in response to heightened inflationary trends and other economic uncertainties that emerged during the year. In management’s view, the combination of the ALC business cessation strategy, coupled with deteriorating economic conditions, including elevated inflation levels, increased overall credit risk in ALC’s loan portfolio as of December 31, 2022, compared to December 31, 2021. Loan loss provisions recorded by the Company in 2022 included expense of $2.0 million associated with ALC’s loans and $1.3 million associated with the Bank’s portfolio. While loan loss provisioning at ALC resulted primarily from increased charge-offs and heightened economic risk factors, provisions at the Bank resulted primarily from loan growth.
Non-interest Income
Non-interest income totaled $3.5 million for both years ended December 31, 2022 and 2021.
Non-interest Expense
Non-interest expense decreased to $28.1 million for the year ended December 31, 2022, compared to $32.8 million for the year ended December 31, 2021. The decrease in 2022 resulted primarily from implementation of the ALC business cessation strategy, as well as other efficiency efforts conducted at the Bank. As a result of these efforts, significant expense reductions were realized associated with salaries and employee benefits, occupancy and equipment, as well as other expenses associated with technology, communications, and professional services. Non-interest expense was reduced by nonrecurring gains on sale of other real estate (OREO) totaling $0.4 million in 2022 and $0.5 million in 2021.
Total Assets
As of December 31, 2022, the Company's assets totaled $994.7 million, compared to $958.3 million as of December 31, 2021, an increase of 3.8%.
Loan Growth
Total loans increased by $64.2 million, or 9.0%, as of December 31, 2022, compared to December 31, 2021. Loan volume increases included growth in the Bank’s indirect consumer, residential (secured by multi-family and 1-4 family residential properties), commercial real estate (secured by non-farm, non-residential collateral), and commercial and industrial (C&I) portfolios. Growth in these categories in 2022 was consistent with continued robust commercial economic activity and consumer demand in the markets in which the Company operates. The growth in these categories was partially offset by reductions in ALC’s loans, construction loans and Paycheck Protection Plan (PPP) loans during the year ended December 31, 2022.
Asset Quality
	The Company’s non-performing assets, including loans in non-accrual status and OREO, totaled $2.3 million as of December 31, 2022, compared to $4.2 million as of December 31, 2021. The reduction in nonperforming assets during the year ended December 31, 2022 resulted mostly from the sale of OREO properties during the period. Reductions in OREO totaled $1.5 million and included the sale of banking centers that were closed by the Company in 2021. As a percentage of total assets, non-performing assets were reduced to 0.24% as of December 31, 2022, compared to 0.43% as of December 31, 2021. As a percentage of average loans, net charge-offs increased to 0.30% for the year ended December 31, 2022, compared to 0.16% for the year ended December 31, 2021. The increase in net charge-offs in 2022 resulted from elevated charge-offs in ALC’s runoff loan portfolio.
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 December 31, 2022, the investment securities portfolio, including both the available-for-sale and held-to-maturity portfolios, totaled $132.7 million, compared to $134.3 million as of December 31, 2021. Management monitors its liquidity position, including forecasted expectations related to loan growth, when making determinations about whether to re-invest in the securities portfolio. The investment portfolio is maintained at average durations that are expected to provide monthly cash flows that can be utilized to reinvest in earning assets at current market rates. As of December 31, 2022, the expected average life of investment securities was 3.5 years, compared to 3.7 years as of December 31, 2021. During the fourth quarter of 2022, the Company sold investment securities with principal balances totaling $8.6 million at a net loss of $83 thousand. The intent of these sales was to effectively prune the investment portfolio and allow for reinvestment in higher earning assets in future periods.
Deposits and Borrowings
Deposits totaled $870.0 million as of December 31, 2022, compared to $838.1 million as of December 31, 2021. Core deposits, which exclude time deposits of $250 thousand or greater, totaled $778.1 million, or 89.4% of total deposits, as of December 31, 2022, compared to $775.1 million, or 92.5% of total deposits, as of December 31, 2021. Average deposit costs, including both interest- and noninterest-bearing deposits, totaled 0.40% for 2022, compared to 0.32% for 2021. Given the rising interest rate environment, competition for deposits increased significantly, particularly during the latter portion of 2022. During the third and fourth quarters of 2022, management utilized wholesale funding sources, including brokered deposits and short-term borrowings, as a tool to provide
greater flexibility in managing balance sheet levels and long-term interest expense relative to actual and expected growth in earning assets. As of December 31, 2022, the Company’s short-term borrowings totaled $20.0 million, compared to $10.0 million as of December 31, 2021. In addition, as of both December 31, 2022 and 2021, the Company held long-term borrowings of $10.7 million (net of unamortized debt issuance costs) resulting from the issuance of subordinated debt with a 10-year term on October 1, 2021. Interest on the subordinated debt is fixed at 3.50% for the first five years of the term, resetting to a variable interest rate for the last five years of the term. For the year ended December 31, 2022, the Company’s funding costs (including interest and non-interest bearing deposits and borrowings) totaled 0.48%, compared to 0.35% for the year ended December 31, 2021.
Shareholders’ Equity
As of December 31, 2022, shareholders’ equity totaled $85.1 million, compared to $90.1 million as of December 31, 2021. The decrease in shareholders’ equity resulted from increases in accumulated other comprehensive loss due to declines in the market value of the Company’s available-for-sale investment portfolio, as well as repurchases of shares of the Company’s common stock during the year ended December 31, 2022. The market value declines in investment securities available-for-sale were the direct result of the increasing interest rate environment in 2022. No other-than-temporary impairment was recognized in the portfolio as of December 31, 2022. The market value decrease in available-for-sale securities was partially offset by an increase in the market value of cash flow derivative instruments that hedge certain deposits and borrowings on the Company’s balance sheet.
Cash Dividends
Commensurate with the earnings growth experienced during 2022, the Company increased its quarterly cash dividend in the fourth quarter of 2022 by $0.02 per share. For the year ended December 31, 2022, the Company declared total dividends of $0.14 per share, compared to $0.12 per share for the year ended December 31, 2021.
Share Repurchases
	During 2022, the Company completed share repurchases totaling 412,400 shares of its common stock at a weighted average price of $10.87 per share. The share repurchases were completed under the Company’s existing share repurchase program, which was amended in each of December 2019 and April 2021 to allow the repurchase of additional shares, and the Company's Board of Directors has periodically extended the expiration date of the program, most recently to December 31, 2023. As of December 31, 2022, a total of 596,813 shares remained available for repurchase under the program.
Regulatory Capital
During 2022, the Bank continued to maintain capital ratios at higher levels than required to be considered a “well-capitalized” institution under applicable banking regulations. As of December 31, 2022, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 11.07%, its total capital ratio was 12.19%, and its Tier 1 leverage ratio was 9.39%.
Liquidity
As of December 31, 2022, the Company continued to maintain excess funding capacity sufficient to provide adequate liquidity for loan growth, capital expenditures and ongoing operations. The Company benefits from a strong core deposit base, a liquid investment securities portfolio and access to funding from a variety of sources, including federal funds lines, Federal Home Loan Bank advances and brokered deposits.
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 borrowings.
The following table shows the average balances of each principal category of assets, liabilities and shareholders’ equity for the years ended December 31, 2022 and 2021. Additionally, the table provides 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.
Year Ended December 31,
Average
Balance
Interest
Annualized
Yield/
Rate %
Average
Balance
Interest
Annualized
Yield/
Rate %
(Dollars in Thousands)
ASSETS
Interest-earning assets:
Total loans (Note A)
$
724,639
$
38,015
5.25
%
$
685,010
$
38,229
5.58
%
Taxable investment securities
141,283
2,631
1.86
%
107,141
1,503
1.40
%
Tax-exempt investment securities
2,342
1.54
%
3,370
1.78
%
Federal Home Loan Bank stock
1,247
4.25
%
3.66
%
Federal funds sold
3.77
%
-
-
Interest-bearing deposits in banks
38,379
1.15
%
76,972
0.12
%
Total interest-earning assets
908,474
41,197
4.53
%
873,504
39,921
4.57
%
Noninterest-earning assets
65,855
66,782
Total
$
974,329
$
940,286
LIABILITIES AND SHAREHOLDERS’
EQUITY
Interest-bearing liabilities:
Demand deposits
$
246,124
$
0.26
%
$
236,084
$
0.23
%
Savings deposits
208,672
1,204
0.58
%
193,766
0.31
%
Time deposits
212,591
1,540
0.72
%
226,425
1,517
0.67
%
Total interest-bearing deposits
667,387
3,382
0.51
%
656,275
2,669
0.41
%
Noninterest-bearing demand deposits
182,032
-
-
172,187
-
-
Total deposits
849,419
3,382
0.40
%
828,462
2,669
0.32
%
Borrowings
30,048
2.91
%
13,512
2.08
%
Total funding costs
879,467
4,256
0.48
%
841,974
2,950
0.35
%
Other noninterest-bearing liabilities
8,977
9,416
Shareholders’ equity
85,885
88,896
Total
$
974,329
$
940,286
Net interest income (Note B)
$
36,941
$
36,971
Net interest margin
4.07
%
4.23
%
Note A - For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. Non-accruing loans averaged $1.8 million for both years ended December 31, 2022 and 2021.
Note B - Loan fees are included in the interest amounts presented. Loan fees totaled $0.9 million and $1.7 million for 2022 and 2021, respectively.
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.
2022 Compared to 2021
Increase (Decrease)
Due to Change In:
2021 Compared to 2020
Increase (Decrease)
Due to Change In:
Volume
Average
Rate
Net
Volume
Average
Rate
Net
(Dollars in Thousands)
Interest earned on:
Total loans
$
2,212
$
(2,426
)
$
(214
)
$
6,145
$
(6,167
)
$
(22
)
Taxable investments
1,128
(401
)
(258
)
Tax-exempt investments
(18
)
(6
)
(24
)
(14
)
Federal Home Loan Bank stock
(9
)
(8
)
(17
)
Federal funds
(44
)
(1
)
(45
)
Interest-bearing deposits in banks
(48
)
(156
)
(119
)
Total interest-earning assets
2,637
(1,361
)
1,276
6,291
(6,747
)
(456
)
Interest expense on:
Demand deposits
(156
)
(24
)
Savings deposits
(302
)
(157
)
Time deposits
(93
)
(99
)
(1,527
)
(1,626
)
Other borrowings
Total interest-bearing liabilities
1,306
(1,884
)
(1,661
)
Increase (decrease) in net interest income
$
2,316
$
(2,346
)
$
(30
)
$
6,068
$
(4,863
)
$
1,205
Note: Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates.
Net interest income for the year ended December 31, 2022 decreased by $30 thousand compared to the year ended December 31, 2021. A decrease in net interest income was anticipated by management in 2022 due to the reduction in ALC’s higher yielding loans compared to 2021. As a result of the ALC cessation of business strategy, interest and fees on ALC loans decreased by $4.3 million during the year ended December 31, 2022, compared to the year ended December 31, 2021. In addition, due primarily to the rising interest rate environment, combined with long-term debt issued by the Company in the fourth quarter of 2021, the Company’s interest expense increased by $1.3 million, comparing 2022 to 2021. However, the year-over-year reduction in interest income on ALC loans, combined with the increase in interest expense, was mostly offset by an increase of $5.6 million in interest and fee income attributable to the Bank’s other interest-earning asset categories. Revenue growth in these categories was primarily attributable to growth in average balances of loans, and to a lesser extent, improved yields on the Company’s securities investments and cash and cash equivalent balances.
As ALC’s loan portfolio continues to pay down, there will be continued reduction in interest and fees attributable to ALC’s loans. These reductions are expected to put downward pressure on total loan yield and net interest margin in the future. As a result of the changing mix of loans, combined with increased interest expense, the Company’s net interest margin decreased to 4.07% during the year ended December 31, 2022, compared to 4.23% for the year ended December 31, 2021. However, as discussed in the Executive Summary under the section entitled “Update on Strategic Initiatives,” while revenue associated with ALC’s loans will continue to decrease, management also expects continued reduction in non-interest expense as ALC’s operations wind down, as well as reductions in provision for loan losses as ALC’s loans continue to decrease.
It is expected that net interest income will continue to be impacted significantly by the interest rate environment. Management’s interest rate risk modeling generally indicates that both net interest margin and net interest income would benefit in a rising interest rate environment, specifically with increases up to 200 basis points from December 31, 2022 levels. However, this modeling also indicates that net interest income and margin would decrease in a declining interest rate environment, or in an upward rate environment with increases in excess of 200 basis point from December 31, 2022 levels. The Company’s strategy to cease new business development at ALC is expected to reduce average yields on loans in the near term until the ALC portfolio has paid down to nominal levels. Management expects that growth in loan volume with loans of sufficient credit quality will enhance net interest income over time as earning assets are shifted from lower earning cash and federal funds sold balances into loan assets. However, the environment for both loan and deposit generation is highly competitive, particularly in the current rising interest rate environment. Reductions in either loan volume or deposit levels could result in downward pressure on net interest income.
Based on recent statements by Federal Reserve officials, it is expected that the Federal Open Market Committee will continue raising interest rates to address inflationary pressures in the near-term, and, monetary tightening may continue through much of 2023. The level of interest rate increases or decreases is unpredictable and can result in rates rising in an uneven manner that causes unpredictable effects. In addition, higher rates could negatively affect the economy, loan demand and borrowers’ financial position.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $3.3 million for the year ended December 31, 2022, compared to $2.0 million for the year ended December 31, 2021. The increase in provision expense in 2022 compared to 2021 reflected both an increase in charge-offs associated with ALC’s loan portfolio, as well as qualitative adjustments applied to the portfolio in response to heightened inflationary trends and other economic uncertainties that emerged during the year. In management’s view, the combination of the ALC business cessation strategy, coupled with deteriorating economic conditions, including elevated inflation levels, increased overall credit risk in ALC’s loan portfolio as of December 31, 2022, compared to December 31, 2021. Loan loss provisions recorded by the Company in 2022 included expense of $2.0 million associated with ALC’s loans and $1.3 million associated with the Bank’s portfolio. While loan loss provisioning at ALC resulted primarily from increased charge-offs and heightened economic risk factors, provisions at the Bank resulted primarily from loan growth. The Company’s net charge-offs totaled $2.2 million, or 0.30% of average loans, in 2022, compared to $1.2 million, or 0.16% of average loans, in 2021. Of the $2.2 million in net charge-offs in 2022, $1.9 million was associated ALC’s loans, while the remaining $0.3 million was associated with the Bank’s portfolio. Of the $1.2 million in net charge-offs in 2021, $0.8 million was associated with ALC’s loans, while $0.4 million was associated with the Bank’s portfolio.
Management believes that the allowance for loan and lease losses as of December 31, 2022, which was calculated under an incurred loss model, was sufficient to absorb losses in the Company’s loan portfolio based on circumstances existing as of the balance sheet date. Furthermore, we believe that continued runoff of ALC’s direct consumer loans will continue to lead to reduced provisions over time. However, uncertainty continues to exist related to various economic factors, including, but not limited to, the ultimate impact on the Company’s borrowers of inflation, elevated interest levels, supply chain disruption, geopolitical activities, and any future impacts of the COVID-19 pandemic. Accordingly, management will continue to monitor circumstances associated with the loan portfolio. Should economic circumstances deteriorate, additional loan loss provisioning may be required.
Due to its classification as a smaller reporting company by the Securities and Exchange Commission, as of December 31, 2022, the Company was not required to adopt, and had not adopted, the Current Expected Credit Loss (CECL) model to account for credit losses. Effective January 1, 2023, the Company adopted the CECL accounting model, and recorded a transition adjustment that increased loan loss reserves by approximately $2.4 million. Of this amount, approximately $0.7 million, or 29%, was associated with ALC’s run-off loan portfolio, while approximately $1.7 million, or 71%, was associated with the Bank’s loan portfolio. In accordance with CECL transition accounting guidance, the transition adjustment was recorded directly to retained earnings during the first quarter of 2023 and did not impact current period earnings.
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:
Year Ended December 31,
$ Change
% Change
(Dollars in Thousands)
Service charges and other fees on deposit accounts
$
1,154
$
1,069
$
8.0
%
Bank-owned life insurance
2.7
%
Net (loss) gain on sale and prepayment of investment securities
(83
)
(105
)
NM
Lease income
4.1
%
Other income
1,065
1,161
(96
)
(8.3
)%
Total non-interest income
$
3,451
$
3,521
$
(70
)
(2.0
)%
NM: Not Meaningful
The Company’s non-interest income decreased in 2022 compared to 2021 primarily due to nonrecurring net losses on sales of investment securities totaling $83 thousand in 2022, compared to a gain of $22 thousand in 2021. During the fourth quarter of 2022, investment securities with principal balances totaling $8.6 million were sold at a net loss of $83 thousand. The intent of these sales was to effectively prune the investment portfolio and allow for reinvestment in higher earning assets in future periods. In addition to the impact of investment security sales, other income decreased in 2022 compared to 2021 due primarily to reductions in credit insurance revenues associated with FUSB Reinsurance which ceased writing new insurance contracts in 2022.
Certain of the Company’s non-interest revenue sources, including gains or losses on the sale of investments and other assets are largely dependent on facts and circumstances at a given point in time, and accordingly, revenues from these sources cannot be forecasted with any certainty. Non-interest revenues earned from service charges and other fees on deposit accounts have generally declined during recent years based on changes in depositor preferences for liquidity, particularly during the COVID-19 pandemic. Management will continue to evaluate opportunities to add new non-interest revenue streams or to grow existing streams; however, significant growth in non-interest income is not expected in the near term.
Non-Interest Expense
Non-interest expense represents expenses incurred from sources other than interest-bearing liabilities. The following table presents the major components of non-interest expense for the periods indicated:
Year Ended December 31,
$ Change
% Change
(Dollars in Thousands)
Salaries and employee benefits
$
16,418
$
19,157
$
(2,739
)
(14.3
)%
Net occupancy and equipment expense
3,281
4,388
(1,107
)
(25.2
)%
Computer services
1,639
1,832
(193
)
(10.5
)%
Insurance expense and assessments
1,250
1,361
(111
)
(8.2
)%
Fees for professional services
1,060
1,275
(215
)
(16.9
)%
Postage, stationery and supplies
(188
)
(23.4
)%
Telephone/data communication
(221
)
(24.5
)%
Other real estate/foreclosure expense, net
(331
)
(371
)
(10.8
)%
Other
3,459
3,409
1.5
%
Total non-interest expense
$
28,072
$
32,756
$
(4,684
)
(14.3
)%
Non-interest expense was reduced in 2022, compared to 2021, due primarily to the strategic initiatives executed by the Company beginning in the third quarter of 2021. The initiatives, which included the ALC cessation of business strategy, Bank branch closures and other operational efficiency efforts at the Bank, led to significant reductions in the Company’s personnel levels, reduced levels of occupancy and equipment expense, and decreases in various other expense categories.
Salaries and employee benefits expense reductions were achieved through the reduction of employee levels, the most notable of which was realized during the third quarter of 2021 following implementation of the ALC business cessation strategy. Further reductions of employee levels were achieved through the Company’s ongoing efficiency efforts. As of December 31, 2022, the Company employed 155 full-time equivalent employees (including 149 at the Bank and six at ALC), compared to 175 as of December 31, 2021, and 259 as of June 30, 2021 (the quarter-end date immediately prior to execution of the strategic initiatives).
The reduction in occupancy and equipment expense resulted primarily from the termination of the majority of ALC’s lease contracts following cessation of business at its branches, as well as the closure of four bank branches in the third quarter of 2021. As of December 31, 2022, all previously existing ALC leases had been terminated except for the ongoing lease of ALC’s headquarters office that continues to house the remaining ALC staff. During the year ended December 31, 2022, non-interest expense was also reduced by one-time net gains on the sale of OREO that totaled $0.4 million. The gains were primarily generated by the sale of the Bank’s closed branch assets.
Due to the strategic initiatives, additional expense reductions were also realized related to telephone/data communications, computer services, professional services, postage and supplies and various other expense categories, comparing the year ended December 31, 2022 to the year ended December 31, 2021.
Both years presented included certain one-time restructuring charges associated with the ALC cessation of business strategy. These charges included expenses associated with employee severances, termination of leases and technology contracts, fixed asset valuation adjustments, and miscellaneous other expenses. The restructuring charges totaled $0.2 million during the year ended December 31, 2022, compared to $0.9 million during the year ended December 31, 2021. As of December 31, 2022, the majority of estimated restructuring charges associated with the ALC strategy have been incurred. The strategic initiatives are expected to continue to reduce the Company’s expense structure in the near term, although the reductions may be offset by inflationary pressures affecting the Company’s ongoing operations. One of management’s primary focuses continues to be business simplification and process improvements in an effort to continue improving the Company’s overall efficiency levels.
Provision for Income Taxes
The provision for income taxes was $2.1 million and $1.3 million for the years ended December 31, 2022 and 2021, respectively. The Company’s effective tax rate was 23.8% and 22.3%, respectively, for the same periods.
The effective tax rate is impacted by recurring items, such as changes in tax-exempt interest income earned from bank-qualified municipal bonds and loans and the cash surrender value of bank-owned life insurance. Management makes decisions about whether to invest in tax-exempt instruments on a case-by-case basis after considering a number of factors, including investment return, credit quality and the consistency of such investments with the Company’s overall strategy. The Company’s effective tax rate is expected to fluctuate commensurate with the level of these investments as compared to total pre-tax income.
BALANCE SHEET ANALYSIS
Investment Securities
The investment securities portfolio is used by management to provide liquidity, to generate interest income and for use as collateral for public deposits and wholesale funding. Risk and return can be adjusted by altering the duration, composition and/or balance of the portfolio. The expected average life of securities in the investment portfolio was 3.5 years and 3.7 years as of December 31, 2022 and 2021, respectively.
Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income or loss, a separate component of shareholders’ equity. As of December 31, 2022, available-for-sale securities totaled $130.8 million, or 98.6% of the total investment portfolio, compared to $130.9 million, or 97.4% of the total investment portfolio, as of December 31, 2021. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, corporate bonds 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 December 31, 2022, held-to-maturity securities totaled $1.9 million, or 1.4% of the total investment portfolio, compared to $3.4 million, or 2.6% of the total investment portfolio, as of December 31, 2021. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies and obligations of states and political subdivisions.
Investment Securities Maturity Schedule
The following tables summarize the carrying values and weighted average yield of the available-for-sale and held-to-maturity securities portfolios as of December 31, 2022, according to contractual maturity. Available-for-sale securities are stated at fair value. Held-to-maturity securities are stated at amortized cost. The calculations of the weighted average yields for each maturity category are based upon yield weighted by the respective costs of the securities.
Available-for-Sale
Stated Maturity as of December 31, 2022
Within One
Year
After One But
Within Five
Years
After Five But
Within Ten
Years
After
Ten Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
(Dollars in Thousands)
Investment securities available-for-sale:
Mortgage-backed securities:
Residential
$
3.42
%
$
5,639
2.35
%
$
37,356
1.81
%
$
5,227
1.85
%
Commercial
7.17
%
2,510
1.81
%
3,211
1.92
%
5,967
4.81
%
Obligations of states and political subdivisions
3.25
%
1.09
%
-
-
1,060
1.09
%
Corporate notes
-
-
-
-
15,920
3.48
%
-
-
U.S. Treasury securities
-
-
48,497
1.58
%
4,384
1.44
%
-
-
Total
$
3.29
%
$
57,158
1.66
%
$
60,871
2.22
%
$
12,254
3.23
%
Total securities with stated maturity
$
130,795
1.91
%
Held-to-Maturity
Stated Maturity as of December 31, 2022
Within One
Year
After One But
Within Five
Years
After Five But
Within Ten
Years
After
Ten Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
(Dollars in Thousands)
Investment securities held-to-maturity:
Mortgage-backed securities:
Residential
$
-
-
$
-
-
$
2.29
%
$
-
-
Commercial
-
-
-
-
2.25
%
1.86
%
Obligations of states and political subdivisions
-
-
-
-
-
0.00
%
3.05
%
Total
$
-
-
$
-
-
$
1,607
2.26
%
$
2.26
%
Total securities with stated maturity
$
1,862
2.26
%
Condensed Portfolio Maturity Schedule
Maturity Summary as of December 31, 2022
Dollar
Amount
Portfolio
Percentage
(Dollars in Thousands)
Maturing in three months or less
$
0.4
%
Maturing after three months to one year
0.0
%
Maturing after one year to three years
35,129
26.5
%
Maturing after three years to five years
22,030
16.6
%
Maturing after five years to fifteen years
62,478
47.1
%
Maturing in more than fifteen years
12,508
9.4
%
Total
$
132,657
100.0
%
Loans and Allowance for Loan Losses
The tables below summarize loan balances by portfolio category at the end of each of the most recent five years as of December 31, 2022:
Year Ended December 31,
(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans
$
54,396
$
67,048
$
37,282
$
30,820
$
42,648
Secured by 1-4 family residential properties
88,426
72,727
88,856
104,537
110,756
Secured by multi-family residential properties
67,917
46,000
54,326
50,910
23,009
Secured by non-farm, non-residential properties
199,965
197,901
184,528
162,981
156,162
Commercial and industrial loans
73,561
73,947
81,735
90,957
85,779
Consumer loans:
Direct consumer
10,053
21,689
29,788
38,040
38,583
Branch retail
14,237
25,692
32,094
32,305
28,324
Indirect
266,567
205,940
141,514
45,503
40,609
Total loans
$
775,122
$
710,944
$
650,123
$
556,053
$
525,870
Less unearned interest, fees and deferred cost
1,249
2,594
4,279
5,048
5,948
Allowance for loan losses
9,422
8,320
7,470
5,762
5,055
Net loans
$
764,451
$
700,030
$
638,374
$
545,243
$
514,867
The tables below summarize changes in the allowance for loan and lease losses for each of the most recent five years as of December 31, 2022:
Year Ended December 31,
(Dollars in Thousands)
Balance at beginning of period
$
8,320
$
7,470
$
5,762
$
5,055
$
4,774
Charge-offs:
Real estate loans:
Construction, land development and other loan loans
-
(23
)
-
-
-
Secured by 1-4 family residential properties
(40
)
(12
)
(61
)
(101
)
(101
)
Secured by multi-family residential properties
-
-
-
-
-
Secured by non-farm, non-residential properties
-
-
-
-
-
Commercial and industrial loans
-
(6
)
-
-
(3
)
Consumer loans:
Direct consumer
(1,958
)
(1,230
)
(1,621
)
(2,000
)
(2,482
)
Branch retail
(633
)
(377
)
(374
)
(425
)
(415
)
Indirect
(382
)
(483
)
(152
)
(301
)
(116
)
Total charge-offs
(3,013
)
(2,131
)
(2,208
)
(2,827
)
(3,117
)
Recoveries
Net charge-offs
(2,206
)
(1,160
)
(1,237
)
(2,007
)
(2,341
)
Provision for loan and lease losses
3,308
2,010
2,945
2,714
2,622
Ending balance
$
9,422
$
8,320
$
7,470
$
5,762
$
5,055
Ending balance as a percentage of loans
1.22
%
1.17
%
1.16
%
1.05
%
0.97
%
Net charge-offs as a percentage of average loans
0.30
%
0.16
%
0.21
%
0.38
%
0.57
%
Nonperforming Assets
Nonperforming assets at the end of the five most recent years as of December 31, 2022 were as follows:
Year Ended December 31,
(Dollars in Thousands)
Non-accrual loans
$
1,651
$
2,008
$
3,086
$
3,723
$
2,759
Other real estate owned
2,149
1,078
1,505
Total
$
2,337
$
4,157
$
4,035
$
4,801
$
4,264
Nonperforming assets as a percentage of loans and other
real estate
0.30
%
0.59
%
0.62
%
0.87
%
0.82
%
Nonperforming assets as a percentage of total assets
0.24
%
0.43
%
0.45
%
0.61
%
0.54
%
Summarized below is information concerning income on those loans with deferred interest or principal payments resulting from deterioration in the financial condition of the borrower.
December 31,
(Dollars in Thousands)
Total loans accounted for on a non-accrual basis
$
1,651
$
2,008
Interest income that would have been recorded under original
terms
Interest income reported and recorded during the year
Allocation of Allowance for Loan and Lease Losses
While no portion of the allowance 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 the end of the five years indicated.
Allocation
Allowance
% Loans
in Each
Category
Allocation
Allowance
% Loans
in Each
Category
Allocation
Allowance
% Loans
in Each
Category
Allocation
Allowance
% Loans
in Each
Category
Allocation
Allowance
% Loans
in Each
Category
(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans
$
7.0
%
$
9.4
%
$
5.7
%
$
5.5
%
$
8.1
%
Secured by 1-4 family residential properties
11.4
%
10.2
%
13.7
%
18.8
%
21.1
%
Secured by multi-family residential properties
8.8
%
6.5
%
8.4
%
9.2
%
4.4
%
Secured by non-farm, non-residential properties
1,970
25.8
%
1,958
27.8
%
1,566
28.4
%
29.3
%
29.7
%
Commercial and industrial loans
9.5
%
10.4
%
1,008
12.5
%
1,377
16.4
%
1,138
16.3
%
Consumer loans:
Director consumer
1.3
%
1,004
3.1
%
1,202
4.6
%
1,625
6.8
%
1,799
7.3
%
Branch retail
1.8
%
3.6
%
4.9
%
5.8
%
5.4
%
Indirect
3,154
34.4
%
2,439
29.0
%
1,712
21.8
%
8.2
%
7.7
%
Total
$
9,422
100.0
%
$
8,320
100.0
%
$
7,470
100.0
%
$
5,762
100.0
%
$
5,055
100.0
%
Summary of Loan Loss Experience
The following table summarizes the Company’s loan loss experience for each of the two years indicated.
(Dollars in Thousands)
Balance of allowance for loan and lease losses at beginning
of period
$
8,320
$
7,470
Charge-offs:
Real estate loans:
Construction, land development and other land loans
-
(23
)
Secured by 1-4 family residential properties
(40
)
(12
)
Secured by multi-family residential properties
-
-
Secured by non-farm, non-residential properties
-
-
Commercial and industrial loans
-
(6
)
Consumer loans:
Direct consumer
(1,958
)
(1,230
)
Branch retail
(633
)
(377
)
Indirect
(382
)
(483
)
Total charge-offs
(3,013
)
(2,131
)
Recoveries:
Real estate loans:
Construction, land development and other land loans
Secured by 1-4 family residential properties
Secured by multi-family residential properties
-
-
Secured by non-farm, non-residential properties
Commercial and industrial loans
-
Consumer loans:
Direct consumer
Branch retail
Indirect
Total recoveries
Net charge-offs
(2,206
)
(1,160
)
Provision for loan and lease losses
3,308
2,010
Balance of allowance for loan and lease losses at end of period
$
9,422
$
8,320
Ratio of net charge-offs during period to average loans
outstanding
0.30
%
0.16
%
Deposits
Total deposits increased by 3.8% to $870.0 million as of December 31, 2022, from $838.1 million as of December 31, 2021. Core deposits, which exclude time deposits of $250 thousand or more, provide a relatively stable funding source that supports earning assets. Core deposits totaled $778.1 million, or 89.4% of total deposits, as of December 31, 2022, compared to $775.1 million, or 92.5% of total deposits, as of December 31, 2021.
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.
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:
Average
Amount
Rate
Average
Amount
Rate
(Dollars in Thousands)
Non-interest-bearing demand deposit accounts
$
182,032
-
$
172,187
-
Interest-bearing demand deposit accounts
246,124
0.26
%
236,084
0.23
%
Savings deposits
208,672
0.58
%
193,766
0.31
%
Time deposits
212,591
0.72
%
226,425
0.67
%
Total deposits
$
849,419
0.40
%
$
828,462
0.32
%
Total interest-bearing deposits
$
667,387
0.51
%
$
656,275
0.41
%
As of December 31, 2022 and 2021, uninsured demand and savings deposits (deposits in excess of $250 thousand, which is the maximum amount for federal deposit insurance) totaled $148.3 million and $156.9 million, respectively. Maturities of time deposits of greater than $250 thousand outstanding as of December 31, 2022 and 2021 are summarized as follows:
Maturities
December 31,
(Dollars in Thousands)
Three months or less
$
22,024
$
13,340
Over three through six months
1,976
6,794
Over six through twelve months
16,553
6,291
Over twelve months
52,244
36,576
Total
$
92,797
$
63,001
Maturities of time certificates of deposit of greater than $100 thousand and less than $250 thousand outstanding as of December 31, 2022 and 2021 are summarized as follows:
Maturities
December 31,
(Dollars in Thousands)
Three months or less
$
7,971
$
13,951
Over three through six months
5,968
9,993
Over six through twelve months
8,834
17,240
Over twelve months
45,156
13,944
Total
$
67,929
$
55,128
Other Interest-Bearing Liabilities
Other interest-bearing liabilities consist of federal funds purchased, securities sold under agreements to repurchase, FHLB advances and subordinated debt. These liabilities continue to be utilized by the Company as alternative sources of funds. As of December 31, 2022, these liabilities represented 4.2% of interest-bearing liabilities, compared to 3.0% as of December 31, 2021.
Short-Term
Borrowings
(Maturity
Less Than
One Year)
Long-Term
Borrowings
(Maturity
One Year
or Greater)
(Dollars in Thousands)
Other interest-bearing liabilities outstanding at year-end:
$
20,038
$
10,726
$
10,046
$
-
Weighted average interest rate at year-end:
4.40
%
4.20
%
0.18
%
4.20
%
Maximum amount outstanding at any month end:
$
48,095
$
10,726
$
10,046
$
10,653
Average amount outstanding during the year:
$
19,293
$
10,689
$
10,028
$
2,682
Weighted average interest rate during the year:
2.44
%
4.20
%
0.17
%
4.20
%
Shareholders’ Equity
The Company has historically placed significant emphasis on maintaining its strong capital base and continues to do so. As of December 31, 2022, shareholders’ equity totaled $85.1 million, or 8.6% of total assets, compared to $90.1 million, or 9.4% of total assets, as of December 31, 2021. The decrease in shareholders’ equity during 2022 was due primarily to an increase in accumulated other comprehensive loss associated with unrealized losses on available-for-sale investment securities, as well as the repurchase of common shares by the Company in accordance with its established share repurchase program.
The increase in unrealized losses within the securities portfolio resulted from significant increases in interest rates during 2022 which reduced the fair value of securities. The reductions in security valuations were partially offset by increases in the fair value of cash flow hedges during the year. Changes in both the fair value of the available-for-sales investment securities portfolio and changes in the fair value of cash flow hedges are recorded (net of tax) in accumulated other comprehensive income (loss). The total impact of these fair value adjustments was to increase the Company’s accumulated net loss by $7.0 million (net of tax), comparing December 31, 2022 to December 31, 2021.
During the year ended December 31, 2022 the Company completed repurchases of 412,400 shares of its common stock at a weighted average price of $10.87 per share, or $4.5 million in aggregate. The repurchased shares were allocated to treasury stock under the Company’s existing share repurchase program that was amended by the Board of Directors in each of December 2019 and April 2021 to allow the repurchase of additional shares. The Board has periodically extended the expiration date of the share repurchase program, most recently to December 31, 2023. Share repurchases under the program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate, subject to applicable regulatory requirements. The repurchase program does not obligate the Company to acquire any particular number of shares and may be suspended at any time at the Company’s discretion. As of December 31, 2022, 596,813 shares remained available for repurchase under the program.
The reductions to shareholders’ equity as a result of changes in accumulated other comprehensive loss and share repurchases were partially offset by the Company’s net income for the year ended December 31, 2022, less dividends paid to shareholders. Commensurate with the growth in net income in 2022, the Company increased its quarterly cash dividend in the fourth quarter of 2022 by $0.02 per share. For the year ended December 31, 2022, the Company declared total dividends of $0.14 per share, compared to $0.12 per share for the year ended December 31, 2021.
Shareholders’ equity is also impacted by share-based awards granted to the Company’s employees or non-employee directors. Share-based awards granted to date are governed under the Company’s 2013 Incentive Plan. The Company recognizes the cost of services received in exchange for share-based awards based on the grant date fair value of the award, with compensation expense recognized over the awards vesting period. In addition, non-employee directors may elect to defer payment of all or any portion of their director fees under the Company’s Non-Employee 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 or shares of the Company’s common stock. All deferred fees, whether in the form of cash or shares of common stock, are reflected as compensation expense in the period in which service is rendered by the non-employee director. As of December 31, 2022 and 2021, a total of 114,190 and 117,825 shares of stock, respectively, were deferred in connection with the Deferral Plan. The Company classifies all share-based awards and deferred directors’ fees allocated to be paid in shares of stock as additional paid-in capital. The Company may use issued shares or shares of treasury stock to satisfy these obligations when due.
Liquidity and Capital Resources
The asset portion of the balance sheet provides liquidity primarily from 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 $212.5 million as of December 31, 2022 and $102.4 million as of December 31, 2021. Investment securities forecasted to mature or reprice in one year or less were estimated to be $7.1 million and $9.5 million of the investment portfolio as of December 31, 2022 and 2021, respectively.
Although some securities in the investment portfolio have legal final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. As of December 31, 2022, the investment securities portfolio had an estimated average life of 3.5 years. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings.
The liability portion of the balance sheet provides liquidity through interest-bearing and non-interest-bearing deposit accounts, which represent the Company’s primary sources of funds. In addition, federal funds purchased, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of available liquidity. Liquidity management involves the continual monitoring of the sources and uses of funds to maintain an acceptable cash position. Long-term liquidity management focuses on considerations related to the total balance sheet structure. The Bank manages the pricing of its deposits to maintain a desired deposit balance.
As of December 31, 2022 and 2021, the Company had $20.0 million and $10.0 million, respectively, in outstanding short-term borrowings under FHLB advances. In addition, on October 1, 2021, the Company completed a private placement of $11.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that will mature on October 1, 2031. Net of unamortized debt issuance costs, the subordinated notes were recorded as long-term borrowings totaling $10.7 million as of both December 31, 2022 and 2021.
The Company had up to $246.8 million and $237.0 million in remaining unused credit from the FHLB (subject to available collateral) as of December 31, 2022 and 2021, respectively. In addition, the Company had $45.0 million and $46.0 million in unused established federal funds lines as of December 31, 2022 and 2021, respectively. The Company believes that these potential funding sources will continue to be available.
Management believes that the Company has adequate sources of liquidity to cover its contractual obligations and commitments over the next twelve months.
Regulatory Capital
The Bank is subject to the revised capital requirements as described in the section captioned “Supervision and Regulation - Capital Adequacy” included in Part I, Item I of this report. Under these requirements, the Bank is subject to minimum risk-based capital and leverage capital requirements, which are administered by the federal banking regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Failure to meet minimum capital requirements can result in mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of Bancshares and the Bank, and could impact Bancshares’ ability to pay dividends. As of both December 31, 2022 and 2021, the Bank exceeded all applicable minimum capital standards, and met applicable regulatory guidelines to be considered well-capitalized. No significant conditions or events have occurred since December 31, 2022 that management believes would affect the Bank’s classification as well-capitalized for regulatory purposes.
Refer to the section captioned “Regulatory Capital” included in Note 15, “Shareholders’ Equity,” in the Notes to the consolidated financial statements for an illustration of the Bank’s actual regulatory capital amounts and ratios under regulatory capital standards in effect as of December 31, 2022 and December 31, 2021. Additionally, refer to the section captioned “Dividend Restrictions” included in Note 15 for a discussion regarding restrictions that could materially influence the Bank’s, and therefore Bancshares’, ability to pay dividends.
Asset/Liability Management
Market risk reflects the potential risk of loss arising from adverse changes in interest rates and market prices. The Company has risk management policies and procedures in place to monitor and limit exposure to market risk. The Company’s primary market risk is interest rate risk created by core banking activities. Interest rate risk is the potential variability of the Company’s income that results from changes in various market interest rates. The Bank’s Asset/Liability Committee routinely reassesses the Company’s strategies to manage interest rate risk in accordance with policies established by the Company’s Board of Directors. A key objective of the asset/liability management program is to quantify, monitor and manage interest rate risk and to assist management in maintaining stability in net interest margin under varying interest rate environments.
As part of interest rate risk management, the Company may use derivative instruments in accordance with policies established by the Board of Directors. Derivative instruments may include the use of interest rate swaps, caps and floors. In an effort to dampen the Company’s risk exposure to downward interest rates, during 2022 and subsequent to December 31, 2022, the Company terminated certain pay fixed interest rate swaps. During the second quarter of 2022, the Company terminated one interest rate swap and recorded a deferred gain of $0.3 million. The deferred gain is being accreted to net interest income over the remaining life of the original term of the swap. As of December 31, 2022, the Bank held four forward interest rate swap contracts. The interest rate swap contracts, which were designated as either cash flow hedges or fair value hedges, were intended to mitigate risk associated with rising interest rates by converting floating interest rate payments to a fixed rate or by converting a pool of fixed rate loans to a variable rate. Subsequent to December 31, 2022, the Company terminated all four interest rate swap contracts that were in place as of December 31, 2022 and recorded deferred gains totaling $2.2 million. The deferred gains will be accreted to net interest income over the remaining life of the original term of each swap. See Note 17, “Derivative Financial Instruments,” in the consolidated financial statements for additional information related to these derivative instruments.
Contractual Obligations
The Company has contractual obligations to make future payments under debt and lease agreements. Long-term debt and operating lease obligations are reflected on the consolidated balance sheets. The Company has not entered into any unconditional purchase obligations or other long-term obligations, other than as included below. These types of obligations are further discussed in Note 10, “Borrowings,” and Note 16, “Leases,” in the Notes to consolidated financial statements.
Many of the Bank’s lending relationships, including those with commercial and consumer customers, contain both funded and unfunded elements. The unfunded component of these commitments is not recorded in the consolidated balance sheets. These commitments are further discussed in Note 20, “Guarantees, Commitments and Contingencies,” in the consolidated financial statements.
The following table summarizes the Company’s contractual obligations as of December 31, 2022:
Payment Due by Period
Contractual Obligations
Total
Less than
One Year
One to
Three Years
Three to
Five Years
More than
Five Years
(Dollars in Thousands)
Time deposits
$
252,712
$
115,494
$
119,680
$
17,439
$
Commitments to extend credit
186,169
186,169
-
-
-
Subordinated notes (1)
12,540
11,000
FHLB advances
20,000
20,000
-
-
-
Operating leases
2,146
Standby letters of credit
-
-
-
Total
$
474,123
$
323,036
$
121,227
$
18,523
$
11,337
(1)Contractual obligations for the subordinated notes include the contractual fixed interest payments during the first five years of the note, as well as the final principal payment at the end of the 10-year term of the note. The note is callable by the Company after the first five years. If not called, the interest rate becomes variable. Since interest payments under a variable rate cannot be forecasted with certainty, contractual interest during the variable period is not included in the table above.
Off-Balance Sheet Obligations
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources other than as described in Note 16 “Leases,” Note 17 “Derivative Financial Instruments” and Note 20 “Guarantees, Commitments and Contingencies” in the consolidated financial statements.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market/Interest Rate Risk Management
The primary purpose of managing interest rate risk is to invest capital effectively and preserve the value created by our core banking business. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments, subject to liquidity and interest rate risk guidelines. Effective interest rate sensitivity management ensures that both assets and liabilities respond to changes in interest rates within an acceptable 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 Company’s Asset/Liability Committee to measure interest rate exposure. Using a wide range of scenarios, management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. In these simulations, assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of the Company’s balance sheet resulting from both strategic plans and customer behavior. Simulation models also incorporate management’s assumptions regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates paid on deposits and charged on loans.
Assessing Short-Term Interest Rate Risk - Net Interest Margin Simulation
On a periodic basis, management simulates how changes in short- and long-term interest rates will impact future profitability, as reflected by changes in the Bank’s net interest margin and net interest income. The tables below depict how, as of December 31, 2022, pre-tax net interest margin and net interest income are forecasted to change over timeframes of six months, one year, two years and five years under the 8 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%
+2%
+3%
(12
)
(10
)
(4
)
+4%
(23
)
(21
)
(13
)
-1%
(10
)
(11
)
(13
)
(20
)
-2%
(24
)
(27
)
(33
)
(48
)
-3%
(42
)
(47
)
(55
)
(75
)
-4%
(58
)
(65
)
(76
)
(101
)
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%
$
$
$
1,634
$
7,731
+2%
1,434
11,718
+3%
(598
)
(1,030
)
(758
)
10,445
+4%
(1,160
)
(2,114
)
(2,525
)
10,497
-1%
(512
)
(1,125
)
(2,691
)
(10,266
)
-2%
(1,220
)
(2,747
)
(6,633
)
(24,171
)
-3%
(2,094
)
(4,670
)
(11,008
)
(37,846
)
-4%
(2,920
)
(6,530
)
(15,319
)
(50,614
)

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment and those criteria, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2022.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting is not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us, as a non-accelerated filer, to provide only management’s report on internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
First US Bancshares, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First US Bancshares, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan and Lease Losses
As described in Notes 2 and 5 to the consolidated financial statements, the Company’s allowance for loan and lease losses (“allowance”) reflects the Company’s estimation of probable incurred losses in its loan portfolio. The allowance was $9,422,000 on loans of $775 million as of December 31, 2022 and consisted of two components: the allowance for loans individually evaluated for impairment (“specific reserve”), and the allowance for loans collectively evaluated for impairment (“general reserve”).
The general reserve is based on the Company’s recent loss experience, adjusted for qualitative factors. The qualitative factors include consideration of the following: the nature of the loan portfolio, credit concentrations, trends in historical loss experience, current economic conditions and trends, current asset quality trends, and other risks inherent in the portfolio. As disclosed by management, the estimation of the allowance is inherently subjective and involves complex judgment. The use of different assumptions in developing and applying the qualitative factors could result in a materially different amount for the allowance.
We have determined that the allowance is a critical audit matter. The principal considerations for our determination of the allowance as a critical audit matter is the subjectivity of the assumptions that management utilized in developing and applying the qualitative factors in the allowance model. Therefore, especially subjective auditor judgment was involved in selecting and conducting audit procedures to evaluate management’s determination and application of the qualitative factors.
The primary procedures we performed to address this critical audit matter included substantively testing management’s process, including evaluating the judgments and assumptions used, for developing and applying the qualitative factors, which included:
•Evaluation of the completeness and accuracy of data inputs used as a basis for the qualitative factors.
•Evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of the qualitative factors and the resulting allocation to the allowance.
•Evaluating the qualitative factors year over year for directional consistency, testing for reasonableness, and obtaining evidence for significant changes.
•Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.
/s/ Carr, Riggs & Ingram, LLC
We have served as the Company’s auditor since 2008.
Atlanta, Georgia
March 10, 2023
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
December 31,
December 31,
ASSETS
Cash and due from banks
$
11,844
$
10,843
Interest-bearing deposits in banks
18,308
50,401
Total cash and cash equivalents
30,152
61,244
Federal funds sold
1,768
Investment securities available-for-sale, at fair value
130,795
130,883
Investment securities held-to-maturity, at amortized cost
1,862
3,436
Federal Home Loan Bank stock, at cost
1,359
Loans, net of allowance for loan and lease losses of $9,422 and $8,320, respectively
764,451
700,030
Premises and equipment, net of accumulated depreciation of $21,623 and $21,916,
respectively
24,439
25,123
Cash surrender value of bank-owned life insurance
16,399
16,141
Accrued interest receivable
3,011
2,556
Goodwill and core deposit intangible, net
7,801
8,069
Other real estate owned
2,149
Other assets
11,944
7,719
Total assets
$
994,667
$
958,302
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing
$
169,822
$
174,501
Interest-bearing
700,203
663,625
Total deposits
870,025
838,126
Accrued interest expense
Other liabilities
8,136
9,189
Short-term borrowings
20,038
10,046
Long-term borrowings
10,726
10,653
Total liabilities
909,532
868,238
Shareholders’ equity:
Common stock, par value $0.01 per share, 10,000,000 shares authorized; 7,680,856 and
7,634,918 shares issued, respectively; 5,812,258 and 6,172,378 shares
outstanding, respectively
Additional paid-in capital
14,510
14,163
Accumulated other comprehensive loss, net of tax
(7,241
)
(276
)
Retained earnings
104,460
98,428
Less treasury stock: 1,868,598 and 1,462,540 shares at cost, respectively
(26,669
)
(22,326
)
Total shareholders’ equity
85,135
90,064
Total liabilities and shareholders’ equity
$
994,667
$
958,302
The accompanying notes are an integral part of these consolidated statements.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
Year Ended December 31,
Interest income:
Interest and fees on loans
$
38,015
$
38,229
Interest on investment securities
3,182
1,692
Total interest income
41,197
39,921
Interest expense:
Interest on deposits
3,382
2,669
Interest on borrowings
Total interest expense
4,256
2,950
Net interest income
36,941
36,971
Provision for loan and lease losses
3,308
2,010
Net interest income after provision for loan and lease losses
33,633
34,961
Non-interest income:
Service and other charges on deposit accounts
1,154
1,069
Net (loss) gain on sales and prepayments of investment securities
(83
)
Lease income
Other income, net
1,516
1,600
Total non-interest income
3,451
3,521
Non-interest expense:
Salaries and employee benefits
16,418
19,157
Net occupancy and equipment
3,281
4,388
Computer services
1,639
1,832
Fees for professional services
1,060
1,275
Other expense
5,674
6,104
Total non-interest expense
28,072
32,756
Income before income taxes
9,012
5,726
Provision for income taxes
2,148
1,275
Net income
$
6,864
$
4,451
Basic net income per share
$
1.13
$
0.70
Diluted net income per share
$
1.06
$
0.66
Dividends per share
$
0.14
$
0.12
The accompanying notes are an integral part of these consolidated statements.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in Thousands)
Year Ended December 31,
Net income
$
6,864
$
4,451
Other comprehensive loss:
Unrealized holding losses on securities available-for-sale arising during the
year, net of tax benefit of $2,844 and $369, respectively
(8,534
)
(1,106
)
Reclassification adjustment for net losses (gains) on securities available-for-sale realized in net income, net of tax expense (benefit) of $21 and $(6), respectively
(16
)
Unrealized holding gains on effective cash flow hedge derivatives arising
during the year, net of tax expense of $480 and $298, respectively
1,437
Reclassification adjustment for net gains on cash flow hedge derivatives realized in net
income, net of tax expense of $25 and $0, respectively
-
Other comprehensive loss
(6,965
)
(224
)
Total comprehensive (loss) income
$
(101
)
$
4,227
The accompanying notes are an integral part of these consolidated statements.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands, Except Share and Per Share Data)
Common
Stock
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Treasury
Stock, at
Cost
Total
Shareholders’
Equity
Balance, December 31, 2020
6,176,556
$
$
13,786
$
(52
)
$
94,722
$
(21,853
)
86,678
Net income
-
-
-
-
4,451
-
4,451
Net change in fair value of
securities available-for-sale,
net of tax
-
-
-
(1,122
)
-
-
(1,122
)
Net change in fair value of
derivative instruments,
net of tax
-
-
-
-
-
Dividends declared: $.12 per share
-
-
-
-
(745
)
-
(745
)
Impact of stock-based
compensation plans, net
37,722
-
-
-
(7
)
Reissuance of treasury stock as
compensation
3,848
-
(59
)
-
-
-
Treasury stock repurchases
(45,748
)
-
-
-
-
(525
)
(525
)
Balance, December 31, 2021
6,172,378
$
$
14,163
$
(276
)
$
98,428
$
(22,326
)
$
90,064
Net income
-
-
-
-
6,864
-
6,864
Net change in fair value of
securities available-for-sale,
net of tax
-
-
-
(8,472
)
-
-
(8,472
)
Net change in fair value of
derivative instruments,
net of tax
-
-
-
1,507
-
-
1,507
Dividends declared: $.14 per share
-
-
-
-
(832
)
-
(832
)
Impact of stock-based
compensation plans, net
43,096
-
-
-
-
Reissuance of treasury stock as
compensation
9,184
-
(138
)
-
-
-
Treasury stock repurchases
(412,400
)
-
-
-
-
(4,481
)
(4,481
)
Balance, December 31, 2022
5,812,258
$
$
14,510
$
(7,241
)
$
104,460
$
(26,669
)
$
85,135
The accompanying notes are an integral part of these consolidated statements.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
Cash flows from operating activities:
Net income
$
6,864
$
4,451
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
1,614
1,692
Provision for loan and lease losses
3,308
2,010
Deferred income tax benefit
(367
)
(401
)
Net loss (gain) on sale and prepayment of investment securities
(22
)
Cash received in settlement of derivatives contracts
-
Stock-based compensation expense
Net amortization of securities
Amortization of intangible assets
Net gain on premises and equipment and other real estate
(207
)
(53
)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable
(455
)
Decrease in other assets
1,137
Increase (decrease) in accrued interest expense
(68
)
Decrease in other liabilities
(299
)
(287
)
Net cash provided by operating activities
12,529
9,825
Cash flows from investing activities:
Net (increase) decrease in federal funds sold
(1,686
)
Purchases of investment securities, available-for-sale
(39,255
)
(86,642
)
Proceeds from sales of investment securities, available-for-sale
8,531
-
Proceeds from maturities and prepayments of investment
securities, available-for-sale
19,250
38,975
Proceeds from maturities and prepayments of investment securities,
held-to-maturity
1,563
2,957
Net (increase) decrease in Federal Home Loan Bank stock
(489
)
Proceeds from the sale of premises and equipment and other real estate
3,084
2,061
Net increase in loans
(69,935
)
(65,112
)
Purchases of premises and equipment
(1,262
)
(822
)
Net cash used in investing activities
(80,199
)
(108,315
)
Cash flows from financing activities:
Net increase in customer deposits
31,899
55,914
Net increase in short-term borrowings
9,992
Net proceeds from long-term borrowings
-
10,653
Net share-based compensation transactions
-
(7
)
Treasury stock repurchases
(4,481
)
(525
)
Dividends paid
(832
)
(745
)
Net cash provided by financing activities
36,578
65,319
Net decrease in cash and cash equivalents
(31,092
)
(33,171
)
Cash and cash equivalents, beginning of period
61,244
94,415
Cash and cash equivalents, end of period
$
30,152
$
61,244
The accompanying notes are an integral part of these consolidated statements.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 AND 2021
1.DESCRIPTION OF BUSINESS
First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its subsidiaries, the “Company”), is a bank holding company formed in 1983 registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancshares operates one banking subsidiary, First US Bank, an Alabama banking corporation (the “Bank”). Prior to its name change on October 11, 2016, Bancshares was known as United Security Bancshares, Inc. Bancshares and the Bank are headquartered in Birmingham, Alabama.
The Bank conducts a general commercial banking business and offers banking services such as demand, savings, individual retirement account and time deposits, personal and commercial loans, safe deposit box services and remote deposit capture. The Bank operates and serves its customers through 15 full-service banking offices located in Birmingham, Butler, Calera, Centreville, Gilbertown, Grove Hill, Harpersville, Jackson, Thomasville, Tuscaloosa and Woodstock, Alabama; Knoxville and Powell, Tennessee; and Rose Hill, Virginia; as well as loan production offices in Mobile, Alabama and the Chattanooga, Tennessee area. The Bank provides a wide range of commercial banking services to small- and medium-sized businesses, property managers, business executives, professionals and other individuals. The Bank also performs indirect lending through third-party retailers and currently conducts this lending in 12 states, including Alabama, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. During the third quarter of 2021, the Company closed four banking offices located in Bucksville, Columbiana and south Tuscaloosa, Alabama, as well as Ewing, Virginia.
The Bank has two wholly owned subsidiaries: Acceptance Loan Company, Inc., an Alabama corporation (“ALC”), and FUSB Reinsurance, Inc., an Arizona corporation (“FUSB Reinsurance”). As used herein, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Bancshares, as well as the Bank, ALC, and FUSB Reinsurance, collectively.
The Bank owns all of the stock of ALC. ALC is a finance company headquartered in Mobile, Alabama. During the third quarter of 2021, ALC ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. ALC continues to service its remaining portfolio of loans from its headquarters in Mobile, Alabama.
FUSB Reinsurance was designed to reinsure or “underwrite” credit life and credit accident and health insurance policies sold to the Bank’s and ALC’s consumer loan customers. FUSB Reinsurance was responsible for the first level of risk on these policies up to a specified maximum amount, while the primary third-party insurer retained the remaining risk. While FUSB Reinsurance underwrote insurance contracts for both the Bank and ALC, in recent years, the majority of contracts were associated with ALC’s loans. Due to reduced contract volume, particularly following the cessation of business of ALC, during 2022, management of FUSB Reinsurance began procedures to terminate the entity’s activities. During 2022, FUSB Reinsurance ceased writing new insurance contracts, and reached an agreement with a third-party insurance provider to indemnify FUSB Reinsurance for all remaining liabilities associated with previously underwritten insurance policies. As of December 31, 2022, the remaining assets and liabilities of FUSB Reinsurance were transferred to the Bank, and it is anticipated that FUSB Reinsurance will be legally dissolved during 2023.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Bancshares, the Bank and its wholly-owned subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated. The Company consolidates an entity if the Company has a controlling financial interest in the entity.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates
The accounting principles and reporting policies of the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with general practices within the financial services industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets, and revenues and expenses for the period included in the consolidated statements of operations and of cash flows. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes in the near term relate to the accounting for the allowance for loan and lease losses, the right-of-use asset and lease liability, the value of other real estate owned (“OREO”) and certain collateral-dependent loans, consideration related to goodwill impairment testing and deferred tax asset valuation. In connection with the determination of the allowance for loan losses and OREO, management generally obtains independent appraisals for significant properties, evaluates the overall portfolio characteristics and delinquencies and monitors economic conditions.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, instruments with an original maturity of less than 90 days from issuance and amounts due from banks.
Supplemental disclosures of cash flow information and non-cash transactions related to cash flows for the years ended December 31, 2022 and 2021 are as follows:
(Dollars in Thousands)
Cash paid during the year for:
Interest
$
3,873
$
3,018
Income taxes
2,855
1,375
Non-cash transactions:
Assets acquired in settlement of loans
Transfers of closed branch assets to OREO
1,978
Reissuance of treasury stock as compensation
Revenue Recognition
The Company records revenue when control of the promised products or services is transferred to the customer in an amount that reflects the consideration that the Company expects to be entitled to receive in exchange for those products and services.
Interest Income
The majority of the Company’s revenue is generated through interest earned on financial instruments, including loans and investment securities. This revenue is recognized on an accrual basis and calculated through the use of non-discretionary formulas based on written contracts including loan agreements or securities contracts. Loan origination fees are accreted into interest income over the term of the loan.
Service Charges on Deposit Accounts
Service charges on deposit accounts include non-sufficient fund fees, overdraft fees and other service charges. When a depositor presents an item for payment in excess of available funds, non-sufficient funds fees are earned when an item is returned unpaid, and overdraft fees are earned when the Company provides the necessary funds to complete the transaction. The Company generates other service charges by providing depositors with proper safeguard and remittance of funds, as well as by providing optional services such as check imaging or treasury management. Charges for proper safeguard and remittance of funds are recognized monthly as the deposit customer maintains funds in the account, while revenue for optional services are recognized when the customer completes the transaction.
Gains or Losses on the Sale of Investment Securities
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Gains or losses on the sale of investment securities are recognized as the sale transaction occurs with the cost of securities sold based on the specific identification method.
Lease Income
The Bank leases certain office facilities to third parties and classifies the leases as operating leases. Lease income is recognized on a monthly basis based on the contractual terms of the lease agreement.
Bank-owned Life Insurance
Bank-owned life insurance income represents income earned from the appreciation of the cash surrender value of insurance contracts held and the proceeds of insurance benefits. The Company recognizes revenue each period in the amount of the appreciation of the cash surrender value of the contracts. Revenue recognized from the proceeds of insurance benefits is recognized at the time the claim is confirmed.
ATM Fee Income
Fee income is generated by allowing the Bank’s debit cardholders to withdraw funds from the ATM’s of other financial institutions and by allowing non-customers to withdraw funds from the Bank’s ATMs. The Bank satisfies performance obligations for each transaction when the withdrawal is processed. The Bank does not direct the activities of the related processing network’s service and recognizes revenue on a net basis as the agent in each transaction.
Other Miscellaneous Income
Other miscellaneous income includes mortgage fees, credit insurance income, auto club revenue, wire transfer fees, safe deposit box fee income, check fees and other miscellaneous sources of income. The Company recognizes revenue associated with these sources of income in accordance with the satisfaction of the performance obligation based on the timing of the occurrence of a transaction or when service is provided.
Reinsurance Activities
Before FUSB Reinsurance ceased writing new insurance contracts in 2022, the Company assumed insurance risk related to credit life and credit accident and health insurance written by a non-affiliated insurance company for its customers that choose such coverage through a quota share reinsurance agreement. Assumed premiums on credit life insurance were deferred and earned over the period of insurance coverage using either a pro rata method or the effective yield method, depending on whether the amount of insurance coverage generally remains level or declines. Assumed premiums for accident and health policies were earned on an average of the pro rata and the effective yield methods.
Investment Securities
The investment portfolio consists of debt securities, including U.S. Treasury securities, obligations of U.S. government agencies, municipal bonds, residential and commercial mortgage-backed securities and corporate notes. Securities may be held in one of three portfolios: trading account securities, securities held-to-maturity or securities available-for-sale. Trading account securities are carried at estimated fair value, with unrealized gains and losses included in operations. The Company held no trading account securities as of December 31, 2022 or 2021. Investment securities held-to-maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts. With regard to investment securities held-to-maturity, management has the intent and the Bank has the ability to hold such securities until maturity. Investment securities available-for-sale are carried at fair value, with any unrealized gains or losses excluded from operations and reflected, net of tax, as a separate component of shareholders’ equity in accumulated other comprehensive income or loss. Investment securities available-for-sale are so classified because management may decide to sell certain securities prior to maturity for liquidity, tax planning or other valid business purposes. When the fair value of a security falls below carrying value, an evaluation must be made to determine whether the unrealized loss is a temporary or other-than-temporary impairment. Impaired securities that are not deemed to be temporarily impaired are written down by a charge to operations to the extent that the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income or loss. The Company uses a systematic methodology to evaluate potential impairment of its investments that considers, among other things, the magnitude and duration of the decline in fair value, the financial health and business outlook of the issuer and the Company’s ability and intent to hold the investment until such time as the security recovers its fair value.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest earned on investment securities available-for-sale is included in interest income. Amortization of premiums and discounts on investment securities is determined by the interest method and included in interest income. Gains and losses on the sale of investment securities available-for-sale, computed principally on the specific identification method, are shown separately in non-interest income.
The Company also holds Federal Home Loan Bank (“FHLB”) stock, which, based on the redemption provision of the FHLB, has no quoted market value and is carried at cost. Dividends earned on FHLB stock are included in interest income.
Derivatives and Hedging Activities
The Company uses derivative instruments to minimize unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Company’s interest rate risk management strategy involves modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect net interest margin and cash flow. Derivative instruments utilized by the Company generally include interest rate swaps, caps and floors, and are carried as assets and/or liabilities at fair value on the Company’s consolidated balance sheets. The Company does not use derivatives for trading or speculative purposes and generally enters into transactions that have a qualifying hedge relationship. Depending upon the characteristics of the hedged item, derivatives are classified as either cash flow hedges or fair value hedges. When cash flow or fair value hedging strategies are utilized, the Company specifically identifies the derivative instrument as a hedge and identifies the risk that is being hedged contemporaneously with the execution of the hedge transaction.
Cash flow hedge relationships mitigate exposure to variability of future cash flows or other forecasted transactions. The change in fair value of cash flow hedges is recorded, net of tax, in accumulated other comprehensive income (loss) except for amounts excluded from hedge effectiveness. Amounts excluded from hedge effectiveness are recorded in earnings.
Fair value hedge relationships mitigate exposure to the change in fair value of the hedged risk in an asset, liability, or firm commitment. Gains or losses attributable to the derivative instrument, as well as gains or losses attributable to changes in the fair value of the hedged item are recognized in interest income or interest expense in the same income statement line item with the hedged item in the period in which the change in fair value occurs. To the extent the changes in fair value of the derivative instrument do not offset the changes in the fair value of the hedged item, the difference is recognized in earnings. The corresponding adjustment to the hedged asset or liability is included in the basis of the hedged item, while the corresponding change in the fair value of the derivative instrument is recorded as an adjustment to other assets or other liabilities, as applicable. The Company has entered into certain fair value hedges using the last-of-layer method, which allows the Company to hedge the interest rate risk of prepayable financial assets by designating as the hedged item a stated amount of a closed portfolio that is not expected to be affected by prepayments, defaults, or other factors impacting the timing and amount of cash flows.
If a hedge relationship is de-designated or if hedge accounting is discontinued because the hedged item no longer exists, or does not meet the definition of a firm commitment, or because it is probable that the forecasted transaction will no longer occur, the derivative instrument will continue to be recorded in other assets or liabilities in the consolidated balance sheets at its estimated fair value, with changes in fair value recognized in non-interest expense. Any asset or liability that was recognized pursuant to a firm commitment is removed from the consolidated balance sheets and recognized in non-interest expense. Gains or losses that were unrecognized and aggregated in accumulated other comprehensive gain (loss) pursuant to a cash flow hedging relationship are recognized immediately in non-interest expense.
The Company may also enter into derivative contracts that are not designated as hedges in order to mitigate economic risks or risks associated with volatility in connection with customer derivative transactions.
Loans and Interest Income
Loans are reported at principal amounts outstanding, adjusted for unearned income, net deferred loan origination fees and costs, purchase premiums and discounts, write-downs and the allowance for loan losses. Loan origination fees, net of certain deferred origination costs, and purchase premiums and discounts are recognized as an adjustment to the yield of the related loans, on an effective yield basis.
Interest on all loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to make payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed against current income unless
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the collateral for the loan is sufficient to cover the accrued interest. Interest received on non-accrual loans generally is either applied against principal or reported as interest income in accordance with management’s judgment as to the collectability of principal. The policy for interest recognition on impaired loans is consistent with the non-accrual interest recognition policy. Generally, loans are restored to accrual status when the obligation is brought current and the borrower has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is determined based on various components for individually impaired loans and for homogeneous pools of loans and leases. The allowance for loan and lease losses is increased by a provision for loan and lease losses, which is charged to expense, and reduced by charge-offs, net of recoveries by portfolio segment. The methodology for determining charge-offs is consistently applied to each segment. The allowance for loan and lease losses is maintained at a level that, in management’s judgment, is adequate to absorb credit losses inherent in the loan and lease portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan and lease portfolio, including the nature of the portfolio, and changes in its risk profile, credit concentrations, historical trends and economic conditions. This evaluation also considers the balance of impaired loans. Losses on individually identified impaired loans are measured based on the present value of expected future cash flows, discounted at each loan’s original effective market interest rate. As a practical expedient, impairment may be measured based on the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through the provision added to the allowance for loan losses. In general, all loans of $0.5 million or more and, at ALC, any loans of $50 thousand or more that are 90 days or more past due are identified for impairment analysis. One-to-four family residential mortgages and consumer installment loans are subjected to a collective evaluation for impairment, considering delinquency and repossession statistics, loss experience and other factors. Though management believes the allowance for loan and lease losses to be adequate, ultimate losses may vary from estimates. However, estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings during periods in which they become known.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation, and amortization is computed principally by the straight-line method over the estimated useful lives of the assets or the expected lease terms for leasehold improvements, whichever is shorter. Useful lives for all premises and equipment range from three to forty years.
Bank Owned Life Insurance
The Company has purchased life insurance policies on certain directors and former executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Goodwill and Other Intangible Assets
Goodwill arises from business combinations and is generally determined as the excess of cost over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is determined to have an indefinite useful life and is not amortized but tested for impairment at least annually or more frequently if events or circumstances exist that indicate that a goodwill impairment test should be performed. The Company performs its annual goodwill impairment test as of October 1st.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other intangible assets consist of core deposit intangible assets arising from acquisitions. Core deposit intangibles have definite useful lives and are amortized on an accelerated basis over their estimated useful lives. The Company’s core deposit intangible assets have estimated useful lives of seven years. In addition, these intangible assets are evaluated for impairment whenever events or circumstances exist that indicate that the carrying amount should be reevaluated.
Other Real Estate Owned (OREO)
OREO consists of properties acquired through a foreclosure or in satisfaction of loans, as well as closed Bank and ALC branches. These properties are carried at net realizable value, less estimated selling costs. Losses arising from the acquisition of properties are charged against the allowance for loan losses. Gains or losses realized upon the sale of OREO and additional losses related to subsequent valuation adjustments are determined on a specific property basis and are included as a component of non-interest expense along with carrying costs.
Income Taxes
The Company accounts for income taxes on the accrual basis through the use of the asset and liability method. Under the asset and liability method, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the consolidated financial statement carrying amounts and the basis of existing assets and liabilities. Deferred tax assets are also recorded for any tax attributes, such as tax credit and net operating loss carryforwards. The net balance of deferred tax assets and liabilities is reported in other assets in the consolidated balance sheets. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company evaluates the realization of deferred tax assets based on all positive and negative evidence available at the balance sheet date. Realization of deferred tax assets is based on the Company’s judgments about relevant factors affecting realization, including taxable income within any applicable carryback periods, future projected taxable income, reversal of taxable temporary differences and other tax planning strategies to maximize realization of deferred tax assets. A valuation allowance is recorded for any deferred tax assets that are not “more likely than not” to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit for which there is a greater than 50% likelihood that such amount would be realized upon examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest expense, interest income and penalties related to unrecognized tax benefits within current income tax expense.
Stock-Based Compensation
Compensation expense is recognized for stock options and restricted stock awards issued to employees based on the fair value of these awards at the date of grant. The Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.
Compensation expense is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation expense is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize compensation expense net of forfeitures.
Treasury Stock
Treasury stock purchases and sales are accounted for using the cost method.
Advertising Costs
Advertising costs for promoting the Company are minimal and expensed as incurred.
Segment Reporting
Management has identified two reportable operating segments of Bancshares: the Bank and ALC. The reportable segments were determined based on the internal management reporting system and comprise Bancshares’ and the Bank’s significant subsidiaries. Segment results include certain overhead allocations and intercompany transactions that were recorded at current market prices. All intercompany transactions were eliminated in the determination of consolidated balances.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassification
Certain disclosures in the notes to the prior period consolidated financial statements have been reclassified to conform to the 2022 presentation. These reclassifications had no effect on the Company’s results of operations, financial position or net cash flow.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding (basic shares). Included in basic shares are 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 years ended December 31, 2022 and 2021.
Year Ended December 31,
Weighted average shares outstanding
5,969,575
6,205,261
Weighted average director deferred shares
114,483
114,096
Basic shares
6,084,058
6,319,357
Dilutive shares
419,650
420,250
Diluted shares
6,503,708
6,739,607
Year Ended December 31,
(Dollars in Thousands,
Except Per Share Data)
Net income
$
6,864
$
4,451
Basic net income per share
$
1.13
$
0.70
Diluted net income per share
$
1.06
$
0.66
Comprehensive Income
Comprehensive income consists of net income, as well as unrealized holding gains and losses that arise during the period associated with the Company’s available-for-sale securities portfolio and the effective portion of cash flow hedge derivatives. In the calculation of comprehensive income, reclassification adjustments are made for gains or losses realized in the statement of operations associated with the sale of available-for-sale securities, settlement of derivative contracts or changes in the fair value of cash flow derivatives.
Accounting Policies Recently Adopted
ASU 2020-04 and ASU 2021-01, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting." These ASUs provide optional and temporary relief, in the form of optional expedients and exceptions, for applying GAAP to modifications of contracts, hedging relationships and other transactions affected by reference rate (e.g. LIBOR) reforms. The Company utilizes LIBOR, among other indexes, as a reference rate for underwriting certain variable rate loans and interest rate hedging instruments. Management has identified all contracts referencing LIBOR and will continue to monitor risks associated with the discontinuance of LIBOR until remediation of such contracts is complete. Reference rate reform has not had, nor does the Company expect it to have, a material effect on the Company’s consolidated balance sheet, operations or cash flows.
ASU 2022-01, "Fair Value Hedging - Portfolio Layer Method - Derivatives and Hedging (Topic 815)." In March 2022, the FASB issued ASU 2022-01. The amendments in this standard update expand the current last-of-layer method of hedge accounting that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. This standard update
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2022-01 on January 1, 2023. The adoption of this standard update is not expected to have a material impact on the Company's consolidated financial statements; however, the impact will be dependent on future hedging activity.
ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. As originally issued, ASU 2017-04 was effective prospectively for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. On October 16, 2019, the FASB approved a delay in the implementation of ASU 2017-04 by three years for smaller reporting companies, including the Company. The ASU became effective for the Company on January 1, 2023. The adoption of this standard update is not currently expected to have a material effect on the Company’s financial statements; however, the impact will be dependent on future evaluations of goodwill impairment that will continue to be performed by management on an annual basis.
ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables and held-to-maturity debt securities. Known as the Current Expected Credit Loss (CECL) model, the revised guidance removes all current recognition thresholds and requires companies to recognize an allowance for lifetime expected credit losses. Credit losses will be immediately recognized through net income; the amount recognized will be based on the current estimate of contractual cash flows not expected to be collected over the financial asset’s contractual term. The standard also adds disclosure requirements intended to enable users of the financial statements to understand credit risk in the portfolio and how management monitors credit quality, management’s estimate of expected credit losses, and changes in the estimate of credit losses during the period. As originally issued, ASU 2016-13 was effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019, with institutions required to apply the changes through a cumulative-effect adjustment to their retained earnings balance as of the beginning of the first reporting period in which the guidance is effective. On October 16, 2019, the FASB approved a delay in the implementation of ASU 2016-13 by three years for smaller reporting companies, including the Company. The standard became effective for the Company on January 1, 2023, and the Company recorded a transition adjustment that increased loan loss reserves by approximately $2.4 million. In accordance with transition accounting guidance, the transition adjustment was recorded directly to retained earnings during the first quarter of 2023 and will not impact current period earnings. In 2022, the FASB introduced ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures.” ASU 2022-02 seeks to improve the decision usefulness of information provided to investors concerning certain loan refinancings, restructurings and write-offs. The ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL accounting model and enhances the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted the amendments of ASU 2022-02 on January 1, 2023, concurrent with the adoption of the CECL accounting model. The amendments of ASU 2022-02 include only changes to certain financial statement disclosures; and, therefore, adoption of ASU 2022-02 is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.RESTRUCTURING CHARGES
Effective September 3, 2021, ALC ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. The closure of ALC’s branches eliminated the majority of ALC’s full-time employment positions during the third quarter of 2021. ALC continues to service its remaining portfolio of loans from its headquarters in Mobile, Alabama. The cessation of new business and closure of ALC’s branch locations were undertaken by the Company as part of a long-term strategy to reduce expenses, fortify asset quality, and focus the Company’s loan growth efforts in other areas, including the Bank’s commercial lending and consumer indirect lending efforts.
Total restructuring charges incurred during the years ended December 31, 2022 and 2021 consisted of the following:
Year Ended
Year Ended
December 31, 2022
December 31, 2021
Total
(Dollars in Thousands)
Expense Category
Severance and personnel expenses
$
$
$
Lease termination costs
Fixed asset valuation adjustments
-
Termination of technology contracts
Other expenses
-
Total expenses
$
$
$
1,059
	As of December 31, 2022, the majority of restructuring charges associated with the closure of ALC's branches have been incurred.
4.INVESTMENT SECURITIES
Details of investment securities available-for-sale and held-to-maturity as of December 31, 2022 and 2021 were as follows:
Available-for-Sale
December 31, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
(Dollars in Thousands)
Mortgage-backed securities:
Residential
$
47,659
$
$
(3,704
)
$
43,957
Commercial
12,169
(480
)
11,693
Obligations of U.S. government-sponsored agencies
5,116
-
(846
)
4,270
Obligations of states and political subdivisions
2,166
-
(94
)
2,072
Corporate notes
17,817
(1,898
)
15,921
U.S. Treasury securities
56,956
-
(4,074
)
52,882
Total
$
141,883
$
$
(11,096
)
$
130,795
Held-to-Maturity
December 31, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
(Dollars in Thousands)
Mortgage-backed securities:
Commercial
$
1,167
$
-
$
(41
)
$
1,126
Obligations of U.S. government-sponsored agencies
-
(40
)
Obligations of states and political subdivisions
-
(12
)
Total
$
1,862
$
-
$
(93
)
$
1,769
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Available-for-Sale
December 31, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
(Dollars in Thousands)
Mortgage-backed securities:
Residential
$
46,020
$
$
(242
)
$
46,228
Commercial
24,647
(47
)
24,971
Obligations of U.S. government-sponsored agencies
5,207
-
(15
)
5,192
Obligations of states and political subdivisions
4,247
(10
)
4,317
Corporate notes
15,458
(52
)
15,482
U.S. Treasury securities
35,097
-
(404
)
34,693
Total
$
130,676
$
$
(770
)
$
130,883
Held-to-Maturity
December 31, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
(Dollars in Thousands)
Mortgage-backed securities:
Commercial
$
2,115
$
$
-
$
2,144
Obligations of U.S. government-sponsored agencies
-
Obligations of states and political subdivisions
-
Total
$
3,436
$
$
-
$
3,477
The scheduled maturities of investment securities available-for-sale and held-to-maturity as of December 31, 2022 are presented in the following table:
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
Value
(Dollars in Thousands)
Maturing within one year
$
$
$
-
$
-
Maturing after one to five years
61,068
57,159
-
-
Maturing after five to ten years
67,309
60,872
1,606
1,536
Maturing after ten years
12,995
12,253
Total
$
141,883
$
130,795
$
1,862
$
1,769
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.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table reflects gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2022 and 2021.
Available-for-Sale
December 31, 2022
Less than 12 Months
12 Months or More
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(Dollars in Thousands)
Mortgage-backed securities:
Residential
$
19,876
$
(952
)
$
23,903
$
(2,752
)
Commercial
9,720
(357
)
1,247
(123
)
Obligations of U.S. government-sponsored agencies
-
-
4,270
(846
)
Obligations of states and political subdivisions
1,559
(41
)
(53
)
Corporate notes
6,845
(898
)
8,075
(1,000
)
U.S. Treasury securities
21,240
(698
)
31,642
(3,376
)
Total
$
59,240
$
(2,946
)
$
69,649
$
(8,150
)
Held-to-Maturity
December 31, 2022
Less than 12 Months
12 Months or More
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(Dollars in Thousands)
Mortgage-backed securities:
Commercial
$
1,125
$
(41
)
$
-
$
-
Obligations of U.S. government-sponsored agencies
(7
)
(33
)
Obligations of states and political subdivisions
(12
)
-
-
Total
$
1,413
$
(60
)
$
$
(33
)
Available-for-Sale
December 31, 2021
Less than 12 Months
12 Months or More
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(Dollars in Thousands)
Mortgage-backed securities:
Residential
$
31,346
$
(240
)
$
$
(2
)
Commercial
2,245
(12
)
2,970
(35
)
Obligations of U.S. government-sponsored agencies
4,987
(13
)
(2
)
Obligations of states and political subdivisions
(10
)
-
-
Corporate notes
9,092
(52
)
-
-
U.S. Treasury securities
34,692
(404
)
-
-
Total
$
82,923
$
(731
)
$
3,417
$
(39
)
There were no held-to-maturity securities in an unrealized loss position as of December 31, 2021.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Due to the increasing interest rate environment during the year ended December 31, 2022, gross unrealized losses increased, particularly within the Company’s available-for-sale portfolio. Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation. Consideration is given to: (i) the length of time and the extent to which fair value has been less than cost; (ii) the financial condition and near-term prospects of the issuer; (iii) whether the Company intends to sell the securities; and (iv) whether it is more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases.
As of December 31, 2022, 38 debt securities had been in a loss position for more than 12 months, and 86 debt securities had been in a loss position for less than 12 months. As of December 31, 2021, ten debt securities had been in a loss position for more than 12 months, and 32 debt securities had been in a loss position for less than 12 months. As of both December 31, 2022 and 2021, the losses for all securities were considered to be a direct result of the effect that the prevailing interest rate environment had on the value of debt securities and were not related to the creditworthiness of the issuers. Further, the Company has the current intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. The Company did not recognize any other-than-temporary impairments as of December 31, 2022 and 2021.
Investment securities with a carrying value of $54.7 million and $52.2 million as of December 31, 2022 and 2021, respectively, were pledged to secure public deposits and for other purposes.
5.LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Portfolio Segments
The Company has divided the loan portfolio into the following portfolio segments based on risk characteristics:
Construction, land development and other land loans - Commercial construction, land and land development loans include loans for the development of residential housing projects, loans for the development of commercial and industrial use property, loans for the purchase and improvement of raw land and loans primarily for agricultural production that are secured by farmland. These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrowing entity.
Secured by 1-4 family residential properties - These loans include conventional mortgage loans on one-to-four family residential properties. The 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 loans and leases - This portfolio segment includes loans and leases to commercial customers for use in the normal course of business. These credits may be loans, lines of credit and leases to financially strong borrowers, secured by inventories, equipment or receivables, and are generally guaranteed by the principals of the borrowing entity.
Direct consumer - This portfolio segment includes a variety of secured and unsecured personal loans, including automobile loans, loans for household and personal purposes and all other direct consumer installment loans.
Branch retail - This portfolio segment includes loans secured by collateral purchased by consumers at retail stores with whom ALC had an established relationship through its branch network to provide financing for the retail products sold if applicable underwriting standards were met. The collateral securing these loans generally includes personal property items such as furniture, ATVs and home appliances.
Indirect consumer - 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.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2022 and 2021, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:
December 31, 2022
Bank
ALC
Total
(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans
$
54,396
$
-
$
54,396
Secured by 1-4 family residential properties
86,946
1,480
88,426
Secured by multi-family residential properties
67,917
-
67,917
Secured by non-farm, non-residential properties
199,965
-
199,965
Commercial and industrial loans (1)
73,561
-
73,561
Consumer loans:
Direct consumer
5,145
4,908
10,053
Branch retail
-
14,237
14,237
Indirect
266,567
-
266,567
Total loans
754,497
20,625
775,122
Less: Unearned interest, fees and deferred cost
1,249
Allowance for loan losses
8,057
1,365
9,422
Net loans
$
745,641
$
18,810
$
764,451
December 31, 2021
Bank
ALC
Total
(Dollars in Thousands)
Real estate loans:
Construction, land development and other land loans
$
67,048
$
-
$
67,048
Secured by 1-4 family residential properties
70,439
2,288
72,727
Secured by multi-family residential properties
46,000
-
46,000
Secured by non-farm, non-residential properties
197,901
-
197,901
Commercial and industrial loans (1)
73,947
-
73,947
Consumer loans:
Direct consumer
5,972
15,717
21,689
Branch retail
-
25,692
25,692
Indirect
205,940
-
205,940
Total loans
667,247
43,697
710,944
Less: Unearned interest, fees and deferred cost
(324
)
2,918
2,594
Allowance for loan losses
7,038
1,282
8,320
Net loans
$
660,533
$
39,497
$
700,030
(1)Includes equipment financing leases and PPP loans. As of December 31, 2022 and 2021, equipment financing leases totaled $10.3 million and $11.0 million, respectively. As of December 31, 2022 and 2021, PPP loans totaled $6 thousand and $1.7 million, respectively.
The Company makes commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 53.0% and 54.0%% of the portfolio was concentrated in loans secured by real estate as of December 31, 2022 and 2021, respectively.
Loans with a carrying value of $68.2 million and $66.6 million were pledged as collateral to secure FHLB borrowings as of December 31, 2022 and 2021, respectively.
Related Party Loans
In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with unrelated parties. Management believes that such loans do not represent more than a normal risk of collectability, nor do they present other unfavorable features. The aggregate balances of such related party loans and commitments as of December 31, 2022 and 2021 were $0.2 million and $0.3 million, respectively. During the year ended December 31, 2022, there were no new
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
loans to these parties, and repayments by active related parties were $0.1 million. During the year ended December 31, 2021, there were no new loans to these parties, and repayments by active related parties were $0.1 million.
Allowance for Loan and Lease Losses
The following tables present changes in the allowance for loan and lease losses during the years ended December 31, 2022 and 2021 and the related loan balances by loan type as of December 31, 2022 and 2021:
As of and for the Year Ended December 31, 2022
Construction,
Land
Development,
and Other
1-4
Family
Real
Estate
Multi-
Family
Non-
Farm Non-
Residential
Commercial and
Industrial
Direct
Consumer
Branch Retail
Indirect
Total
(Dollars in Thousands)
Allowance for loan and lease losses:
Beginning balance
$
$
$
$
1,958
$
$
1,004
$
$
2,439
$
8,320
Charge-offs
-
(40
)
-
-
-
(1,958
)
(633
)
(382
)
(3,013
)
Recoveries
-
Provision
(113
)
1,255
1,052
3,308
Ending balance
$
$
$
$
1,970
$
$
$
$
3,154
$
9,422
Ending balance of allowance
attributable to loans:
Individually evaluated for
impairment
$
-
$
$
-
$
-
$
$
-
$
-
$
-
$
Collectively evaluated for
impairment
1,970
3,154
9,163
Total allowance for loan and lease losses
$
$
$
$
1,970
$
$
$
$
3,154
$
9,422
Ending balance of loans
receivable:
Individually evaluated for
impairment
$
-
$
$
-
$
2,492
$
2,429
$
$
-
$
-
$
5,521
Collectively evaluated for
impairment
54,396
87,844
67,917
197,473
71,132
10,035
14,237
266,567
769,601
Total loans receivable
$
54,396
$
88,426
$
67,917
$
199,965
$
73,561
$
10,053
$
14,237
$
266,567
$
775,122
As of and for the Year Ended December 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
Total
(Dollars in Thousands)
Allowance for loan and lease losses:
Beginning balance
$
$
$
$
1,566
$
1,008
$
1,202
$
$
1,712
$
7,470
Charge-offs
(23
)
(12
)
-
-
(6
)
(1,230
)
(377
)
(483
)
(2,131
)
Recoveries
-
Provision
(140
)
(163
)
1,142
2,010
Ending balance
$
$
$
$
1,958
$
$
1,004
$
$
2,439
$
8,320
Ending balance of allowance
attributable to loans:
Individually evaluated for
impairment
$
-
$
$
-
$
-
$
$
-
$
-
$
-
$
Collectively evaluated for
impairment
1,958
1,004
2,439
8,253
Total allowance for loan and lease losses
$
$
$
$
1,958
$
$
1,004
$
$
2,439
$
8,320
Ending balance of loans
receivable:
Individually evaluated for
impairment
$
-
$
$
-
$
1,051
$
$
$
-
$
-
$
2,598
Collectively evaluated for
impairment
67,048
72,081
46,000
196,850
73,067
21,668
25,692
205,940
708,346
Total loans receivable
$
67,048
$
72,727
$
46,000
$
197,901
$
73,947
$
21,689
$
25,692
$
205,940
$
710,944
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 2022 or 2021.
•Loss (Risk Grade 9): Loans are classified in this category when borrowers are deemed incapable of repayment of unsecured debt. Loans to such borrowers are considered uncollectable and of such little value that continuance as active assets of the Company is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not prudent to defer writing off these assets, even though partial recovery may be realized in the future. The Company did not have any loans classified as Loss (Risk Grade 9) as of December 31, 2022 or 2021.
Because residential real estate and consumer loans are more uniform in nature, each loan is categorized into one of two risk grades, depending on whether the loan is considered to be performing or nonperforming. Performing loans are loans that are paying principal and interest in accordance with a contractual agreement. Nonperforming loans are loans that have demonstrated characteristics that indicate a probability of loss.
The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31, 2022:
December 31, 2022
Pass 1-5
Special Mention 6
Substandard 7
Total
(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans
$
54,396
$
-
$
-
$
54,396
Secured by multi-family residential properties
67,917
-
-
67,917
Secured by non-farm, non-residential properties
196,813
2,501
199,965
Commercial and industrial loans
70,515
-
3,046
73,561
Total
$
389,641
$
$
5,547
$
395,839
As a percentage of total loans
98.43
%
0.17
%
1.40
%
100.00
%
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2022
Performing
Nonperforming
Total
(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties
$
87,302
$
1,124
$
88,426
Consumer loans:
Direct consumer
10,007
10,053
Branch retail
14,205
14,237
Indirect
266,496
266,567
Total
$
378,010
$
1,273
$
379,283
As a percentage of total loans
99.66
%
0.34
%
100.00
%
The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31, 2021:
December 31, 2021
Pass 1-5
Special Mention 6
Substandard 7
Total
(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans
$
67,046
$
-
$
$
67,048
Secured by multi-family residential properties
43,472
2,528
-
46,000
Secured by non-farm, non-residential properties
189,425
7,442
1,034
197,901
Commercial and industrial loans
72,116
1,498
73,947
Total
$
372,059
$
10,303
$
2,534
$
384,896
As a percentage of total loans
96.66
%
2.68
%
0.66
%
100.00
%
December 31, 2021
Performing
Nonperforming
Total
(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties
$
71,526
$
1,201
$
72,727
Consumer loans:
Direct consumer
20,939
21,689
Branch retail
25,486
25,692
Indirect
205,940
-
205,940
Total
$
323,891
$
2,157
$
326,048
As a percentage of total loans
99.34
%
0.66
%
100.00
%
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides an aging analysis of past due loans by class as of December 31, 2022:
As of December 31, 2022
30-59
Days
Past
Due
60-89
Days
Past
Due
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
$
-
$
-
$
-
$
-
$
54,396
$
54,396
$
-
Secured by 1-4 family residential
properties
87,461
88,426
-
Secured by multi-family residential
properties
-
-
-
-
67,917
67,917
-
Secured by non-farm, non-residential
properties
-
-
199,828
199,965
-
Commercial and industrial loans
-
73,200
73,561
-
Consumer loans:
Direct consumer
9,724
10,053
-
Branch retail
13,863
14,237
Indirect
266,255
266,567
-
Total
$
1,691
$
$
$
2,478
$
772,644
$
775,122
$
-
As a percentage of total loans
0.21
%
0.04
%
0.07
%
0.32
%
99.68
%
100.00
%
The following table provides an aging analysis of past due loans by class as of December 31, 2021:
As of December 31, 2021
30-59
Days
Past
Due
60-89
Days
Past
Due
Days
Or
Greater
Total
Past
Due
Current
Total
Loans
Recorded
Investment >
90 Days
And
Accruing
(Dollars in Thousands)
Loans secured by real estate:
Construction, land development
and other land loans
$
-
$
-
$
-
$
-
$
67,048
$
67,048
$
-
Secured by 1-4 family residential
properties
72,335
72,727
-
Secured by multi-family residential
properties
-
-
-
-
46,000
46,000
-
Secured by non-farm, non-residential
properties
-
-
197,498
197,901
-
Commercial and industrial loans
-
73,659
73,947
-
Consumer loans:
Direct consumer
1,971
19,718
21,689
-
Branch retail
24,927
25,692
Indirect
-
205,883
205,940
-
Total
$
1,878
$
$
1,190
$
3,876
$
707,068
$
710,944
$
-
As a percentage of total loans
0.27
%
0.11
%
0.17
%
0.55
%
99.45
%
100.00
%
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides an analysis of non-accruing loans by class as of December 31, 2022 and 2021:
Loans on Non-Accrual Status
December 31,
December 31,
(Dollars in Thousands)
Loans secured by real estate:
Construction, land development and other land loans
$
-
$
Secured by 1-4 family residential properties
Secured by multi-family residential properties
-
-
Secured by non-farm, non-residential properties
-
-
Commercial and industrial loans
Consumer loans:
Direct consumer
Branch retail
Indirect
-
Total loans
$
1,651
$
2,008
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 December 31, 2022 and 2021, there were $0.1 million of impaired loans with no related allowance recorded at ALC. Impaired loans, or portions thereof, are charged off when deemed uncollectable.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2022, the carrying amount of the Company’s impaired loans consisted of the following:
December 31, 2022
Carrying
Amount
Unpaid
Principal
Balance
Related
Allowances
(Dollars in Thousands)
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans
$
-
$
-
$
-
Secured by 1-4 family residential properties
-
Secured by multi-family residential properties
-
-
-
Secured by non-farm, non-residential properties
2,492
2,492
-
Commercial and industrial
2,076
2,076
-
Direct consumer
-
Total impaired loans with no related allowance recorded
$
5,154
$
5,154
$
-
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
Secured by multi-family residential properties
-
-
-
Secured by non-farm, non-residential properties
-
-
-
Commercial and industrial
Direct consumer
-
-
-
Total impaired loans with an allowance recorded
$
$
$
Total impaired loans
Loans secured by real estate
Construction, land development and other land loans
$
-
$
-
$
-
Secured by 1-4 family residential properties
Secured by multi-family residential properties
-
-
-
Secured by non-farm, non-residential properties
2,492
2,492
-
Commercial and industrial
2,429
2,429
Direct consumer
-
Total impaired loans
$
5,521
$
5,521
$
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2021, the carrying amount of the Company’s impaired loans consisted of the following:
December 31, 2021
Carrying
Amount
Unpaid
Principal
Balance
Related
Allowances
(Dollars in Thousands)
Impaired loans with no related allowance recorded
Loans secured by real estate
Construction, land development and other land loans
$
-
$
-
$
-
Secured by 1-4 family residential properties
-
Secured by multi-family residential properties
-
-
-
Secured by non-farm, non-residential properties
1,051
1,051
-
Commercial and industrial
-
Direct consumer
-
Total impaired loans with no related allowance recorded
$
2,525
$
2,525
$
-
Impaired loans with an allowance recorded
Loans secured by real estate
Construction, land development and other land loans
$
-
$
-
$
-
Secured by 1-4 family residential properties
Secured by multi-family residential properties
-
-
-
Secured by non-farm, non-residential properties
-
-
-
Commercial and industrial
Direct consumer
-
-
-
Total impaired loans with an allowance recorded
$
$
$
Total impaired loans
Loans secured by real estate
Construction, land development and other land loans
$
-
$
-
$
-
Secured by 1-4 family residential properties
Secured by multi-family residential properties
-
-
-
Secured by non-farm, non-residential properties
1,051
1,051
-
Commercial and industrial
Direct consumer
-
Total impaired loans
$
2,598
$
2,598
$
The average net investment in impaired loans and interest income recognized and received on impaired loans during the years ended December 31, 2022 and 2021 was as follows:
Year Ended December 31, 2022
Average
Recorded
Investment
Interest
Income
Recognized
Interest
Income
Received
(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans
$
$
-
$
-
Secured by 1-4 family residential properties
Secured by multi-family residential properties
-
-
-
Secured by non-farm, non-residential properties
1,529
Commercial and industrial
1,279
Direct consumer
Total
$
3,528
$
$
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year Ended December 31, 2021
Average
Recorded
Investment
Interest
Income
Recognized
Interest
Income
Received
(Dollars in Thousands)
Loans secured by real estate
Construction, land development and other land loans
$
-
$
-
$
-
Secured by 1-4 family residential properties
Secured by multi-family residential properties
-
-
-
Secured by non-farm, non-residential properties
2,377
Commercial and industrial
Direct consumer
Total
$
3,809
$
$
Loans on which the accrual of interest has been discontinued totaled $1.7 million and $2.0 million as of December 31, 2022 and 2021, respectively. If interest on those loans had been accrued, there would have been $60 thousand and $52 thousand of interest accrued for the years ended December 31, 2022 and 2021, respectively. Interest income related to these loans for the years ended December 31, 2022 and 2021 was $29 thousand and $30 thousand, respectively.
Troubled Debt Restructurings
Troubled debt restructurings include loans with respect to which concessions have been granted to borrowers that generally would not have otherwise been considered had the borrowers not been experiencing financial difficulty. The concessions granted may include payment schedule modifications, interest rate reductions, maturity date extensions, modifications of note structure, principal balance reductions or some combination of these concessions. There were no loans modified with concessions granted during the years ended December 31, 2022 or 2021. Restructured loans may involve loans remaining on non-accrual, moving to non-accrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Non-accrual restructured loans are included with all other non-accrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, then the loan remains on non-accrual. As of both December 31, 2022 and 2021, the Company did not have any non-accruing loans that were previously restructured and that remained on non-accrual status. For both of the years ended December 31, 2022 and 2021, the Company had no loans that were restored to accrual status based on a sustained period of repayment performance.
The following table provides, as of December 31, 2022 and 2021, the number of loans remaining in each loan category that the Company had previously modified in a troubled debt restructuring, as well as the pre- and post-modification principal balance as of each date.
December 31, 2022
December 31, 2021
Number
of
Loans
Pre-
Modification
Outstanding
Principal
Balance
Post-
Modification
Principal
Balance
Number
of Loans
Pre-
Modification
Outstanding
Principal
Balance
Post-
Modification
Principal
Balance
(Dollars in Thousands)
Loans secured by real estate:
Secured by 1-4 family residential properties
Secured by non-farm, non-residential properties
Commercial loans
Total
$
$
$
$
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2022 and 2021, no loans that previously had been modified in a troubled debt restructuring had defaulted subsequent to modification.
Restructured loan modifications primarily included maturity date extensions and payment schedule modifications. There were no modifications to principal balances of the loans that were restructured. Accordingly, there was no impact on the Company’s allowance for loan losses resulting from the modifications.
All loans with a principal balance of $0.5 million or more that have been modified in a troubled debt restructuring are considered impaired and evaluated individually for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, are considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses attributable to such restructured loans of $6 thousand and $7 thousand as of December 31, 2022 and 2021, respectively.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS
Other Real Estate Owned
Other real estate and certain other assets acquired in foreclosure are reported at the net realizable value of the property, less estimated costs to sell. The following table summarizes foreclosed property activity during the years ended December 31, 2022 and 2021:
December 31,
December 31,
(Dollars in Thousands)
Beginning balance
$
2,149
$
Additions (1)
1,981
Sales proceeds
(2,232
)
(1,205
)
Gross gains
Gross losses
(27
)
-
Net gains
Impairment
(1
)
(67
)
Ending balance
$
$
2,149
(1)Additions to other real estate owned (“OREO”) include transfers from loans, transfers from closed Bank and ALC branches, 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 $20 thousand and $151 thousand as of December 31, 2022 and 2021, 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 both December 31, 2022 and 2021.
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 during the years ended December 31, 2022 and 2021:
December 31,
December 31,
(Dollars in Thousands)
Beginning balance
$
$
Transfers from loans
Sales proceeds
(506
)
(798
)
Gross gains
-
-
Gross losses
(452
)
(96
)
Net losses
(452
)
(96
)
Impairment
-
-
Ending balance
$
$
Repossessed assets are included in Other Assets in the Company’s consolidated balance sheet.
7.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 years ended December 31, 2022 or 2021.
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
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
be written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements. Goodwill totaled $7.4 million as of both December 31, 2022 and 2021.
Core deposit premiums are amortized over a seven-year period and are periodically evaluated, at least annually, as to the recoverability of their carrying value. Core deposit premiums of $2.0 million were recorded during 2018 as part of the TPB acquisition.
The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) as of December 31, 2022 were as follows:
December
31, 2022
December
31, 2021
(Dollars in
Thousands)
(Dollars in
Thousands)
Goodwill
$
7,435
$
7,435
Core deposit intangible:
Gross carrying amount
2,048
2,048
Accumulated amortization
(1,682
)
(1,414
)
Core deposit intangible, net
Total
$
7,801
$
8,069
The Company’s estimated remaining amortization expense on intangible assets as of December 31, 2022 was as follows:
Amortization
Expense
(Dollars in
Thousands)
Total
$
The net carrying amount of the Company’s core deposit assets 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 its carrying amount may not be recoverable.
8.PREMISES AND EQUIPMENT
Premises and equipment and applicable depreciable lives are summarized as follows:
December 31,
(Dollars in Thousands)
Land
$
5,390
$
5,486
Premises (40 years)
24,880
25,924
Furniture, fixtures and equipment (3-7 years)
15,792
15,629
Total cost of premises and equipment
46,062
47,039
Less accumulated depreciation
(21,623
)
(21,916
)
Total premises and equipment, net
$
24,439
$
25,123
Depreciation expense of $1.6 million and $1.7 million was recorded in 2022 and 2021, respectively.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9.DEPOSITS
As of December 31, 2022, the scheduled maturities of the Company’s time deposits were as follows:
(Dollars in
Thousands)
$
115,494
56,104
63,576
13,274
4,264
Total
$
252,712
Time deposits greater than $250 thousand totaled $29.5 million and $31.0 million as of December 31, 2022 and 2021, respectively. Included in deposits, the Company held brokered certificates of deposit totaling $62.5 million as of December 31, 2022 and $32.0 million as of December 31, 2021. Deposits from related parties held by the Company totaled $4.1 million and $4.2 million as of December 31, 2022 and 2021, respectively.
10.BORROWINGS
Short-Term Borrowings
Short-term borrowings may 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 December 31, 2022 and 2021, there were no federal funds purchased outstanding.
•Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The Bank monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements as of December 31, 2022 and 2021 totaled $38 thousand and $46 thousand, respectively.
•Short-term FHLB advances are secured borrowings available to the Bank as an alternative funding source. As of December 31, 2022 and 2021, the Bank had $20.0 million and $10.0 million in outstanding FHLB advances with original maturities of less than one year, respectively.
Long-Term Borrowings
FHLB Advances
The Company may use FHLB advances with original maturities of more than one year as an alternative to funding sources with similar maturities, such as certificates of deposit or other deposit programs. These advances generally offer more attractive rates than other mid-term financing options. They are also flexible, allowing the Company to quickly obtain the necessary maturities and rates that best suit its overall asset/liability strategy. FHLB advances with an original maturity of more than one year are classified as long-term. As of both December 31, 2022 and 2021, the Company did not have any long-term FHLB advances outstanding.
Subordinated Debt
On October 1, 2021, the Company completed a private placement of $11.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that will mature on October 1, 2031 (the “Notes”). The Notes bear interest at a rate of 3.50% per annum for the first five years; then the interest rate will be reset quarterly to a benchmark interest rate per annum which,
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
subject to certain conditions provided in the Notes, will be equal to the then current three-month term Secured Overnight Financing Rate (“SOFR”) plus 275 basis points. The Company has used and expects to continue to use the net proceeds for general corporate purposes, which may include the repurchase of the Company’s common stock, and to support organic growth plans, including the maintenance of capital ratios. Following receipt of the net proceeds of the Notes, the Company invested $5.0 million into capital surplus of the Bank. As of both December 31, 2022 and 2021, the Notes were recorded as long-term borrowings totaling $10.7 million, net of unamortized debt issuance costs.
(Dollars in Thousands)
Balance at year-end
$
10,726
$
10,653
Average balance during the year
$
10,689
$
2,682
Maximum month-end balance during the year
$
10,726
$
10,653
Average rate paid during the year, including amortization of debt issuance costs
4.20
%
4.20
%
Weighted average remaining maturity (in years)
8.75
9.75
Available Credit
As an additional funding source, the Company has available unused lines of credit with correspondent banks, the Federal Reserve and the FHLB. Certain of these funding sources are subject to underlying collateral availability. As of December 31, 2022 and 2021, the Company’s available unused lines of credit consisted of the following:
Available Unused Lines of Credit
Collateral Requirements
December 31, 2022
December 31, 2021
Correspondent banks
None
$45.0 million
$45.0 million
Federal Reserve (discount window)
Subject to collateral
$15.0 million
$15.0 million
FHLB advances (1)
Subject to collateral
$246.8 million
$237.0 million
(1)These amounts represent the total remaining credit the Company has from the FHLB, but this credit can only be utilized to the extent that underlying collateral exists. Assets pledged (including loans and investment securities) associated with FHLB advances and letters of credit totaled $68.2 million and $66.6 million as of December 31, 2022 and 2021, respectively. The Company’s collateral exposure with the FHLB in the form of advances and letters of credit was $50.0 million and $40.0 million as of December 31, 2022 and 2021, respectively, leaving an excess of collateral of $18.2 million and $26.6 million available to utilize for additional credit as of the respective dates.
11.INCOME TAXES
The consolidated provisions for income taxes for the years ended December 31, 2022 and 2021 were as follows:
(Dollars in Thousands)
Federal
Current
$
2,025
$
1,522
Deferred
(291
)
(527
)
Total federal
1,734
State
Current
Deferred
(76
)
Total state
Total
$
2,148
$
1,275
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The consolidated tax expense differed from the amount computed by applying the Company’s federal statutory income tax rate of 21.0% in 2022 and 2021 as described in the following table:
(Dollars in Thousands)
Income tax expense at federal statutory rate
$
1,892
$
1,202
Increase (decrease) resulting from:
Tax-exempt interest
(76
)
(88
)
Bank-owned life insurance
(62
)
(62
)
State income tax expense, net of federal income taxes
Other
Total
$
2,148
$
1,275
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2022 and 2021 are presented below:
(Dollars in Thousands)
Deferred tax assets:
Allowance for loan losses
$
2,333
$
2,065
Deferred compensation
Deferred commissions and fees
Unrealized loss on securities available-for-sale
2,715
-
Unrealized loss on cash flow hedges
-
Other
Total gross deferred tax assets
7,255
4,261
Deferred tax liabilities:
Premises and equipment
1,288
1,248
Core deposit intangible
Limited partnerships
Unrealized gain on securities available-for-sale
-
Unrealized gain on cash flow hedges
-
Other
Total gross deferred tax liabilities
2,115
1,811
Net deferred tax asset, included in other assets
$
5,140
$
2,450
The Company did not have any federal or state net operating loss carryforwards as of December 31, 2022 or December 31, 2021. The Company files income tax returns with the federal government and several states. The majority of its income is attributable to the states of Alabama and Tennessee. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the states in which it filed for the years ended December 31, 2014 through 2022.
As of December 31, 2022, the Company had no unrecognized tax benefits related to federal or state income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to December 31, 2022. As of December 31, 2022, the Company had accrued no interest and no penalties related to uncertain tax positions.
12.EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan (the “401(k) Plan”). The 401(k) Plan allows participants to defer a portion of their compensation on a pre-tax basis, subject to the statutory annual contribution limit. For 2022 and 2021, the Company made “safe harbor” contributions on behalf of participants in the form of a match that was equal to 100% of each participant’s elective deferrals, up to a maximum of 4% of the participant’s eligible compensation. The 401(k) Plan also allows the Company to make discretionary matching contributions on behalf of participants equal to 2% of each participant’s elective deferrals. No discretionary match was made in 2022 or 2021. The Company’s matching contributions to the 401(k) Plan totaled $0.4 million in 2022 and 0.5 million 2021.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Participants can elect to invest up to 20% of incoming contributions (measured at the time of investment) in the 401(k) Plan in the form of Company stock. The 401(k) Plan held 184,987 and 238,514 shares of Company stock as of December 31, 2022 and 2021, respectively. These shares are allocated to participants in the 401(k) Plan and, accordingly, are included in the earnings per share calculations.
13.DEFERRED COMPENSATION PLANS
The Company has entered into separate supplemental retirement compensation benefits agreements with certain non-employee directors and former executive officers. These agreements are structured as nonqualified retirement plans for federal income tax purposes. The Company’s obligation under these agreements is accrued as deferred compensation in accordance with the terms of the individual contracts over the required service period to the date the employee is eligible to receive benefits. The Company’s deferred compensation obligation under these agreements totaled $3.1 million and $3.2 million as of December 31, 2022 and 2021, respectively.
Non-employee directors may elect to defer payment of all or any portion of their Bancshares and Bank director fees under Bancshares’ Non-Employee Directors’ Deferred Compensation Plan (the “Deferral Plan”). The Deferral Plan permits non-employee directors to invest their directors’ fees and to receive the adjusted value of the deferred amounts in cash and/or shares of Bancshares’ common stock. Neither Bancshares nor the Bank makes any contribution to participants’ accounts under the Deferral Plan. As of December 31, 2022 and 2021, a total of 114,190 and 117,825 shares of Bancshares common stock, respectively, were deferred in connection with the Deferral Plan. All deferred fees, whether in the form of cash or shares of Bancshares common stock, are reflected as compensation expense in the period earned. The Company classifies all deferred directors’ fees allocated to be paid in shares as additional paid-in capital. The Company may use issued shares or shares of treasury stock to satisfy these obligations when due.
14.STOCK AWARDS
In accordance with the 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 $0.4 million and $0.3 million for the years ended December 31, 2022 and 2021, respectively.
Stock Options
Stock option awards have been granted with an exercise price equal to the market price of the Company’s common stock on the date of the grant and have vesting periods ranging from one to three years, with 10-year contractual terms. The Company recognizes the cost of services received in exchange for stock option awards based on the grant date fair value of the award, with compensation expense recognized on a straight-line basis over the award’s vesting period. The fair value of outstanding awards was determined using the Black-Scholes option pricing model at the date of grant. The Company did not grant any stock option awards during the years ended December 31, 2022 and 2021.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company’s stock option activity for the periods presented.
Year Ended
December 31, 2022
December 31, 2021
Number of
Shares
Average
Exercise
Price
Number of
Shares
Average
Exercise
Price
Options:
Outstanding, beginning of year
420,250
$
9.79
421,000
$
9.79
Granted
-
-
-
-
Exercised
-
-
8.23
Forfeited
10.86
-
-
Options outstanding, end of year
419,650
$
9.79
420,250
$
9.79
Options exercisable, end of year
416,249
$
9.77
395,678
$
9.74
The aggregate intrinsic value of stock options outstanding (calculated as the amount by which the market value of underlying stock exceeds the exercise price of the option) was approximately $0.1 million as of December 31, 2022 and $0.6 million as of December 31, 2021.
Restricted Stock
During the years ended December 31, 2022 and 2021, 45,935 shares and 38,430 shares, respectively, of restricted stock were granted. Awards granted to employees had a three-year vesting period, while awards granted to non-employee directors had a one-year vesting period. 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.
15.SHAREHOLDERS’ EQUITY
Dividends are paid at the discretion of the Company’s Board of Directors, based on the Company’s operating performance and financial position, including earnings, capital and liquidity. Dividends from the Bank are the Company’s primary source of funds for the payment of dividends to shareholders. In addition, federal and state regulatory agencies have the authority to prevent the Company from paying a dividend to shareholders. During the year ended December 31, 2022, the Company declared dividends totaling $0.8 million, or $0.14 per share, compared to $0.7 million, or $0.12 per share, during the year ended December 31, 2021.
Regulatory Capital
The Bank is subject to the revised capital requirements as described in the section captioned “Supervision and Regulation - Capital Adequacy” included in Part I, Item I of this report. Under these requirements, the Bank is subject to minimum risk-based capital and leverage capital requirements, which are administered by the federal bank regulatory agencies. These capital requirements, as defined by federal regulations, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Bank and Bancshares, and could impact Bancshares’ ability to pay dividends. The Bank’s minimum risk-based capital requirements include the fully implemented capital conservation buffer of 2.50%. As of both December 31, 2022 and 2021, the Bank exceeded all applicable minimum capital standards. In addition, the Bank met applicable regulatory guidelines to be considered well-capitalized as of both December 31, 2022 and 2021. To be categorized in this manner, the Bank maintained common equity Tier 1 risk-based capital, Tier 1 risk-based capital, total risk-based capital and Tier 1 leverage ratios as set forth in the tables below. In addition, the Bank was not subject to any written agreement, order, capital directive or prompt corrective action directive issued by its primary federal regulator to meet and maintain a specific level for any capital measures.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables provide the Bank’s actual regulatory capital amounts and ratios under regulatory capital standards in effect (Basel III) at December 31, 2022 and 2021:
Actual Regulatory Capital
Minimum
To Be Well
Amount
Ratio
Requirement
Capitalized
(Dollars in Thousands)
Common equity Tier 1 capital (to risk-weighted assets)
$
92,853
11.07
%
7.00
%
6.50
%
Tier 1 capital (to risk-weighted assets)
92,853
11.07
%
8.50
%
8.00
%
Total capital (to risk-weighted assets)
102,275
12.19
%
10.50
%
10.00
%
Tier 1 leverage (to average assets)
92,853
9.39
%
4.00
%
5.00
%
Actual Regulatory Capital
Minimum
To Be Well
Amount
Ratio
Requirement
Capitalized
(Dollars in Thousands)
Common equity Tier 1 capital (to risk-weighted assets)
$
87,379
11.36
%
7.00
%
6.50
%
Tier 1 capital (to risk-weighted assets)
87,379
11.36
%
8.50
%
8.00
%
Total capital (to risk-weighted assets)
95,699
12.44
%
10.50
%
10.00
%
Tier 1 leverage (to average assets)
87,379
9.17
%
4.00
%
5.00
%
No significant conditions or events have occurred since December 31, 2022 that management believes have affected the Bank’s classification as “well-capitalized.” Because of the size of the Company’s balance sheet, there is currently no requirement for separate reporting of capital amounts and ratios for Bancshares. Accordingly, such amounts and ratios are not included.
Under the FDIC’s final rule establishing the methodology for calculating deposit insurance assessments for banks with less than $10 billion in assets, the rate is determined based on a number of factors, including the bank’s CAMELS ratings, leverage ratio, net income, non-performing loan ratios, OREO ratios, core deposit ratios, one-year organic asset growth and a loan mix index. The CAMELS rating system is a supervisory rating system developed to classify a bank’s overall condition by taking into account capital adequacy, assets, management capability, earnings, liquidity and sensitivity to market and interest rate risk. The loan mix index component of the assessment model requires banks to calculate each of their loan categories as a percentage of assets and then multiply each category by a standardized historical charge-off rate percentage provided by the FDIC, with a higher index leading to a higher assessment rate. The rule implements maximum assessment rates for institutions with a composite CAMELS rating of 1 or 2 and minimum rates for institutions with a rating of 3, 4 or 5.
Dividend Restrictions
Under Delaware law, dividends may be paid only out of “surplus,” defined as an amount equal to the present fair value of the total assets of the corporation, minus the present fair value of the total liabilities of the corporation, minus the capital of the corporation. In the event that there is no surplus, dividends may be paid out of the net profits of the corporation for the fiscal year in which the dividend is declared and/or the immediately preceding fiscal year. Dividends may not be paid, however, out of net profits of the corporation if the capital represented by the issued and outstanding stock of all classes having a preference on the distribution of assets is impaired. Further, the Federal Reserve permits bank holding companies to pay dividends only out of current earnings and only if future retained earnings would be consistent with the company’s capital, asset quality and financial condition.
Since it has no significant independent sources of income, Bancshares’ ability to pay dividends depends on its ability to receive dividends from the Bank. Under Alabama law, a state-chartered bank must annually transfer to surplus at least 10% of its “net earnings” (defined as the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets, less all current operating expenses, actual losses, accrued dividends on preferred stock and all federal, state and local taxes) until the bank’s surplus is at least 20% of its capital. Until the bank’s surplus reaches this level, a bank may not declare a dividend in excess of 90% of its net earnings. Once a bank’s surplus equals or exceeds 20% of its capital, if the total of all dividends declared by the bank in a calendar year will exceed the sum of its net earnings for that year and its retained net earnings for the preceding two years (less any required transfers to surplus), then the bank must obtain prior written approval from the Superintendent of the Alabama State Banking Department. The bank may not pay any dividends or make any withdrawals or transfers from surplus without the prior written approval of the Superintendent. The FDIC prohibits the payment of cash dividends if (1) as a result of such payment, the bank would be undercapitalized or (2) the bank is in default with respect to any assessment due to the FDIC, including a deposit insurance assessment. These restrictions could materially influence the Bank’s, and therefore Bancshares’, ability to pay dividends.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16.LEASES
The Bank and ALC are involved in a number of operating leases, primarily for branch locations. Branch leases have remaining lease terms ranging from two years to six 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 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021:
Year Ended
Location
December 31,
December 31,
(Dollars in Thousands)
Operating lease expense (1)
Net occupancy and equipment
$
$
Operating lease income (2)
Lease income
$
$
(1)Includes short-term lease costs. For the years ended December 31, 2022 and 2021, short-term lease costs were nominal in amount.
(2)Operating lease income includes rental income from owned properties.
The following table provides supplemental lease information for operating leases on the Consolidated Balance Sheet as of December 31, 2022:
Location
December 31,
December 31,
(Dollars in
Thousands)
(Dollars in
Thousands)
Operating lease right-of-use assets
Other assets
$
1,883
$
2,245
Operating lease liabilities
Other liabilities
$
1,961
$
2,317
Weighted-average remaining lease term (in years)
5.03
5.90
Weighted-average discount rate
3.30
%
3.29
%
The following table provides supplemental lease information for the Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021:
Year Ended
December 31,
December 31,
(Dollars in Thousands)
Cash paid for amounts included in the measurement of
lease liabilities:
Operating cash flows from operating leases
$
$
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 2022:
Minimum
Rental Payments
(Dollars in
Thousands)
$
2028 and thereafter
Total future minimum lease payments
$
2,146
Less: Imputed interest
Total
$
1,961
17.DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of certain balance sheet assets and liabilities. In the normal course of business, the Company also uses derivative financial instruments to add stability to interest income or expense and to manage its exposure to movements in interest rates. The Company does not use derivatives for trading or speculative purposes and only enters into transactions that have a qualifying hedge relationship. The Company’s hedging strategies involving interest rate derivatives are classified as either cash flow hedges or fair value hedges, depending upon the rate characteristic of the hedged item.
Cash Flow Hedges
The Bank has entered into forward interest rate swap contracts on certain variable-rate money market deposit accounts (indexed to the Federal Funds effective rate’s daily weighted average). The money market account balances are expected to exceed the notional amount for the duration of the hedges and the rates on these deposits are anticipated to move closely with changes in one-month LIBOR, or a comparable benchmark interest rate. These interest rate swaps were designated as derivative instruments in cash flow hedges with the objective of converting the floating interest payments to a fixed rate. Under the swap arrangements, the Bank pays a fixed interest rate and receives a variable interest rate based on one-month LIBOR, or a comparable benchmark interest rate, on the notional amount, with monthly net settlements.
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 during the years ended December 31, 2022 and 2021.
Terminated Hedges
Cash Flow Hedge Terminated in 2022
During the second quarter of 2022, the Bank terminated a forward interest rate swap contract on a variable FHLB advance that was previously designated as a cash flow hedge. The termination of the swap resulted in a net deferred gain of $0.3 million which will remain in accumulated other comprehensive income and be reclassified into earnings over the original term of the interest rate swap contract. During the year ended December 31, 2022, a gain of $70 thousand, net of income taxes, was reclassified from other comprehensive income (loss) related to the terminated contract. There were no gains or losses reclassified from other comprehensive income (loss) related to cash flow hedges for the year ended December 31, 2021.
Hedges Terminated Subsequent to December 31, 2022
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Subsequent to December 31, 2022, the Company terminated all four interest rate swap contracts that were in place as of December 31, 2022 and recorded deferred gains totaling $2.2 million associated with the terminations. The purpose of the terminations was to partially mitigate interest rate risk in downward interest rate scenarios. The deferred gains will be accreted to net interest income over the remaining life of the original term of each swap.
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 December 31, 2022 and 2021.
As of December 31, 2022
As of December 31, 2021
Estimated Fair Value
Estimated Fair Value
Notional Amount
Gain (Loss) (1)
Notional Amount
Gain (Loss) (1)
(Dollars in Thousands)
Derivatives designated as hedging instruments:
Fair value hedges:
Interest rate swaps related to fixed rate commercial real estate loans
$
20,000
$
1,101
$
20,000
$
(198
)
Total fair value hedges
1,101
(198
)
Cash flow hedges:
Interest rate swaps related to variable-rate money market deposit accounts
20,000
1,205
20,000
(472
)
Interest rate swaps related to FHLB advances
-
-
10,000
(104
)
Total cash flow hedges
1,205
(576
)
Total hedges designated as hedging instruments, net
$
2,306
$
(774
)
(1) Derivatives in a gain position are recorded as other assets and derivatives in a loss position are recorded as other liabilities in the consolidated balance sheets.
The Company has elected the last-of-layer method with respect to both of its fair value hedges. This approach allows the Company to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and other factors affecting the timing and amount of cash flows. Relative to the identified pools of loans, this represents the last dollar amount of the designated commercial loans, which is equivalent to the notional amounts of the derivative instruments.
The following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:
Location in the 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
December 31, 2022
(Dollars in Thousands)
Loans and leases, net of allowance for loan and
lease losses (1)
$
32,233
$
1,101
(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 December 31, 2022, the amortized cost basis of the closed portfolios used in these hedging relationships was $33.3 million, the cumulative basis adjustments associated with these hedging relationships were $1.1 million, and the amounts of the designated hedged items were $20 million.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the effect of hedging derivative instruments on the Company’s Consolidated Statements of Operations.
Location in the
Year Ended December 31,
Consolidated Statements
of Operations
(Dollars in Thousands)
Interest income
Interest and fees on loans
$
$
(253
)
Interest expense
Interest on deposits
(127
)
Interest expense
Interest on short-term borrowings
(5
)
(333
)
Net increase (decrease) to income before income taxes
$
$
(713
)
18.SEGMENT REPORTING
In the tables below, 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.” 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 parent company and FUSB Reinsurance are included in the "All Other" column. The results for the two reportable segments of the Company are included in the tables below:
Bank
ALC
All Other
Eliminations
Consolidated
(Dollars in Thousands)
Total interest income
$
37,510
$
4,716
$
$
(1,034
)
$
41,197
Total interest expense
3,803
1,029
(1,034
)
4,256
Net interest income
33,707
3,687
(453
)
-
36,941
Provision for loan and lease losses
1,338
1,970
-
-
3,308
Net interest income after provision
32,369
1,717
(453
)
-
33,633
Total non-interest income
3,535
8,091
(8,379
)
3,451
Total non-interest expense
25,278
1,751
1,238
(195
)
28,072
Income (loss) before income taxes
10,626
6,400
(8,184
)
9,012
Provision for income taxes
2,475
(372
)
-
2,148
Net income (loss)
$
8,151
$
$
6,772
$
(8,184
)
$
6,864
Other significant items:
Total assets
$
998,727
$
19,772
$
101,072
$
(124,904
)
$
994,667
Total investment securities
132,657
-
-
-
132,657
Total loans, net
763,941
18,810
-
(18,300
)
764,451
Goodwill and core deposit intangible, net
7,801
-
-
-
7,801
Investment in subsidiaries
-
-
93,414
(93,414
)
-
Fixed asset additions
1,262
-
-
-
1,262
Depreciation and amortization expense
1,579
-
-
1,614
Total interest income from external customers
36,481
4,716
-
-
41,197
Total interest income from affiliates
1,029
-
(1,034
)
-
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Bank
ALC
All Other
Eliminations
Consolidated
(Dollars in Thousands)
Total interest income
$
32,537
$
9,019
$
$
(1,642
)
$
39,921
Total interest expense
2,842
1,635
(1,642
)
2,950
Net interest income
29,695
7,384
(108
)
-
36,971
Provision for loan and lease losses
1,515
-
-
2,010
Net interest income after provision
28,180
6,889
(108
)
-
34,961
Total non-interest income
3,206
5,697
(5,958
)
3,521
Total non-interest expense
25,188
6,599
1,421
(452
)
32,756
Income (loss) before income taxes
6,198
4,168
(5,506
)
5,726
Provision for income taxes
1,305
(251
)
-
1,275
Net income (loss)
$
4,893
$
$
4,419
$
(5,506
)
$
4,451
Other significant items:
Total assets
$
961,572
$
40,924
$
106,247
$
(150,441
)
$
958,302
Total investment securities
134,238
-
-
134,319
Total loans, net
699,600
39,499
-
(39,069
)
700,030
Goodwill and core deposit intangible, net
8,069
-
-
-
8,069
Investment in subsidiaries
-
-
95,172
(95,172
)
-
Fixed asset additions
-
-
Depreciation and amortization expense
1,613
-
-
1,692
Total interest income from external customers
30,902
9,019
-
-
39,921
Total interest income from affiliates
1,635
-
(1,642
)
-
On September 3, 2021, the Company announced that, effective immediately, ALC had ceased new business development and permanently closed its 20 branch lending locations in Alabama and Mississippi to the public. See Note 3 for additional discussion.
19.OTHER OPERATING INCOME AND EXPENSE
Other operating income for the years ended December 31, 2022 and 2021 consisted of the following:
Year Ended December 31,
(Dollars in Thousands)
Bank-owned life insurance
$
$
Credit insurance commissions and fees
$
(93
)
$
ATM fee income
Mortgage fees from secondary market
Wire transfer fees
Gain on sales of premises and equipment and other assets
Other income
Total
$
1,516
$
1,600
Other operating expense for the years ended December 31, 2022 and 2021 consisted of the following:
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year Ended December 31,
(Dollars in Thousands)
Postage, stationery and supplies
$
$
Telephone/data communication
Advertising and marketing
Travel and business development
Collection and recoveries
Other services
Insurance expense
FDIC insurance and state assessments
Loss on sales of premises and equipment and other assets
Core deposit intangible amortization
Other real estate/foreclosure expense, net
(331
)
(371
)
Other expense
2,124
2,114
Total
$
5,674
$
6,104
20.GUARANTEES, COMMITMENTS AND CONTINGENCIES
The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments. For interest rate swap transactions and commitments to purchase or sell securities for forward delivery, the contract or notional amounts do not represent exposure to credit loss. The Bank controls the credit risk of these derivative instruments through credit approvals, limits and monitoring procedures. Certain derivative contracts have credit risk for the carrying value plus the amount to replace such contracts in the event of counterparty default. All of the Bank’s financial instruments are held for risk management and not for trading purposes. During the years ended December 31, 2022 and 2021, there were no credit losses associated with derivative contracts.
In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit, letters of credit and other commitments, 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:
December 31,
(Dollars in Thousands)
Standby letters of credit
$
-
$
-
Standby performance letters of credit
$
$
Commitments to extend credit
$
186,169
$
164,247
Standby letters of credit and standby performance letters of credit are contingent commitments issued by the Bank generally to guarantee the performance of a customer to a third party. The Bank has recourse against the customer for any amount that it is required to pay to a third party under a standby letter of credit or standby performance letter of credit. Revenues are recognized over the lives of the standby letters of credit and standby performance letters of credit. As of December 31, 2022 and 2021, the potential amounts of future payments that the Bank could be required to make under its standby letters of credit and standby performance letters of credit, which represent the Bank’s total credit risk in these categories, are included in the table above.
A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon the extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is self-insured for a significant portion of employee health benefits. However, the Company maintains stop-loss coverage with third-party insurers to limit the Company’s individual claim and total exposure related to self-insurance. The Company estimates accrued liability for the ultimate costs to settle known claims, as well as claims incurred but not yet reported, as of the balance sheet date. The Company’s recorded estimated liability for self-insurance is based on the insurance companies’ incurred loss estimates and management’s judgment, including assumptions and evaluation of factors related to the frequency and severity of claims, the Company’s claims development history and the Company’s claims settlement practices. The assessment of loss contingencies and self-insurance reserves is a highly subjective process that requires judgments about future events. Contingencies are reviewed at least quarterly to determine the adequacy of self-insurance accruals. Self-insurance accruals totaled $0.2 million as of both December 31, 2022 and 2021. The ultimate settlement of loss contingencies and self-insurance reserves may differ significantly from amounts accrued in the Company’s consolidated financial statements.
Litigation
The Company is party to certain ordinary course litigation from time to time, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations.
21.FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows a uniform framework for estimating and classifying the fair value of financial instruments. 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 years ended December 31, 2022 or 2021.
Fair Value Measurements on a Recurring Basis
Securities Available-for-Sale
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include exchange-traded equities. Level 2 securities include U.S. Treasury and agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
Interest Rate Derivative Agreements
Interest rate derivative agreements are used by the Company to mitigate risk associated with changes in interest rates. The fair value of these agreements is based on information obtained from third-party financial institutions. This information is periodically evaluated by the Company and, as necessary, corroborated against other third-party valuations. The Company classifies these derivative assets within Level 2 of the valuation hierarchy.
The following table presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021.
Fair Value Measurements as of December 31, 2022 Using
Totals At
December 31,
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
$
43,957
$
-
$
43,957
$
-
Commercial
11,693
-
11,693
-
Obligations of U.S. government-sponsored agencies
4,270
-
4,270
-
Obligations of states and political subdivisions
2,072
-
2,072
-
Corporate notes
15,921
14,921
1,000
U.S. Treasury securities
52,882
52,882
-
-
Other assets - derivatives
2,306
-
2,306
-
Fair Value Measurements as of December 31, 2021 Using
Totals At
December 31,
Quoted Prices
in Active
Markets For
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(Dollars in Thousands)
Investment securities, available-for-sale
Mortgage-backed securities:
Residential
$
46,228
$
-
$
46,228
$
-
Commercial
24,971
-
24,971
-
Obligations of U.S. government-sponsored agencies
5,192
-
5,182
Obligations of states and political subdivisions
4,317
-
4,317
-
Corporate notes
15,482
15,482
-
U.S. Treasury securities
34,693
34,693
-
-
Other liabilities - derivatives
-
-
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value Measurements on a Non-recurring Basis
Impaired Loans
Loans that are considered impaired are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due under the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price or the fair value of the collateral less estimated selling cost if the loan is collateral-dependent. For the Company, the fair value of impaired loans is primarily measured based on the value of the collateral securing the loans (typically real estate). The Company determines the fair value of the collateral based on independent appraisals performed by qualified licensed appraisers. The appraisals may include a single valuation approach or a combination of approaches, including comparable sales and income approaches. Appraised values are discounted for estimated costs to sell and may be discounted further based on management’s knowledge of the collateral, changes in market conditions since the most recent appraisal and/or management’s knowledge of the borrower and the borrower’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are evaluated by management for additional impairment at least quarterly and are adjusted accordingly.
OREO and Other Assets Held-for-Sale
OREO consists of properties obtained through foreclosure or in satisfaction of loans and is recorded at net realizable value, less estimated cost to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically significant unobservable inputs for determining fair value.
As of both December 31, 2022 and 2021, included within OREO were certain assets that were formerly included as premises and equipment but have been removed from service, and as of the balance sheet date, were designated as assets to be disposed of by sale. These include assets associated with branches of the Bank and ALC that have been closed. When an asset is designated as held-for-sale, the Company ceases depreciation of the asset, and the asset is recorded at the lower of its carrying amount or fair value less estimated cost to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically unobservable inputs for determining fair value.
The following table presents the balances of impaired loans, OREO and other assets held-for-sale measured at fair value on a non-recurring basis as of December 31, 2022 and 2021:
Fair Value Measurements as of December 31, 2022 Using
Totals At
December 31,
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
$
$
-
$
-
$
OREO and other assets held-for-sale
-
-
Fair Value Measurements as of December 31, 2021 Using
Totals At
December 31,
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
$
$
-
$
-
$
OREO and other assets held-for-sale
2,149
-
-
2,149
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 2022. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input and the weighted average within the range utilized as of December 31, 2022 are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.
Level 3 Significant Unobservable Input Assumptions
Fair Value
December 31,
Valuation Technique
Unobservable Input
Quantitative Range
of Unobservable
Inputs
(Weighted Average)
(Dollars in Thousands)
Non-recurring fair value measurements:
Impaired loans
$
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
$
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.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments
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 borrowings: 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.
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 2022 and 2021 were as follows:
December 31, 2022
Carrying
Amount
Estimated
Fair
Value
Level 1
Level 2
Level 3
(Dollars in Thousands)
Assets:
Cash and cash equivalents
$
30,152
$
30,152
$
30,152
$
-
$
-
Investment securities available-for-sale
130,795
130,795
52,882
76,913
1,000
Investment securities held-to-maturity
1,862
1,769
-
1,769
-
Federal funds sold
1,768
1,768
-
1,768
-
Federal Home Loan Bank stock
1,359
1,359
-
-
1,359
Loans, net of allowance for loan losses
764,451
730,961
-
-
730,961
Liabilities:
Deposits
870,025
788,161
-
788,161
-
Short-term borrowings
20,038
20,038
-
20,038
-
Long-term borrowings
10,726
9,702
9,702
Other assets - derivatives
2,306
2,306
-
2,306
-
December 31, 2021
Carrying
Amount
Estimated
Fair
Value
Level 1
Level 2
Level 3
(Dollars in Thousands)
Assets:
Cash and cash equivalents
$
61,244
$
61,244
$
61,244
$
-
$
-
Investment securities available-for-sale
130,883
130,883
34,612
96,260
Investment securities held-to-maturity
3,436
3,477
-
3,477
-
Federal funds sold
-
-
Federal Home Loan Bank stock
-
-
Loans, net of allowance for loan losses
700,030
694,744
-
-
694,744
Liabilities:
Deposits
838,126
837,439
-
837,439
-
Short-term borrowings
10,046
10,046
-
10,046
-
Long-term borrowings
10,653
10,804
10,804
Other liabilities - derivatives
-
-
22.FIRST US BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Balance Sheets
Year Ended December 31,
(Dollars in Thousands)
Assets:
Cash on deposit
$
2,855
$
5,890
Investment in subsidiaries
93,414
95,172
Other assets
Total assets
$
96,347
$
101,145
Liabilities:
Other liabilities
$
$
Long-term borrowings
10,726
10,653
Shareholders’ equity
85,136
90,064
Total liabilities and shareholders’ equity
$
96,347
$
101,145
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statements of Operations
Year Ended December 31,
(Dollars in Thousands)
Income:
Dividend income, First US Bank
$
3,463
$
1,570
Total income
3,463
1,570
Expense
1,320
1,055
Gain before equity in undistributed income of subsidiaries
2,143
Equity in undistributed income of subsidiaries
4,721
3,936
Net income
$
6,864
$
4,451
Statements of Cash Flows
Year Ended December 31,
(Dollars in Thousands)
Cash flows from operating activities:
Net income
$
6,864
$
4,451
Adjustments to reconcile net income to net cash provided
by operating activities:
Distributions in excess of undistributed income
of subsidiaries
(4,721
)
(3,936
)
Change in other assets and liabilities
Net cash provided by operating activities
2,278
1,095
Cash flows from investing activities:
Investment in subsidiaries
-
(5,000
)
Net cash used in investing activities
-
(5,000
)
Cash flows from financing activities:
Net proceeds from long-term borrowings
-
10,653
Net share-based compensation transactions
-
(7
)
Dividends paid
(832
)
(745
)
Treasury stock repurchases
(4,481
)
(525
)
Net cash provided by (used in) in financing activities
(5,313
)
9,376
Net increase (decrease) in cash
(3,035
)
5,471
Cash at beginning of year
5,890
Cash at end of year
$
2,855
$
5,890
FIRST US BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23.QUARTERLY DATA (UNAUDITED)
Year Ended December 31,
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(Dollars in Thousands)
Interest income
$
11,621
$
10,670
$
9,525
$
9,381
$
9,987
$
10,030
$
10,059
$
9,845
Interest expense
1,730
1,155
Net interest income
9,891
9,515
8,826
8,709
9,260
9,335
9,312
9,064
Provision for loan and lease losses
1,165
Net interest income after provision
for loan and lease losses
9,364
8,350
7,931
7,988
8,767
8,717
8,814
8,663
Non-interest:
Income
1,088
Expense
7,106
7,032
6,878
7,056
7,414
8,547
8,399
8,396
Income before income taxes
2,936
2,406
1,909
1,761
2,218
1,066
1,224
1,218
Provision for income taxes
Net income after taxes
$
2,228
$
1,860
$
1,415
$
1,361
$
1,711
$
$
$
Earnings per common share:
Basic earnings
$
0.37
$
0.31
$
0.23
$
0.22
$
0.27
$
0.13
$
0.15
$
0.15
Diluted earnings
$
0.35
$
0.29
$
0.22
$
0.20
$
0.25
$
0.13
$
0.14
$
0.14

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures and Changes in Internal Control over Financial Reporting
Bancshares maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Bancshares’ Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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) or 15d-15(e) promulgated under the Exchange Act) as of December 31, 2022, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based on that evaluation, Bancshares’ management concluded, as of December 31, 2022, that Bancshares’ disclosure controls and procedures are effective at the reasonable assurance level to ensure that the information required to be disclosed in Bancshares’ periodic filings with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified.
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 December 31, 2022 that have materially affected, or are reasonably likely to materially affect, Bancshares’ internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
This report is included in Item 8 beginning on page 47 and is incorporated herein by reference.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
Bancshares has adopted a Code of Business Conduct and Ethics for directors, officers (including its Chief Executive Officer and Chief Financial Officer) and employees. This Code of Business Conduct and Ethics can be found on our website at http://www.fusb.com under the tabs “Investors - Governance - FUSB Policies.” Bancshares will provide any interested person a copy of the Code of Business Conduct and Ethics free of charge, upon written request to First US Bancshares, Inc., Attention: Beverly J. Dozier, Corporate Secretary, 131 West Front Street, Post Office Box 249, Thomasville, Alabama 36784.
Other information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from Bancshares’ definitive proxy statement for the 2023 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from Bancshares’ definitive proxy statement for the 2023 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from Bancshares’ definitive proxy statement for the 2023 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from Bancshares’ definitive proxy statement for the 2023 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from Bancshares’ definitive proxy statement for the 2023 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules.
(a)Documents filed as part of this report
(1)Financial Statements.
The consolidated financial statements of Bancshares and its subsidiaries, included herein in Item 8, are as follows:
•Management’s Annual Report on Internal Control over Financial Reporting;
•Report of Independent Registered Public Accounting Firm - Carr, Riggs & Ingram, LLC (PCAOB ID 213);
•Consolidated Balance Sheets - December 31, 2022 and 2021;
•Consolidated Statements of Operations - Years Ended December 31, 2022 and 2021;
•Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2022 and 2021;
•Consolidated Statements of Comprehensive (Loss) Income - Years Ended December 31, 2022 and 2021;
•Consolidated Statements of Cash Flows - Years Ended December 31, 2022 and 2021; and
•Notes to Consolidated Financial Statements - Years Ended December 31, 2022 and 2021.
(2)Financial Statement Schedules.
The financial statement schedules required to be included pursuant to this Item are not included herein because they are not applicable, or the required information is shown in the financial statements or notes thereto, which are incorporated by reference at subsection (a)(1) of this Item, above.
(3)Exhibits.
The exhibits to this report are listed in the exhibit index below.
(b)Description of Exhibits
The following exhibits are filed with this report or incorporated by reference.
Exhibit
No.
Description
2.1#
Stock Purchase and Affiliate Merger Agreement, dated April 16, 2018, by and among First US Bancshares, Inc., First US Bank, The Peoples Bank, Tracy E. Thompson and Tyler S. Thompson, and Tracy E. Thompson as shareholder representative (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 000-14549), filed on April 17, 2018)
3.1
Certificate of Incorporation of United Security Bancshares, Inc. (incorporated by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 12, 1999)
3.1A
Certificate of Amendment to the Certificate of Incorporation of United Security Bancshares, Inc., effective as of October 11, 2016 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 000-14549), filed on October 11, 2016)
3.2
Bylaws of First US Bancshares, Inc., effective as of November 16, 2022 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 000-14549), filed on November 16, 2022)
4.1
Description of Registrant’s Securities Registered Pursuant to Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.1 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 18, 2020)
10.1
Amended and Restated Executive Employment Agreement, dated December 19, 2013 (effective as of January 1, 2014), by and among United Security Bancshares, Inc., First United Security Bank and James F. House (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-14549), filed on December 19, 2013)*
10.2
Amended and Restated Change in Control Agreement dated March 1, 2022, by and among First US Bancshares, Inc., First US Bank and Thomas S. Elley (incorporated by reference to Exhibit 10.1 to the Current Report on 8-K (File No. 000-14549), filed on March 4, 2022)*
10.3
Second Amended and Restated Change in Control Agreement dated March 1, 2022, by and among First US Bancshares, Inc., First US Bank, 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 March 4, 2022)*
10.4
Change in Control Agreement dated May 20, 2014, by and among United Security Bancshares, Inc., First United Security Bank and Beverly J. Dozier (incorporated by reference to Exhibit 10.5 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 11, 2016)*
10.5
Amended and Restated Change in Control Agreement dated March 3, 2023, by and among First US Bancshares, Inc., First US Bank and Eric H. Mabowitz*
10.6
Form of Director Indemnification Agreement between United Security Bancshares, Inc. and its directors (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-14549), filed on October 30, 2009)*
10.7
First US Bancshares, Inc. 2013 Incentive Plan, as amended on May 2, 2019 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on May 10, 2019)*
10.8
Form of Nonqualified Stock Option Agreement (Employees - Three-Year Vesting - 2016 Grants) (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 11, 2016)*
10.9
Form of Nonqualified Stock Option Agreement (Employees - Three-Year Vesting - 2017, 2018 and 2019 Grants) (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2018)*
10.10
Form of Restricted Stock Award Agreement (Five-Year Vesting) under the United Security Bancshares, Inc. 2013 Incentive Plan (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.11
Form of Nonqualified Stock Option Agreement (Employees - Three-Year Vesting) (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 18, 2020)*
10.12
Form of Restricted Stock Award Agreement (Employees - Three-Year Vesting) (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 18, 2020)*
10.13
Form of Restricted Stock Award Agreement (Non-Employee Directors - One-Year Vesting) (incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 18, 2020)*
10.14
First United Security Bank Director Retirement Agreement dated October 17, 2002, with John C. Gordon (incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 14, 2002)*
10.14A
First Amendment to the First United Security Bank Director Retirement Agreement for John C. Gordon, dated November 20, 2008 (incorporated by reference to Exhibit 10.13A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.14B
Second Amendment to the First United Security Bank Director Retirement Agreement for John C. Gordon, dated January 25, 2017 (incorporated by reference to Exhibit 10.15B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.15
First United Security Bank Director Retirement Agreement dated October 16, 2002, with William G. Harrison (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 21, 2003)*
10.15A
First Amendment to the First United Security Bank Director Retirement Agreement for William G. Harrison, dated November 20, 2008 (incorporated by reference to Exhibit 10.14A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.15B
Second Amendment to the First United Security Bank Director Retirement Agreement for William G. Harrison, dated January 25, 2017 (incorporated by reference to Exhibit 10.16B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.16
First United Security Bank Director Retirement Agreement dated October 17, 2002, with Jack Meigs (incorporated by reference to Exhibit 10.13 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 14, 2002)*
10.16A
First Amendment to the First United Security Bank Director Retirement Agreement for Jack Meigs, dated November 20, 2008 (incorporated by reference to Exhibit 10.16A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.16B
Second Amendment to the First United Security Bank Director Retirement Agreement for Jack Meigs, dated January 25, 2017 (incorporated by reference to Exhibit 10.17B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.17
First United Security Bank Director Retirement Agreement dated October 17, 2002, with Bruce N. Wilson (incorporated by reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 14, 2002)*
10.17A
First Amendment to the First United Security Bank Director Retirement Agreement for Bruce N. Wilson, dated November 20, 2008 (incorporated by reference to Exhibit 10.21A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.17B
Second Amendment to the First United Security Bank Director Retirement Agreement for Bruce N. Wilson, dated January 25, 2017 (incorporated by reference to Exhibit 10.19B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2017)*
10.18
First United Security Bank Director Retirement Agreement dated November 17, 2011, with Andrew C. Bearden, Jr. (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 30, 2012)*
10.19
First United Security Bank Director Retirement Agreement dated November 30, 2011, with J. Lee McPhearson (incorporated by reference to Exhibit 10.22 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 30, 2012)*
10.20
United Security Bancshares, Inc. Non-Employee Directors’ Deferred Compensation Plan (incorporated by reference to Exhibit 10.22 to the Annual Report on Form 10-K (File No. 000-14549), filed on March 12, 2004)*
10.20A
Amendment One to the United Security Bancshares, Inc. Non-Employee Directors’ Deferred Compensation Plan dated December 18, 2008 (incorporated by reference to Exhibit 10.22A to the Annual Report on Form 10-K (File No. 000-14549), filed on March 16, 2009)*
10.20B
Amendment Two to the United Security Bancshares, Inc. Non-Employee Directors’ Deferred Compensation Plan dated December 30, 2010 (incorporated by reference to Exhibit 10.22B to the Annual Report on Form 10-K (File No. 000-14549), filed on March 15, 2011)*
10.21
First US Bancshares, Inc. 2020 Cash Incentive Program (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File. No. 000-14549), filed on March 3, 2020)*
10.22
First US Bancshares, Inc. Non-Employee Director Fee Schedule (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on August 11, 2021)*
10.23A
Real Estate Sales Agreement, dated April 20, 2015 (incorporated by reference to Exhibit 10.1A to the Current Report on Form 8-K (File No. 000-14549), filed on March 11, 2016)
10.23B
First Amendment to Real Estate Sales Agreement, dated May 26, 2015 (incorporated by reference to Exhibit 10.1B to the Current Report on Form 8-K (File No. 000-14549), filed on March 11, 2016)
10.23C
Second Amendment to Real Estate Sales Agreement, dated August 25, 2015 (incorporated by reference to Exhibit 10.1C to the Current Report on Form 8-K (File No. 000-14549), filed on March 11, 2016)
10.23D
Third Amendment to Real Estate Sales Agreement, dated September 17, 2015 (incorporated by reference to Exhibit 10.1D to the Current Report on Form 8-K (File No. 000-14549), filed on March 11, 2016)
10.23E
Fourth Amendment to Real Estate Sales Agreement, dated October 17, 2015 (incorporated by reference to Exhibit 10.1E to the Current Report on Form 8-K (File No. 000-14549), filed on March 11, 2016)
10.24
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)*
10.25
Form of Subordinated Note Purchase Agreement, dated October 1, 2021, by and among First US Bancshares, Inc. and the Purchasers (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-14549), filed on October 4, 2021)
10.26
2022 Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-14549), filed on January 26, 2022)*
10.27
2023 Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-14549), filed on January 25, 2023)*
Subsidiaries of First US Bancshares, Inc.
Consent of Carr, Riggs & Ingram, LLC
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act, as amended
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from the Company’s Form 10-K Report for the year ended December 31, 2022, formatted in Inline XBRL: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Changes in Shareholders' Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
# Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. First US Bancshares, Inc. agrees to furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.
* Indicates a management contract or compensatory plan or arrangement.