FIRST US BANCSHARES, INC. 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS O F 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, 2023. 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. 27 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, 2023 2022 2021 2020 2019 (Dollars in Thousands, except Per Share Amounts) Results of Operations: Interest income $ 52,806 $ 41,197 $ 39,921 $ 40,377 $ 43,588 Interest expense 15,456 4,256 2,950 4,611 6,646 Net interest income 37,350 36,941 36,971 35,766 36,942 Provision for credit losses 319 3,308 2,010 2,945 2,714 Non-interest income 3,381 3,451 3,521 5,010 5,366 Non-interest expense 29,141 28,072 32,756 34,299 33,782 Income before income taxes 11,271 9,012 5,726 3,532 5,812 Provision for income taxes 2,786 2,148 1,275 825 1,246 Net income $ 8,485 $ 6,864 $ 4,451 $ 2,707 $ 4,566 Per Share Data: Basic net income per share $ 1.42 $ 1.13 $ 0.70 $ 0.43 $ 0.71 Diluted net income per share $ 1.33 $ 1.06 $ 0.66 $ 0.40 $ 0.67 Dividends per share $ 0.20 $ 0.14 $ 0.12 $ 0.12 $ 0.09 Common stock price - High $ 10.44 $ 12.00 $ 12.50 $ 12.00 $ 11.93 Common stock price - Low $ 6.54 $ 6.46 $ 7.54 $ 5.18 $ 7.60 Period end price per share $ 10.31 $ 8.68 $ 10.57 $ 9.02 $ 11.61 Period end shares outstanding (in thousands) 5,735 5,812 6,172 6,177 6,158 Period-End Balance Sheet: Total assets $ 1,072,940 $ 994,667 $ 958,302 $ 890,511 $ 788,738 Total loans 821,791 773,873 708,350 645,844 551,005 Allowance for credit losses on loans 10,507 9,422 8,320 7,470 5,762 Investment securities, net 136,669 132,657 134,319 91,422 108,356 Total deposits 950,191 870,025 838,126 782,212 683,662 Short-term borrowings 10,000 20,038 10,046 10,017 10,025 Long-term borrowings 10,799 10,726 10,653 — — Total shareholders’ equity 90,593 85,135 90,064 86,678 84,748 Book value 15.80 14.65 14.59 14.03 13.76 Performance Ratios: Total loans to deposits 86.5 % 88.9 % 84.5 % 82.6 % 80.6 % Net interest margin 3.87 % 4.07 % 4.23 % 4.69 % 5.18 % Return on average assets 0.82 % 0.70 % 0.47 % 0.32 % 0.58 % Return on average equity 9.88 % 7.99 % 5.01 % 3.17 % 5.51 % Asset Quality: Allowance for credit losses as % of loans 1.28 % 1.22 % 1.17 % 1.16 % 1.05 % Nonperforming assets as % of loans and other real estate 0.37 % 0.30 % 0.59 % 0.62 % 0.87 % Nonperforming assets as % of total assets 0.28 % 0.24 % 0.43 % 0.45 % 0.61 % Net charge-offs as a % of average loans 0.14 % 0.30 % 0.16 % 0.21 % 0.38 % Capital Adequacy: Common equity tier 1 risk-based capital ratio 10.88 % 11.07 % 11.36 % 11.78 % 12.78 % Tier 1 risk-based capital ratio 10.88 % 11.07 % 11.36 % 11.78 % 12.78 % Total risk-based capital ratio 12.11 % 12.19 % 12.44 % 12.92 % 13.77 % Tier 1 leverage ratio 9.36 % 9.39 % 9.17 % 8.98 % 9.61 % 28 DESCRIPTION OF THE BUSINESS First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its subsidiary, 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 17 states, including Alabama, Arkansas, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. Previously, the Bank had two wholly owned subsidiaries: Acceptance Loan Company, Inc., an Alabama corporation (“ALC”), and FUSB Reinsurance, Inc., an Arizona corporation (“FUSB Reinsurance”). Both ALC and FUSB Reinsurance were dissolved in 2023, after all remaining assets and liabilities of these entities were transferred to the Bank. As used herein, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Bancshares and the Bank, as well as ALC and FUSB Reinsurance (for periods prior to their dissolution), collectively. ALC was a finance company headquartered in Mobile, Alabama. The Bank will continue to manage the remaining loans from ALC’s portfolio, which totaled $10.5 million as of December 31, 2023, through final resolution. FUSB Reinsurance was designed to reinsure certain insurance policies sold to the Bank's and ALC's consumer loan customers. 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 2023 and 2022. 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 2023, the banking industry was impacted by significant volatility due both to notable banking failures that began during the first quarter of 2023, as well as ongoing increases in interest rates. The interest rate environment generally led to contraction of net interest margin throughout the industry. While inflation in 2023 eased from 40-year highs that were reached during 2022, it remained elevated over the Federal Reserve Bank's ("FRB") long run target. In its effort to reduce inflation, the FRB raised the target federal funds rate by 525 basis points between March 2022 and July 2023. As of December 31, 2023, the target federal funds rate was in a range of 5.25% to 5.50%. Economic activity generally improved in 2023 compared to 2022; however, as the year closed, significant uncertainty continued to exist related to the potential impact of geopolitical developments (including conflicts in Ukraine and the Middle East), ongoing supply chain disruption, continued higher pricing levels in certain sectors, and the weight of ongoing growth in fiscal deficit levels in the United States. In addition, as of December 31, 2023, the treasury curve (comparing the 10-year treasury to the 2-year treasury) had remained inverted for approximately 18 months. Inversion of the yield curve is commonly considered a leading indicator of economic recession. Furthermore, while inflation remained elevated, unemployment levels in the United States remained low throughout 2023. This has generally caused increased workforce competition resulting in increased labor costs in many industries. This environment has led to increased competitive pressures in a number of areas within the banking industry, but in particular, with respect to deposit pricing. Due to pricing pressures, compression of net interest margin occurred throughout the industry in 2023, and impacted the Company. The ultimate impact that competitive pressures around deposit pricing and other economic factors will have cannot be predicted with certainty. If the rate of inflation remains elevated or accelerates, the Company’s operations could be impacted by, among other things, accelerating costs of goods and services, including the costs of salaries and benefits. Additionally, the Company’s borrowers could be negatively impacted by rising expense levels, leading to deterioration of credit quality and/or reductions in the Company’s lending activity. 29 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 credit losses, goodwill and other intangible assets, other real estate owned, valuation of deferred tax assets and fair value measurements. Allowance for Credit Losses on Loans and Leases The allowance for credit losses is a contra-asset valuation account that is deducted from the amortized cost basis of the loans to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. The allowance for credit losses on loans and leases is adjusted through the provision for (recovery of) credit losses. Management estimates the allowance by using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in loan-specific risk characteristics such as changes in economic and business conditions, underwriting standards, portfolio mix, and delinquency level. Considerations related to environmental conditions include reasonable and supportable current and forecasted data related to economic factors such as inflation, unemployment levels, and interest rates. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty as of the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for estimated selling costs as appropriate. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company, or management has a reasonable expectation at the reporting date that a loan modification will be made to a borrower experiencing financial difficulty. Allowance for Credit Losses on Unfunded Lending Commitments Off-balance sheet credit exposures include unfunded lending commitments that represent unconditional commitments of the Company to lend to a borrower. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The following categories of off-balance sheet credit exposures have been identified: unfunded loan commitments, standby letters of credit, and financial guarantees (collectively, “unfunded lending commitments”). The allowance for credit losses on unfunded lending commitments is included in other liabilities on the Company’s consolidated balance sheet and is adjusted through the provision for (recovery of) credit losses. The estimate may include consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded, as well as reasonable practical expedients or industry practices to assist in the evaluation of estimated funding amounts. Allowance for Credit Losses on Investment Securities Held-to-Maturity Expected credit losses on held-to-maturity debt securities are measured on a collective basis by major security type. Accrued interest receivable on held-to-maturity securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The allowance for credit losses on investment securities held-to-maturity is adjusted through the provision for (recovery of) credit losses. Allowance for Credit Losses on Investment Securities Available-for-Sale For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes in the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount 30 that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded in the provision for (recovery of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses. 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, 2023 or 2022. As of October 1, 2023, 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, 2023, the Company had $0.2 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, 2023 or 2022. 31 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, 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 During the third quarter of 2021, the Company executed strategic initiatives that were designed to improve operating efficiency, focus the Company’s loan growth activities, and fortify asset quality. The most significant component of these initiatives was the cessation of new business at ALC. This initiative, which included the closure of ALC’s branch lending locations in September 2021, served to significantly decrease the Company’s non-interest expense, and has led to substantial improvement in the Company’s consumer lending asset quality as ALC’s remaining loans pay down. Historically, ALC’s loans have produced significantly higher levels of charge-offs than the Bank’s other loan portfolios. During the fourth quarter of 2023, the Company transferred all remaining assets and liabilities of ALC to the Bank via intercompany transactions. On December 29, 2023, ALC was dissolved as a legal entity. The Bank will continue to manage the remaining loans from ALC’s portfolio, which totaled $10.5 million as of December 31, 2023, through final resolution. Financial Highlights For the year ended December 31, 2023, the Company earned net income of $8.5 million, or $1.33 per diluted common share, compared to net income of $6.9 million, or $1.06 per diluted common share, for the year ended December 31, 2022. 32 Summarized condensed consolidated statements of operations are included below for the years ended December 31, 2023 and 2022, respectively. Year Ended December 31, 2023 2022 (Dollars in Thousands) Interest income $ 52,806 $ 41,197 Interest expense 15,456 4,256 Net interest income 37,350 36,941 Provision for credit losses 319 3,308 Net interest income after provision for credit losses 37,031 33,633 Non-interest income 3,381 3,451 Non-interest expense 29,141 28,072 Income before income taxes 11,271 9,012 Provision for income taxes 2,786 2,148 Net income $ 8,485 $ 6,864 Basic net income per share $ 1.42 $ 1.13 Diluted net income per share $ 1.33 $ 1.06 Dividends per share $ 0.20 $ 0.14 The discussion that follows summarizes the most significant activity that impacted changes in the Company’s operations during 2023 as compared to 2022, as well as significant changes in the Company’s balance sheet comparing December 31, 2023 to December 31, 2022. Net Interest Income and Margin Net interest income increased by $0.4 million, or 1.1%, comparing the year ended December 31, 2023 to the year ended December 31, 2022. The increase was primarily attributable to growth in loans which averaged $795.4 million during the year ended December 31, 2023, compared to $724.6 million during the year ended December 31, 2022. The average rate on earning assets totaled 5.47% for the year ended December 31, 2023, compared to 4.53% for the year ended December 31, 2022. While yields on earning assets increased in 2023, rates on interest-bearing liabilities increased at a faster pace, causing margin compression. Net interest margin was 3.87% for the year ended December 31, 2023, compared to 4.07% for the year ended December 31, 2022. The Company’s total funding costs, including the cost of interest and non-interest bearing deposits, as well as borrowings, increased to 1.65% during the year ended December 31, 2023, compared to 0.48% during the year ended December 31, 2022. Provision for Credit Losses The provision for credit losses was $0.3 million for the year ended December 31, 2023, compared to $3.3 million during the year ended December 31, 2022. The reduction resulted primarily from reduced charge-off levels comparing the two periods, mostly related to legacy ALC loans which continued to reduce following implementation of the cessation of business strategy. The Company’s net charge-offs totaled $1.1 million in 2023, compared to $2.2 million in 2022. The reduction included a decrease of $1.7 million in net charge-offs associated with ALC’s portfolio, partially offset by an increase of $0.6 million in net charge-offs associated with the indirect consumer portfolio. The Company’s net charge-offs as a percentage of average loans totaled 0.14% during the year ended December 31, 2023, compared to 0.30% during the year ended December 31, 2022. As of December 31, 2023, the Company’s allowance for credit losses on loans as a percentage of total loans was 1.28%, compared to 1.22% as of December 31, 2022. The allowance in 2023 was calculated under the current expected credit loss (CECL) accounting model which was adopted by the Company effective January 1, 2023. Non-interest Income Non-interest income totaled $3.4 million and $3.5 million for the years ended December 31, 2023 and 2022, respectively. The modest reduction in non-interest income resulted from gains on the sale of premises and equipment that occurred in 2022 but were not repeated in 2023. 33 Non-interest Expense Non-interest expense increased to $29.1 million for the year ended December 31, 2023, compared to $28.1 million for the year ended December 31, 2022. Approximately $0.4 million of the increase resulted from nonrecurring gains on the sale of OREO properties that reduced other real estate expense in 2022 but were not repeated in 2023. In addition, regulatory assessments from the FDIC and state banking authorities increased by approximately $0.3 million and the Bank experienced an increase in check fraud of approximately $0.2 million, comparing 2023 to 2022. Total Assets As of December 31, 2023, the Company's assets totaled $1,072.9 million, compared to $994.7 million as of December 31, 2022, an increase of 7.9%, primarily due to the loan and deposit growth described below. Loans Total loans increased by $47.9 million, or 6.2%, as of December 31, 2023, compared to December 31, 2022. Loan volume increases during 2023 were driven primarily by growth in indirect consumer loans, commercial construction loans, and non-farm non-residential real estate loans. Growth in indirect consumer lending was consistent with continued demand for the products collateralized through the Company's indirect program, including recreational vehicles, campers, boats, horse trailers and cargo trailers. The increase in commercial construction lending (construction, land development and other land loans) was primarily attributable to continued growth in construction fundings on multi-family residential projects. The loan growth during 2023 was partially offset by decreases in the residential real estate (including 1-4 family and multi-family) and commercial and industrial categories, as well as the direct consumer and branch retail consumer categories. Loans in the direct consumer and branch retail categories were expected to decrease as they comprise the majority of ALC’s remaining loan balances. Asset Quality Nonperforming assets, including loans in non-accrual status and OREO, totaled $3.0 million as of December 31, 2023 compared to $2.3 million as of December 31, 2022. The increase in nonperforming assets resulted primarily from one commercial real estate loan that moved into nonaccrual status during the third quarter of 2023. As a percentage of total assets, nonperforming assets totaled 0.28% as of December 31, 2023, compared to 0.24% as of December 31, 2022. Non-accrual loans as a percentage of total loans were 0.29% as of December 31, 2023, compared to 0.21% as of December 31, 2022. OREO totaled $0.6 million and 0.7 million as of December 31, 2023 and 2022, respectively. Deposit Growth Deposits totaled $950.2 million as of December 31, 2023, compared to $870.0 million as of December 31, 2022. The growth in 2023 included an increase of $96.4 million in interest-bearing deposits, partially offset by a decrease of $16.2 million in noninterest-bearing deposits. The shift to interest-bearing deposits is consistent with deposit holders seeking to maximize interest earnings on their accounts amid the rising interest rate environment. The deposit growth in 2023 included growth of $20.2 million in wholesale brokered deposits that were acquired in order to further enhance the Company’s liquidity position following the bank failures that began during the first quarter of 2023. As of December 31, 2023, core deposits, which exclude time deposits of $250 thousand or more and all brokered deposits, totaled $819.5 million, or 86.2% of total deposits, compared to $778.1 million, or 89.4% of total deposits, as of December 31, 2022. Deployment of Funds Management seeks to deploy earning assets in an efficient manner to maximize net interest income while maintaining appropriate levels of liquidity to protect the safety and soundness of the organization. Management’s decisions during 2023, particularly following the bank failures that occurred, were focused on maintaining the Company’s strong liquidity position. As part of this focus, management elected to hold higher levels of cash and cash equivalents. Cash and cash equivalents totaled $50.3 million as of December 31, 2023, compared to $30.2 million as of December 31, 2022. Investment securities, including both the available-for-sale and held-to-maturity portfolios, totaled $136.7 million as of December 31, 2023, compared to $132.7 million as of December 31, 2022. The expected average life of securities in the investment portfolio was 3.9 years as of December 31, 2023, compared to 3.5 years as of December 31, 2022. Management will continue to evaluate opportunities to invest excess cash balances within the context of anticipated loan and deposit growth and current liquidity needs. 34 Shareholders’ Equity Shareholders’ equity increased by $5.5 million, or 6.4%, as of December 31, 2023, compared to December 31, 2022. The increase in shareholders’ equity resulted from increased earnings, net of dividends paid, combined with valuation increases in the Company’s available-for-sale investment portfolio that reduced accumulated other comprehensive loss. The increase in shareholders’ equity during the year was partially offset by the CECL transition adjustment, which reduced retained earnings by $1.8 million, net of tax, as well as a decrease of $1.4 million associated with share repurchases. Cash Dividends The Company declared cash dividends totaling $0.20 per share on its common stock during 2023, compared to cash dividends totaling $0.14 per share on its common stock during 2022. Share Repurchases During 2023, the Company completed share repurchases totaling 137,500 shares of its common stock at a weighted average price of $10.34 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, 2024. As of December 31, 2023, a total of 459,313 shares remained available for repurchase under the program. Regulatory Capital During 2023, 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, 2023, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 10.88%. Its total capital ratio was 12.11%, and its Tier 1 leverage ratio was 9.36%. Liquidity As of December 31, 2023, 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, FHLB advances, brokered deposits, and funding capacity with the FRB. In response to heightened liquidity concerns in the banking industry, during 2023 management undertook measures designed to enhance the Company’s liquidity position. These procedures included holding higher levels of on-balance sheet cash, as well as enhancing the availability of off-balance sheet borrowing capacity. As part of these efforts, during the third quarter of 2023, the Company completed the establishment of additional borrowing capacity through the FRB's discount window, primarily via the pledging of the majority of the Company’s indirect loan portfolio as collateral. Due to these efforts, the Company’s immediate borrowing capacity based on collateral pledged through the discount window increased to $161.7 million as of December 31, 2023, compared to $1.2 million as of December 31, 2022. 35 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, 2023 and 2022. 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, 2023 2022 Average Balance Interest Annualized Yield/ Rate % Average Balance Interest Annualized Yield/ Rate % (Dollars in Thousands) ASSETS Interest-earning assets: Total loans (1) $ 795,446 $ 47,749 6.00 % $ 724,639 $ 38,015 5.25 % Taxable investment securities 127,653 2,858 2.24 % 141,283 2,632 1.86 % Tax-exempt investment securities 1,042 13 1.25 % 2,342 36 1.54 % Federal Home Loan Bank stock 1,264 93 7.36 % 1,247 53 4.25 % Federal funds sold 1,841 95 5.16 % 584 22 3.77 % Interest-bearing deposits in banks 38,111 1,998 5.24 % 38,379 439 1.14 % Total interest-earning assets 965,357 52,806 5.47 % 908,474 41,197 4.53 % Noninterest-earning assets 63,765 65,855 Total $ 1,029,122 $ 974,329 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing liabilities: Demand deposits $ 212,010 $ 777 0.37 % $ 246,124 $ 638 0.26 % Savings deposits 229,238 5,007 2.18 % 208,672 1,204 0.58 % Time deposits 305,848 8,566 2.80 % 212,591 1,540 0.72 % Total interest-bearing deposits 747,096 14,350 1.92 % 667,387 3,382 0.51 % Noninterest-bearing demand deposits 160,598 — — 182,032 — — Total deposits 907,694 14,350 1.58 % 849,419 3,382 0.40 % Borrowings 26,252 1,106 4.21 % 30,048 874 2.91 % Total funding costs 933,946 15,456 1.65 % 879,467 4,256 0.48 % Other noninterest-bearing liabilities 9,302 8,977 Shareholders’ equity 85,874 85,885 Total $ 1,029,122 $ 974,329 Net interest income (2) $ 37,350 $ 36,941 Net interest margin 3.87 % 4.07 % (1) For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. Non-accruing loans averaged $1.7 million and $1.8 million for the years ended December 31, 2023 and 2022, respectively. (2) Loan fees are included in the interest amounts presented. Loan fees totaled $0.6 million and $0.9 million for the years ended December 31, 2023 and December 31, 2022, respectively. 36 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. 2023 Compared to 2022 Increase (Decrease) Due to Change In: 2022 Compared to 2021 Increase (Decrease) Due to Change In: Volume Average Rate Net Volume Average Rate Net (Dollars in Thousands) Interest earned on: Total loans $ 3,715 $ 6,019 $ 9,734 $ 2,212 $ (2,426 ) $ (214 ) Taxable investment securities (254 ) 480 226 479 650 1,129 Tax-exempt investment securities (20 ) (3 ) (23 ) (18 ) (6 ) (24 ) Federal Home Loan Bank stock 1 39 40 12 7 19 Federal funds sold 47 26 73 0 22 22 Interest-bearing deposits in banks (3 ) 1,562 1,559 (48 ) 392 344 Total interest-earning assets 3,486 8,123 11,609 2,637 (1,361 ) 1,276 Interest expense on: Demand deposits (88 ) 227 139 24 61 85 Savings deposits 119 3,684 3,803 46 559 605 Time deposits 676 6,350 7,026 (93 ) 116 23 Borrowings (110 ) 342 232 344 249 593 Total interest-bearing liabilities 597 10,603 11,200 321 985 1,306 Increase (decrease) in net interest income $ 2,889 $ (2,480 ) $ 409 $ 2,316 $ (2,346 ) $ (30 ) 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. Interest income increased by $11.6 million, comparing the 2023 to 2022. Of the increase, $8.1 million was attributable to higher average yields on interest-earning assets, while $3.5 million was attributable to growth in average loan volume comparing the two periods. The increase in average yield was attributable to the rise in market interest rates that began in 2022 and continued in 2023. The increase in interest income associated with loan volume increases was attributable to loan growth during 2023 of $47.9 million, or 6.2%. The increase in interest income was mostly offset by an increase in interest expense of $11.2 million, comparing 2023 to 2022. Of the increase, $10.6 million was attributable to the rise in market interest rates, while $0.6 million was attributable to growth in interest-bearing liabilities, primarily time deposits. During the latter half of 2022 and throughout 2023, the Company focused a portion of its deposit marketing efforts on growth in time deposits of various maturities in an effort to increase the predictability of funding cash flows. Additionally in 2023, the Company utilized wholesale brokered deposits to a larger extent in order to enhance the Company’s on-balance sheet liquidity position. Efforts to enhance the Company’s on-balance sheet liquidity were taken primarily as precautionary measures in the wake of liquidity events that impacted the banking industry during 2023. The rising market interest rate environment has had, and continues to have, a significant impact on the Company and the banking industry in general. Beginning in March 2022 and through July 2023, the FRB raised the federal funds rate by a total of 525 basis points. While the Company has generally been positioned to benefit from the rising interest rate environment, the Company’s net interest margin declined during 2023 as the cost of interest-bearing liabilities increased at a faster pace than income earned on interest-earning assets. Further, in connection with the liquidity events that have occurred in the banking industry, competition for deposits has intensified significantly. This increased competition, coupled with the volatility of the industry, has introduced additional uncertainty into the market. Should market interest rates continue to rise or reduce at significant levels, the Company’s net interest income could be negatively impacted. Provision for Credit Losses The provision for credit losses was $0.3 million for the year ended December 31, 2023, compared to $3.3 million for the year ended December 31, 2022. The decrease in 2023 compared to 2022 was primarily the result of the cessation of business strategy at ALC, which has led to significantly reduced net charge-offs as ALC’s loans have paid down. Net charge-offs on ALC loans totaled $0.2 million, during the year ended December 31, 2023, compared to $1.9 million, during the year ended December 31, 2022. 37 While the Company experienced improved charge-off metrics during 2023, compared to 2022, the timing of charge-offs, economic developments, and other factors that could impact the provision for credit losses cannot be fully predicted with certainty. Sustained levels of high inflation, combined with the recent rapid rise in market interest rates, could negatively impact the Company’s borrowers, which could lead to increased provisions for credit losses in the future. Effective January 1, 2023, the Company adopted the CECL model to account for credit losses on financial instruments, including loans and leases, unfunded commitments and held-to-maturity securities. The adoption of the CECL model resulted in a transition adjustment totaling $2.4 million, increasing the Company’s allowance for credit losses on loans and leases by $2.1 million, and establishing an allowance for unfunded commitments of $0.3 million. As of December 31, 2023, the Company’s allowance for credit losses was 1.28% of total loans, compared to 1.22% as of December 31, 2022. While management believes that the allowance for credit losses on loans and leases, as well as the allowance for credit losses on unfunded commitments, was sufficient to absorb life-of-loan credit losses based on circumstances existing as of the balance sheet date, combined with reasonable and supportable forecasts, the determination of the allowance is complex and requires judgment by management about the effects of matters that are inherently uncertain. Changing economic circumstances or forecasts, or changes in management’s judgments and estimates, could result in additional provision for credit losses in future periods. 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, 2023 2022 $ Change % Change (Dollars in Thousands) Service charges and other fees on deposit accounts $ 1,197 $ 1,154 $ 43 3.7 % Bank-owned life insurance 471 451 20 4.4 % Net loss on sale and prepayment of investment securities — (83 ) 83 NM Gain on sales of premises and equipment and other assets 17 301 (284 ) (94.4 )% Lease income 949 864 85 9.8 % ATM fee income 415 532 (117 ) (22.0 )% Other income 332 232 100 43.1 % Total non-interest income $ 3,381 $ 3,451 $ (70 ) (2.0 )% NM: Not Meaningful The Company’s non-interest income decreased by $0.1 million comparing 2023 to 2022, due primarily to gains on the sale of premises and equipment that occurred in 2022, but were not repeated in 2023, as well as reductions in ATM fee income. In recent periods, the Company’s sources of non-interest revenue have not fluctuated significantly, with the exception of nonrecurring increases or decreases that have occurred from time to time due to gains or losses on sales of assets or other nonrecurring sources. The majority of the Company’s sources of non-interest income are relatively stable and are not expected to change significantly in the near term. However, non-interest revenues earned from service charges and other fees on deposit accounts have generally declined in recent years for a number of reasons, including a changing regulatory environment associated with these types of revenues. Management continues to evaluate opportunities to add non-interest revenue streams and grow existing streams; however, significant growth in non-interest income is not expected in the near term. 38 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, 2023 2022 $ Change % Change (Dollars in Thousands) Salaries and employee benefits $ 16,076 $ 16,418 $ (342 ) (2.1 )% Net occupancy and equipment 3,479 3,281 198 6.0 % Computer services 1,756 1,639 117 7.1 % Insurance expense and assessments 1,583 1,250 333 26.6 % Fees for professional services 1,105 1,060 45 4.2 % Postage, stationery and supplies 620 614 6 1.0 % Telephone/data communication 722 682 40 5.9 % Collection and recoveries 292 261 31 11.9 % Directors fees 471 479 (8 ) (1.7 )% Software amortization 412 460 (48 ) (10.4 )% Other real estate/foreclosure expense, net 68 (331 ) 399 (120.5 )% Other expense 2,557 2,259 298 13.2 % Total non-interest expense $ 29,141 $ 28,072 $ 1,069 3.8 % The Company’s non-interest expense increased by 3.8% comparing 2023 to 2022. The majority of the increase resulted from nonrecurring gains on the sale of properties that reduced other real estate/foreclosure expense in 2022, but were not repeated in 2023, and an increase in FDIC and state assessments of approximately $0.3 million comparing 2023 to 2022. In addition, the Company has experienced increases in other expense categories commensurate with the inflationary environment. Such increases in certain categories of non-interest expense were partially offset by decreases in other categories, most notably salaries and employee benefits, which decreased by 2.1% comparing 2023 to 2022. The reduction in salaries and benefits expense resulted from the impact of the strategic initiatives undertaken by the Company beginning in the third quarter of 2021 to, among other things, improve the Company’s operating efficiency. These initiatives reduced the Company’s expense profile significantly in 2022 and, in some expense areas such as salaries and benefits, continued to benefit the Company during 2023. However, the current inflationary environment and tight labor market is expected to continue to put upward pressure on non-interest expenses. Accordingly, management will remain focused on efforts to streamline business processes in an effort to continue to improve the Company’s overall efficiency levels. Provision for Income Taxes The provision for income taxes was $2.8 million and $2.1 million for the years ended December 31, 2023 and 2022, respectively. The Company’s effective tax rate was 24.7% and 23.8%, 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 3.9 years and 3.5 years as of December 31, 2023 and 2022, respectively. Available-for-sale securities are recorded at estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive loss, a separate component of shareholders’ equity. As of December 31, 2023, available-for-sale securities totaled $135.6 million, or 99.2% of the total investment portfolio, compared to $130.8 million, or 98.6% of the total investment portfolio, as of December 31, 2022. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, corporate notes, obligations of U.S. government-sponsored agencies, and obligations of state and political subdivisions. 39 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, 2023, held-to-maturity securities totaled $1.1 million, or 0.8% of the total investment portfolio, compared to $1.9 million, or 1.4% of the total investment portfolio, as of December 31, 2022. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies and obligations of states and political subdivisions. Due to decreases in the interest rate environment during the fourth quarter of 2023 compared to 2022, as well as investment purchases in 2023 at higher yields, unrealized losses net of unrealized gains decreased, particularly within the Company’s available-for-sale portfolio. Unrealized losses net of unrealized gains in the available-for-sale portfolio totaled $9.3 million as of December 31, 2023, compared to $11.1 million as of December 31, 2022. Unrealized losses net of unrealized gains within the available-for-sale portfolio were recognized, net of tax, in accumulated other comprehensive loss. As of December 31, 2023, the Company evaluated both the available-for-sale and held-to-maturity portfolios for credit loss in accordance with the revised accounting guidance of ASC 326: "Financial Instruments - Credit Losses" ("ASC 326"). Based on these evaluations, management concluded that no credit losses were included in either portfolio and that the unrealized losses in both portfolios resulted from the prevailing interest rate environment. 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, 2023, 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, 2023 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 $ — $ — $ 4,948 2.57 % $ 26,638 1.94 % $ 13,142 2.77 % Commercial — — 3,190 2.46 % 2,769 3.01 % 3,081 2.07 % Obligations of U.S. government-sponsored agencies — — — — 7,107 1.58 % 4,174 2.82 % Obligations of states and political subdivisions — — 523 6.49 % 1,035 3.00 % — — Corporate notes — — — — 14,957 2.18 % — — U.S. Treasury securities 12,895 5.18 % 41,106 1.33 % — 0.00 % — — Total $ 12,895 5.18 % $ 49,767 2.30 % $ 52,506 2.62 % $ 20,397 2.70 % Total securities with stated maturity $ 135,565 2.59 % Held-to-Maturity Stated Maturity as of December 31, 2023 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 $ — — $ — 0.00 % $ — — $ — — Commercial — — 101 2.26 % 337 1.28 % 137 2.65 % Obligations of U.S. government-sponsored agencies — — 148 3.18 % 323 3.00 % — — Obligations of states and political subdivisions — — — — — 0.00 % 58 3.00 % Total $ — — $ 249 2.81 % $ 660 2.12 % $ 195 2.76 % Total securities with stated maturity $ 1,104 2.39 % 40 Condensed Portfolio Maturity Schedule Maturity Summary as of December 31, 2023 Dollar Amount Portfolio Percentage (Dollars in Thousands) Maturing in three months or less $ 12,895 9.4 % Maturing after three months to one year — — Maturing after one year to three years 34,254 25.1 % Maturing after three years to five years 15,763 11.5 % Maturing after five years to fifteen years 53,165 38.9 % Maturing in more than fifteen years 20,592 15.1 % Total $ 136,669 100.0 % Loans and Leases The Company's total loan portfolio increased by $47.9 million, or 6.2%, as of December 31, 2023, compared to December 31, 2022. The table below summarizes loan balances by portfolio category at the end of each of the most recent five years as of December 31, 2023: Year Ended December 31, 2023 2022 2021 2020 2019 (Dollars in Thousands) Real estate loans: Construction, land development and other land loans $ 88,140 $ 53,914 $ 67,393 $ 37,377 $ 30,755 Secured by 1-4 family residential properties 76,200 87,995 72,670 88,936 104,440 Secured by multi-family residential properties 62,397 67,852 46,021 54,421 50,845 Secured by non-farm, non-residential properties 213,586 200,156 198,000 184,622 162,916 Commercial and industrial loans 60,515 73,546 73,865 81,562 90,954 Consumer loans: Direct consumer 5,938 9,851 20,090 27,229 34,518 Branch retail 8,670 13,992 24,380 30,176 29,946 Indirect 306,345 266,567 205,931 141,521 46,631 Total loans $ 821,791 $ 773,873 $ 708,350 $ 645,844 $ 551,005 Allowance for credit losses 10,507 9,422 8,320 7,470 5,762 Net loans $ 811,284 $ 764,451 $ 700,030 $ 638,374 $ 545,243 41 Allowance for Credit Losses on Loans and Leases The table below summarizes changes in the allowance for credit losses on loans and leases for each of the most recent five years as of December 31, 2023. For years ended December 31, 2022 and prior, information presented is as determined in accordance with ASC 310, Receivables , prior to the adoption of ASC 326: Year Ended December 31, 2023 2022 2021 2020 2019 (Dollars in Thousands) Balance at beginning of period $ 9,422 $ 8,320 $ 7,470 $ 5,762 $ 5,055 Impact of adopting CECL accounting guidance 2,123 — — — — Charge-offs: Real estate loans: Construction, land development and other loan loans — — (23 ) — — Secured by 1-4 family residential properties (97 ) (40 ) (12 ) (61 ) (101 ) Secured by multi-family residential properties — — — — — Secured by non-farm, non-residential properties — — — — — Commercial and industrial loans — — (6 ) — — Consumer loans: Direct consumer (571 ) (1,958 ) (1,230 ) (1,621 ) (2,000 ) Branch retail (445 ) (633 ) (377 ) (374 ) (425 ) Indirect (932 ) (382 ) (483 ) (152 ) (301 ) Total charge-offs (2,045 ) (3,013 ) (2,131 ) (2,208 ) (2,827 ) Recoveries 965 807 971 971 820 Net charge-offs (1,080 ) (2,206 ) (1,160 ) (1,237 ) (2,007 ) Provision for credit losses 42 3,308 2,010 2,945 2,714 Ending balance $ 10,507 $ 9,422 $ 8,320 $ 7,470 $ 5,762 Ending balance as a percentage of loans 1.28 % 1.22 % 1.17 % 1.16 % 1.05 % Net charge-offs as a percentage of average loans 0.14 % 0.30 % 0.16 % 0.21 % 0.38 % The adoption of CECL was most impactful on the Company’s consumer indirect loan portfolio due primarily to the extension of the loss estimate period to the estimated life of loans in this category. As of December 31, 2023, the estimated average remaining life of the indirect portfolio was approximately five years. In addition, the Company’s portfolios were impacted by current economic forecasts using data provided by the Federal Reserve on inflation, unemployment, and the forecasted movement of interest rates. Allowance for Credit Losses on Unfunded Lending Commitments In connection with the adoption of the CECL accounting model, the Company also recorded an allowance for credit losses on unfunded lending commitments. Unfunded lending commitments are off-balance sheet arrangements that represent unconditional commitments of the Company to lend to a borrower that are unfunded as of the balance sheet date. These may include unfunded loan commitments, standby letters of credit, and financial guarantees. The CECL accounting guidance requires that an estimate of expected credit loss be measured on commitments in which an entity is exposed to credit risk via a present contractual obligation to extend credit unless the obligation is unconditionally cancellable by the issuer. For the Company, unconditional lending commitments generally include unfunded term loan agreements, home equity lines of credit, lines of credit, and demand deposit account overdraft protection. As of December 31, 2023, the Company’s allowance for credit losses on unfunded commitments, which is recorded in other liabilities in the Company’s consolidated balance sheets, totaled $0.6 million. No allowance for credit losses on unfunded commitments was recorded by the Company in the four years prior to 2023. 42 Allocation of Allowance for Credit Losses on Loans and Leases 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 credit losses as of December 31, 2023 and 2022. The information presented as of December 31, 2022 is as determined in accordance with ASC 310, Receivables , prior to the adoption of ASC 326. 2023 2022 Allowance Allocation Allowance as Percentage of Total Loans Net Charge-offs as a Percentage of Average Loans Allocation Allowance Allowance as Percentage of Total Loans Net Charge-offs as a Percentage of Average Loans (Dollars in Thousands) Real estate loans: Construction, land development and other land loans $ 565 0.64 % — $ 517 0.96 % — Secured by 1-4 family residential properties 591 0.78 % 0.05 % 832 0.95 % — Secured by multi-family residential properties 415 0.66 % — 646 0.95 % — Secured by non-farm, non-residential properties 1,425 0.67 % — 1,970 0.98 % — Commercial and industrial loans 513 0.85 % — 919 1.25 % — Consumer loans: Direct consumer 64 1.06 % -0.06 % 866 8.79 % 10.34 % Branch retail 436 5.03 % 1.82 % 518 3.70 % 2.81 % Indirect 6,498 2.12 % 0.31 % 3,154 1.18 % 0.13 % Total $ 10,507 1.28 % 0.14 % $ 9,422 1.22 % 0.30 % Summary of Loan Loss Experience The following table summarizes the Company's loan loss experience for each of the two years presented. The information presented as of December 31, 2022 is as determined in accordance with ASC 310, Receivables , prior to the adoption of ASC 326: 2023 2022 (Dollars in Thousands) Balance of allowance for credit losses at beginning of period $ 9,422 $ 8,320 Impact of adopting CECL accounting guidance 2,123 — Charge-offs: Real estate loans: Construction, land development and other land loans — — Secured by 1-4 family residential properties (97 ) (40 ) Secured by multi-family residential properties — — Secured by non-farm, non-residential properties — — Commercial and industrial loans — — Consumer loans: Direct consumer (571 ) (1,958 ) Branch retail (445 ) (633 ) Indirect (932 ) (382 ) Total charge-offs (2,045 ) (3,013 ) Recoveries: Real estate loans: Construction, land development and other land loans — 2 Secured by 1-4 family residential properties 54 39 Secured by multi-family residential properties — — Secured by non-farm, non-residential properties — 5 Commercial and industrial loans — — Consumer loans: Direct consumer 619 565 Branch retail 243 151 Indirect 49 45 Total recoveries 965 807 Net charge-offs (1,080 ) (2,206 ) Provision for credit losses 42 3,308 Balance of allowance for credit losses at end of period $ 10,507 $ 9,422 43 Nonperforming Assets Nonperforming assets at the end of the five most recent years as of December 31, 2023 were as follows: Year Ended December 31, 2023 2022 2021 2020 2019 (Dollars in Thousands) Non-accrual loans $ 2,400 $ 1,651 $ 2,008 $ 3,086 $ 3,723 Other real estate owned 602 686 2,149 949 1,078 Total $ 3,002 $ 2,337 $ 4,157 $ 4,035 $ 4,801 Nonperforming assets as a percentage of total loans and other real estate 0.37 % 0.30 % 0.59 % 0.62 % 0.87 % Nonperforming assets as a percentage of total assets 0.28 % 0.24 % 0.43 % 0.45 % 0.61 % Non-accrual loans as a percentage of total loans 0.29 % 0.21 % 0.28 % 0.48 % 0.68 % The increase in nonperforming assets during 2023 resulted primarily from one commercial real estate loan that moved into non-accrual status during the year. 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, 2023 2022 (Dollars in Thousands) Total loans accounted for on a non-accrual basis $ 2,400 $ 1,651 Interest income that would have been recorded under original terms 107 60 Interest income reported and recorded during the year 50 29 Deposits Deposits totaled $950.2 million as of December 31, 2023, compared to $870.0 million as of December 31, 2022. The growth in 2023 included an increase of $96.4 million in interest-bearing deposits, partially offset by a decrease of $16.2 million in noninterest-bearing deposits. The shift to interest-bearing deposits is consistent with deposit holders seeking to maximize interest earnings on their accounts amid the rising interest rate environment. The deposit growth in 2023 included growth of $20.2 million in wholesale brokered deposits that were acquired in order to further enhance the Company’s liquidity position following the bank failures that began during the first quarter of 2023. As of December 31, 2023, core deposits, which exclude time deposits of $250 thousand or more and all brokered deposits, totaled $819.5 million, or 86.2% of total deposits, compared to $778.1 million, or 89.4% of total deposits, as of December 31, 2022. Core deposits have historically been the Company’s primary source of funding and have enabled the Company to successfully meet both short-term and long-term liquidity needs. Management anticipates that core deposits will continue to be the Company’s primary source of funding in the future. Management will continue to monitor core 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 FRB and other central banks. 44 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: 2023 2022 Average Amount Rate Average Amount Rate (Dollars in Thousands) Non-interest-bearing demand deposit accounts $ 160,598 — $ 182,032 — Interest-bearing demand deposit accounts 212,010 0.37 % 246,124 0.26 % Savings deposits 229,238 2.18 % 208,672 0.58 % Time deposits 305,848 2.80 % 212,591 0.72 % Total deposits $ 907,694 1.58 % $ 849,419 0.40 % Total interest-bearing deposits $ 747,096 1.92 % $ 667,387 0.51 % Maturities of time deposits of greater than $250 thousand, as well as brokered deposits, outstanding as of December 31, 2023 and 2022 are summarized in the following table: Maturities December 31, 2023 2022 (Dollars in Thousands) Three months or less $ 12,167 $ 22,024 Over three through six months 26,032 1,976 Over six through twelve months 24,258 16,553 Over twelve months 68,213 52,244 Total $ 130,670 $ 92,797 Maturities of time certificates of deposit of greater than $100 thousand and less than $250 thousand outstanding as of December 31, 2023 and 2022 are summarized as follows: Maturities December 31, 2023 2022 (Dollars in Thousands) Three months or less $ 7,521 $ 7,971 Over three through six months 9,257 5,968 Over six through twelve months 32,323 8,834 Over twelve months 46,788 45,156 Total $ 95,889 $ 67,929 45 Other Interest-Bearing Liabilities Other interest-bearing liabilities consist of federal funds purchased, securities sold under agreements to repurchase, FHLB advances and subordinated debt that are used by the Company as alternative sources of funds. As of December 31, 2023, these liabilities represented 2.5% of interest-bearing liabilities, compared to 4.2% as of December 31, 2022. The table below summarizes short- and long-term liabilities and related interest rate data as of and for the years ended December 31, 2023 and 2022. 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: 2023 $ 10,000 $ 10,799 2022 $ 20,038 $ 10,726 Weighted average interest rate at year-end: 2023 5.46 % 4.20 % 2022 4.40 % 4.20 % Maximum amount outstanding at any month end: 2023 $ 35,048 $ 10,799 2022 $ 48,095 $ 10,726 Average amount outstanding during the year: 2023 $ 15,438 $ 10,766 2022 $ 19,293 $ 10,689 Weighted average interest rate during the year: 2023 5.12 % 4.20 % 2022 2.44 % 4.20 % Shareholders’ Equity As of December 31, 2023, shareholders’ equity totaled $90.6 million, or 8.4% of total assets, compared to $85.1 million, or 8.6% of total assets, as of December 31, 2022. The increase in shareholders’ equity resulted from increased earnings, net of dividends paid, combined with valuation increases in the Company's available-for-sale investment portfolio that reduced accumulated other comprehensive loss. The increase in shareholders' equity during the year was partially offset by the CECL transition adjustment which reduced retained earnings by $1.8 million, net of tax, as well as the repurchase of common shares by the Company in accordance with its established share repurchase program. During the year ended December 31, 2023 the Company completed repurchases of 137,500 shares of its common stock at a weighted average price of $10.34 per share, or $1.4 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, 2024. 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, 2023, 459,313 shares remained available for repurchase under the program. During the year ended December 31, 2023, the Company declared dividends totaling $0.20 per common share, or approximately $1.2 million in aggregate amount, compared to $0.14 per common share, or approximately $0.8 million in aggregate amount, during the year ended December 31, 2022. Bancshares’ Board of Directors evaluates dividend payments based on the Company’s level of earnings and the desire to maintain a strong capital base, as well as regulatory requirements relating to the payment of dividends. 46 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 $241.2 million as of December 31, 2023 and $212.5 million as of December 31, 2022. Investment securities forecasted to mature or reprice in one year or less were estimated to be $12.9 million and $7.1 million of the investment portfolio as of December 31, 2023 and 2022, respectively. Although some securities in the investment portfolio have legal final maturities exceeding 10 years, a substantial percentage of the portfolio provides monthly principal and interest payments and consists of securities that are readily marketable and easily convertible into cash on short notice. The investment securities portfolio had an estimated average life of 3.9 years and 3.5 years as of December 31, 2023 and 2022, respectively. However, management does not rely solely upon the investment portfolio to generate cash flows to fund loans, capital expenditures, dividends, debt repayment and other cash requirements. These activities are also funded by cash flows from loan payments, as well as increases in deposits and short-term borrowings. The liability portion of the balance sheet provides liquidity through interest-bearing and non-interest-bearing deposit accounts, which represent the Company’s primary sources of funds. In addition, federal funds purchased, FHLB advances, securities sold under agreements to repurchase and short-term and long-term borrowings are additional sources of available liquidity. Liquidity management involves the continual monitoring of the sources and uses of funds to maintain an acceptable cash position. Long-term liquidity management focuses on considerations related to the total balance sheet structure. The Bank manages the pricing of its deposits to maintain a desired deposit balance. The Company had $10.0 million and $20.0 million in outstanding short-term borrowings under FHLB advances as of December 31, 2023 and 2022, respectively. In addition, on October 1, 2021, the Company completed a private placement of $11.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that will mature on October 1, 2031. Net of unamortized debt issuance costs, the subordinated notes were recorded as long-term borrowings totaling $10.8 million and $10.7 million as of December 31, 2023 and 2022, respectively. The Company had up to $279.4 million and $246.8 million in remaining unused credit from the FHLB (subject to available collateral) as of December 31, 2023 and 2022, respectively. In addition, the Company had $48.0 million and $45.0 million in unused established federal funds lines as of December 31, 2023 and 2022, respectively. As of December 31, 2023, the Company also had access to both the FRB’s discount window and its Bank Term Funding Program (BTFP), the latter of which was established in 2023 following liquidity events that occurred in the banking industry. Both the discount window and the BTFP allowed borrowing on pledged collateral that includes eligible investment securities and, in certain circumstances, eligible loans. In response to heightened liquidity concerns in the banking industry, during 2023 management undertook measures designed to enhance the Company’s liquidity position. These procedures included holding higher levels of on-balance sheet cash, as well as enhancing the availability of off-balance sheet borrowing capacity. As part of these efforts, during the third quarter of 2023, the Company completed the establishment of additional borrowing capacity through the discount window, primarily via the pledging of the majority of the Company’s indirect loan portfolio to the FRB as collateral. Due to these efforts, the Company’s immediate borrowing capacity based on collateral pledged through the discount window increased to $161.7 million as of December 31, 2023, compared to $1.2 million as of December 31, 2022. The Company did not utilize the BTFP which represented a temporary program that allowed advances to be requested through March 11, 2024. Although the liquidity events that occurred in 2023 strained the banking industry as a whole, the Company’s management remains confident in the stability of the Company’s core deposit base which has served as the Company’s primary funding source for many years. Excluding wholesale brokered deposits, as of December 31, 2023, the Company had over 29 thousand deposit accounts with an average balance of approximately $29.8 thousand per account. Estimated uninsured/uncollateralized deposits (calculated as deposit amounts per deposit holder in excess of $250 thousand, the maximum amount of federal deposit insurance, and excluding deposits secured by pledged assets) totaled $200.3 million, or 21.1% of total deposits, as of December 31, 2023, compared to $148.3 million, or 17.1% of total deposits, as of December 31, 2022. 47 The table below provides information on the Company’s on-balance sheet liquidity, as well as readily available off-balance sheet sources of liquidity as of both December 31, 2023 and 2022. December 31, 2023 December 31, 2022 (Dollars in Thousands) (Unaudited) (Unaudited) Liquidity from cash and federal funds sold: Cash and cash equivalents $ 50,279 $ 30,152 Federal funds sold 9,475 1,768 Liquidity from cash and federal funds sold 59,754 31,920 Liquidity from pledgable investment securities: Investment securities available-for sale, at fair value 135,565 130,795 Investment securities held-to-maturity, at amortized cost 1,104 1,862 Less: securities pledged (41,375 ) (54,717 ) Less: estimated collateral value discounts (11,129 ) (7,833 ) Liquidity from pledgable investment securities 84,165 70,107 Liquidity from unused lendable collateral (loans) at FHLB 21,696 18,215 Liquidity from unused lendable collateral (loans and securities) at FRB 161,729 1,198 Unsecured lines of credit with banks 48,000 45,000 Total readily available liquidity $ 375,344 $ 166,440 The table calculates readily available sources of liquidity, including cash and cash equivalents, federal funds sold, and other liquidity sources. Certain of the measures have not been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”); however, management believes that the non-GAAP measures are beneficial to the reader as they enhance the overall understanding of the Company’s liquidity position and can be used as a supplement to GAAP-based measures of liquidity. Specifically, liquidity from pledgeable investment securities and total readily available liquidity are non-GAAP measures used by management and regulators to analyze a portion of the Company's liquidity. Pledgeable investment securities are considered by management as a readily available source of liquidity since the Company has the ability to pledge the securities with the FHLB or FRB to obtain immediate funding. Both available-for-sale and held-for-maturity securities may be pledged at fair value with the FHLB and through the FRB discount window. The amounts shown as liquidity from pledgeable investment securities represent total investment securities as recorded on the balance sheet, less reductions for securities already pledged and discounts expected to be taken by the lender to determine collateral value. The non-GAAP financial measures that are discussed in this Annual Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. 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, 2023 and 2022, 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, 2023 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 14, “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, 2023 and December 31, 2022. Additionally, refer to the section captioned “Dividend Restrictions” included in Note 14 for a discussion regarding restrictions that could materially influence the Bank’s, and therefore Bancshares’, ability to pay dividends. 48 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 or option products such as caps and floors. As of December 31, 2023, the Company held three forward interest rate swap contracts designated as fair value hedges that were intended to mitigate risk associated with rising interest rates by converting a portfolio of fixed rate loans to a variable rate. As of December 31, 2022, the Company held four forward interest rate swap contracts, designated as either cash flow hedges or fair value hedges, that 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. The net value of all interest rate swap contracts totaled a liability position of $0.1 million as of December 31, 2023, while the net value of all interest rate swap contracts totaled an asset position of $2.3 million as of December 31, 2022. In both 2023 and 2022, the Company terminated certain interest rate swap contracts that had previously been in place, recording deferred gains of $2.1 million and $0.3 million in 2023 and 2022, respectively. The deferred gains are being accreted to net interest income over the remaining life of the original term of each swap. See Note 16, “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 9, “Borrowings,” and Note 15, “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 18, “Guarantees, Commitments and Contingencies,” in the consolidated financial statements. The following table summarizes the Company’s contractual obligations as of December 31, 2023: 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 $ 328,512 $ 173,648 $ 148,359 $ 6,477 $ 28 Commitments to extend credit 141,121 141,121 — — — Subordinated notes (1) 12,155 385 770 — 11,000 FHLB advances 10,000 10,000 — — — Operating leases 2,499 395 597 577 930 Standby letters of credit 669 669 — — — Total $ 494,956 $ 326,218 $ 149,726 $ 7,054 $ 11,958 (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. 49 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 15 “Leases,” Note 16 “Derivative Financial Instruments” and Note 18 “Guarantees, Commitments and Contingencies” in the consolidated financial statements. Item 7A. Quantitative and Qualitat ive 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, 2023, pre-tax net interest margin and net interest income are forecasted to change over timeframes of one year and two years under the 6 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): 1 Year 2 Years +1% 12 10 +2% 23 17 +3% 30 20 -1% (15 ) (11 ) -2% (32 ) (26 ) -3% (52 ) (45 ) Cumulative Change in Net Interest Income from Level Interest Rate Forecast (dollars in thousands, pre-tax): 1 Year 2 Years +1% $ 1,349 $ 2,069 +2% 2,475 3,645 +3% 3,214 4,382 -1% (1,574 ) (2,336 ) -2% (3,466 ) (5,660 ) -3% (5,617 ) (9,680 ) 50 Item 8. Financial Statemen ts 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, 2023. 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, 2023. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. As of December 31, 2023, the Company's internal control over financial reporting was 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. 51 REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of 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, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 2 to the financial statements, the Company changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments – Credit Losses . 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 Credit Losses on Loans and Leases As described in Notes 2 and 4 to the financial statements, the Company’s allowance for credit losses on loans and leases (“allowance”) was $10.5 million on loans and leases of $821.8 million as of December 31, 2023. As described in Note 2, the Company adopted ASC Topic 326, Financial Instruments – Credit Losses , effective January 1, 2023. The Company’s method of estimating the allowance includes the use of historic loss rates that are adjusted for reasonable and supportable forecasts, as well as other qualitative adjustments. 52 The Company measures the allowance on a pool basis when the loans and leases share similar risk characteristics. Loans and leases that do not share risk characteristics are evaluated on an individual basis. Historical loss rates are analyzed for and applied to their respective loan and lease pools over the expected remaining life of the pooled loans and leases. Historical loss rates are adjusted for significant qualitative factors that, in management’s judgment, reflect current conditions on loss recognition. Forecast factors are developed based on information obtained from external sources, as well as consideration of other internal information, and are included in the allowance method for a reasonable and supportable forecast period. We have determined that the allowance is a critical audit matter. Auditing the allowance involved significant judgment and complex review in evaluating management’s estimates, such as the segmentation of loan and lease pools, the remaining life of loans and leases in a pool, economic conditions, and environmental and forecast factors. The use of different assumptions in developing and applying these estimates could result in a materially different amount for the allowance. The primary procedures we performed to address this critical audit matter included substantively testing management’s process, which included: • Obtained an understanding and evaluated the appropriateness of the design and operation of the Company’s process for establishing the allowance, including the implementation of the expected credit loss method and the qualitative factor adjustments of the allowance. • Evaluated the classifications of loans and leases by pools, the estimated life of each pool, and the accuracy of historical loss data used in the allowance calculation. • Evaluated the reasonableness of management’s assumptions and judgments related to estimating the qualitative and economic forecast adjustments to the historical loss rates, including assessing the basis for the adjustments. • Tested the completeness and accuracy of data inputs and verified the mathematical accuracy of the allowance calculation, including the application of the qualitative factor adjustments. /s/ Carr, Riggs & Ingram, LLC We have served as the Company’s auditor since 2008. Atlanta, Georgia March 14, 2024 53 FIRST US BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED B ALANCE SHEETS (In Thousands, Except Share and Per Share Data) December 31, 2023 December 31, 2022 ASSETS Cash and due from banks $ 12,987 $ 11,844 Interest-bearing deposits in banks 37,292 18,308 Total cash and cash equivalents 50,279 30,152 Federal funds sold 9,475 1,768 Investment securities available-for-sale, at fair value 135,565 130,795 Investment securities held-to-maturity, at amortized cost 1,104 1,862 Federal Home Loan Bank stock, at cost 1,201 1,359 Loans and leases held for investment 821,791 773,873 Less allowance for credit losses on loans and leases 10,507 9,422 Net loans and leases held for investment 811,284 764,451 Premises and equipment, net of accumulated depreciation 24,398 24,439 Cash surrender value of bank-owned life insurance 16,702 16,399 Accrued interest receivable 3,976 3,011 Goodwill and core deposit intangible, net 7,606 7,801 Other real estate owned 602 686 Other assets 10,748 11,944 Total assets $ 1,072,940 $ 994,667 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest-bearing $ 153,591 $ 169,822 Interest-bearing 796,600 700,203 Total deposits 950,191 870,025 Accrued interest expense 2,030 607 Other liabilities 9,327 8,136 Short-term borrowings 10,000 20,038 Long-term borrowings 10,799 10,726 Total liabilities 982,347 909,532 Shareholders’ equity: Common stock, par value $ 0.01 per share, 10,000,000 shares authorized; 7,738,201 and 7,680,856 shares issued, respectively; 5,735,075 and 5,812,258 shares outstanding, respectively 75 75 Additional paid-in capital 14,972 14,510 Accumulated other comprehensive loss, net of tax ( 6,431 ) ( 7,241 ) Retained earnings 109,959 104,460 Less treasury stock: 2,003,126 and 1,868,598 shares at cost, respectively ( 27,982 ) ( 26,669 ) Total shareholders’ equity 90,593 85,135 Total liabilities and shareholders’ equity $ 1,072,940 $ 994,667 The accompanying notes are an integral part of these consolidated statements. 54 FIRST US BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEM ENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Data) Year Ended December 31, 2023 2022 Interest income: Interest and fees on loans $ 47,749 $ 38,015 Interest on investment securities 2,871 2,668 Interest on deposits in banks 1,998 439 Other 188 75 Total interest income 52,806 41,197 Interest expense: Interest on deposits 14,350 3,382 Interest on borrowings 1,106 874 Total interest expense 15,456 4,256 Net interest income 37,350 36,941 Provision for credit losses 319 3,308 Net interest income after provision for credit losses 37,031 33,633 Non-interest income: Service and other charges on deposit accounts 1,197 1,154 Lease income 949 864 Other income, net 1,235 1,433 Total non-interest income 3,381 3,451 Non-interest expense: Salaries and employee benefits 16,076 16,418 Net occupancy and equipment 3,479 3,281 Computer services 1,756 1,639 Insurance expense and assessments 1,583 1,250 Fees for professional services 1,105 1,060 Other expense 5,142 4,424 Total non-interest expense 29,141 28,072 Income before income taxes 11,271 9,012 Provision for income taxes 2,786 2,148 Net income $ 8,485 $ 6,864 Basic net income per share $ 1.42 $ 1.13 Diluted net income per share $ 1.33 $ 1.06 Dividends per share $ 0.20 $ 0.14 The accompanying notes are an integral part of these consolidated statements. 55 FIRST US BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in Thousands) Year Ended December 31, 2023 2022 Net income $ 8,485 $ 6,864 Other comprehensive loss: Unrealized holding gains (losses) on securities available-for-sale arising during the year, net of tax (expense) benefit of $( 438 ) and $ 2,844 , respectively 1,322 ( 8,534 ) Reclassification adjustment for net losses on securities available-for-sale realized in net income, net of tax expense of $- and $ 21 , respectively — 62 Unrealized holding (losses) gains on effective cash flow hedge derivatives arising during the year, net of tax benefit (expense) of $ 18 and $( 480 ), respectively ( 50 ) 1,437 Reclassification adjustments on cash flow hedge derivatives realized in net income, net of tax benefit (expense) of $ 154 and $( 25 ), respectively ( 462 ) 70 Other comprehensive gain (loss) 810 ( 6,965 ) Total comprehensive income (loss) $ 9,295 $ ( 101 ) The accompanying notes are an integral part of these consolidated statements. 56 FIRST US BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHA NGES 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, 2021 6,172,378 $ 75 $ 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 — 485 — — — 485 Reissuance of treasury stock as compensation 9,184 — ( 138 ) — — 138 — Common stock share repurchases ( 412,400 ) — — — — ( 4,481 ) ( 4,481 ) Balance, December 31, 2022 5,812,258 $ 75 $ 14,510 $ ( 7,241 ) $ 104,460 $ ( 26,669 ) $ 85,135 Net income — — — — 8,485 — 8,485 Impact of adopting current expected credit loss accounting model, net of tax — — — — ( 1,811 ) — ( 1,811 ) Net change in fair value of securities available-for-sale, net of tax — — — 1,322 — — 1,322 Net change in fair value of derivative instruments, net of tax — — — ( 512 ) — — ( 512 ) Dividends declared: $ .20 per share — — — — ( 1,175 ) — ( 1,175 ) Impact of stock-based compensation plans, net 50,935 — 596 — — ( 25 ) 571 Reissuance of treasury stock as compensation 9,382 — ( 134 ) — — 134 — Common stock share repurchases ( 137,500 ) — — — — ( 1,422 ) ( 1,422 ) Balance, December 31, 2023 5,735,075 $ 75 $ 14,972 $ ( 6,431 ) $ 109,959 $ ( 27,982 ) $ 90,593 The accompanying notes are an integral part of these consolidated statements. 57 FIRST US BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEM ENTS OF CASH FLOWS (Dollars in Thousands) Year Ended December 31, 2023 2022 Cash flows from operating activities: Net income $ 8,485 $ 6,864 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,581 1,614 Provision for credit losses 319 3,308 Deferred income tax expense (benefit) 133 ( 367 ) Net loss on sale and prepayment of investment securities — 83 Proceeds from settlement of derivative contracts 2,166 324 Reclassification of unrealized gains on terminated derivative contracts ( 1,160 ) — Stock-based compensation expense 596 485 Net amortization of securities 28 195 Amortization of intangible assets 195 268 Net loss (gain) on premises and equipment and other real estate 621 ( 207 ) Changes in assets and liabilities: Increase in accrued interest receivable ( 965 ) ( 455 ) (Increase) decrease in other assets ( 1,208 ) 333 Increase in accrued interest expense 1,423 383 Increase (decrease) in other liabilities 853 ( 299 ) Net cash provided by operating activities 13,067 12,529 Cash flows from investing activities: Net increase in federal funds sold ( 7,707 ) ( 1,686 ) Purchases of investment securities, available-for-sale ( 14,891 ) ( 39,255 ) Proceeds from sales of investment securities, available-for-sale — 8,531 Proceeds from maturities and prepayments of investment securities, available-for-sale 11,856 19,250 Proceeds from maturities and prepayments of investment securities, held-to-maturity 755 1,563 Net decrease (increase) in Federal Home Loan Bank stock 158 ( 489 ) Net increase in loans ( 49,650 ) ( 69,935 ) Proceeds from the sale of premises and equipment and other real estate 497 3,084 Purchases of premises and equipment ( 1,464 ) ( 1,262 ) Net cash used in investing activities ( 60,446 ) ( 80,199 ) Cash flows from financing activities: Net increase in customer deposits 80,166 31,899 Net (decrease) increase in short-term borrowings ( 10,038 ) 9,992 Net share-based compensation transactions ( 25 ) — Repurchases of common stock ( 1,422 ) ( 4,481 ) Dividends paid ( 1,175 ) ( 832 ) Net cash provided by financing activities 67,506 36,578 Net increase (decrease) in cash and cash equivalents 20,127 ( 31,092 ) Cash and cash equivalents, beginning of period 30,152 61,244 Cash and cash equivalents, end of period $ 50,279 $ 30,152 The accompanying notes are an integral part of these consolidated statements. 58 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023 AND 2022 1. DESCRIPTION OF BUSINESS First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its subsidiary, 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 17 states, including Alabama, Arkansas, Florida, Georgia, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. Previously, the Bank had two wholly owned subsidiaries: Acceptance Loan Company, Inc., an Alabama corporation (“ALC”), and FUSB Reinsurance, Inc., an Arizona corporation (“FUSB Reinsurance”). Both ALC and FUSB Reinsurance were dissolved in 2023, after all remaining assets and liabilities of these entities were transferred to the Bank. As used herein, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Bancshares and the Bank, as well as ALC and FUSB Reinsurance (for periods prior to their dissolution), collectively. ALC was a finance company headquartered in Mobile, Alabama. The Bank will continue to manage the remaining loans from ALC’s portfolio, which totaled $ 10.5 million as of December 31, 2023, through final resolution. FUSB Reinsurance was designed to reinsure certain insurance policies sold to the Bank's and ALC's consumer loan customers. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Bancshares and the Bank (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. 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 credit 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 credit losses and OREO, management generally obtains independent appraisals for significant properties, evaluates the overall portfolio characteristics and delinquencies and monitors economic conditions. 59 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2023 and 2022 are as follows: 2023 2022 (Dollars in Thousands) Cash paid during the year for: Interest $ 14,033 $ 3,873 Income taxes 2,375 2,855 Non-cash transactions: Assets acquired in settlement of loans 1,178 907 Transfers of closed branch assets to OREO — 391 Reissuance of treasury stock as compensation 134 138 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 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. 60 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 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. 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, 2023 or 2022. 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 Company 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. 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. Loans and Leases Held for Investment Loans and leases held for investment (“loans”) represent financial instruments that the Company has the intent and the ability to hold for the foreseeable future or until maturity or payoff. Loans are reported at amortized cost, net of the allowance for credit losses. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, fair value hedge accounting adjustments, and deferred loan fees and costs. Accrued interest receivable on loans and leases is reported separately on the Company’s consolidated balance sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. At the time a loan is 90 days delinquent, it is placed on nonaccrual status unless it is well-secured and in process of collection. Interest income is discontinued on all loans on nonaccrual status. Past-due status is based on the contractual terms of the loan. In all cases, loans are moved to nonaccrual status, or charged off at an earlier date, if collection of principal and interest is considered doubtful. All interest accrued but not received on loans on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery methods, until qualifying for return to accrual. Under the cash-basis method, interest income is recorded when the payment is received in cash. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 61 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Allowance for Credit Losses On January 1, 2023, the Company adopted Accounting Standards Codification "Financial Instruments - Credit Losses" ("ASC 326"). ASC 326 replaced the previous "incurred loss" model for measuring credit losses on loans and leases, which required allowances for current known and inherent losses within the loan portfolio, with a current expected credit loss ("CECL") model. The CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance-sheet credit exposures based on historical experience, current conditions, and reasonable and supportable forecasts. ASC 326 also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's loan portfolio. In addition, ASC 326 includes certain changes to the accounting for available-for-sale debt securities, including the requirement to present credit losses as an allowance rather than as a direct write-down, in certain circumstances. The Company adopted ASC 326 using the modified retrospective method for financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, the Company recognized an increase in the allowance for credit losses (including both loans and unfunded lending commitments) of $ 2.4 million, which included an after-tax cumulative effect decrease to retained earnings totaling $ 1.8 million. Operating results for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies. The revised accounting policies resulting from the adoption of ASC 326, as well as the accounting policies prior to January 1, 2023, are described below. Allowance for Credit Losses on Loans and Leases The allowance for credit losses on loans and leases is a contra-asset valuation account that is deducted from the amortized cost basis of the loans and leases held for investment to present the net amount expected to be collected. Loans are charged off against the allowance when management believes that the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. The allowance for credit losses on loans and leases is adjusted through the provision for (recovery of) credit losses. Management estimates the allowance for credit losses by using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in loan-specific risk characteristics such as changes in economic and business conditions, underwriting standards, portfolio mix, and delinquency level. Considerations related to environmental conditions include reasonable and supportable current and forecasted data related to economic factors such as inflation, unemployment levels, and interest rates. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective pool evaluations. For individually evaluated loans, When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty as of the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for estimated selling costs as appropriate. Expected credit losses are estimated over the contractual term of the loans and leases, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company, or management has a reasonable expectation at the reporting date that a loan modification will be made to a borrower experiencing financial difficulty. 62 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Allowance for Credit Losses on Unfunded Lending Commitments The Company estimates expected credit losses on unfunded lending commitments over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The following categories of off-balance sheet credit exposures have been identified: unfunded loan commitments, standby letters of credit, and financial guarantees (collectively, “unfunded lending commitments”). The allowance for credit losses on unfunded lending commitments is adjusted through the provision for (recovery of) credit losses. The estimate may include consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded, as well as reasonable practical expedients or industry practices to assist in the evaluation of estimated funding amounts. Management estimates the allowance balance by using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for estimation of expected credit losses. Adjustments to historical loss information are made for differences in loan-specific risk characteristics such as changes in economic and business conditions, underwriting standards, portfolio mix, and delinquency level. Considerations related to environmental conditions include reasonable and supportable current and forecasted data related to economic factors such as inflation, unemployment levels, and interest rates. Allowance for Credit Losses on Investment Securities Held-to-Maturity Expected credit losses on held-to-maturity debt securities are measured on a collective basis by major security type. Accrued interest receivable on held-to-maturity securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The allowance for credit losses on investment securities held-to-maturity is adjusted through the provision for (recovery of) credit losses. Allowance for Credit Losses on Investment Securities Available-for-Sale For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes in the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded in the provision for (recovery of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses. Allowance for Loan and Lease Losses Prior to January 1, 2023 Prior to the adoption of ASC 326 on January 1, 2023, the allowance for loan and lease losses was calculated pursuant to the provisions of ASC 450-20, Loss Contingencies and ASC 310-10-35, Receivables . Under this guidance, loans were divided into homogeneous pools and probable losses for each pool were calculated based on historical loss data. The estimated probable losses for each pool also included qualitative adjustments to historical loss information based on environmental factors as of the balance sheet date. The allowance for loan and lease losses was increased by a provision for loan and lease losses, which was charged to expense, and reduced by charge-offs, net of recoveries by portfolio segment. 63 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Investment Impairment Prior to January 1, 2023 Prior to the adoption of ASC 326 on January 1, 2023, impairment of investment securities was measured under ASC 320, Investments – Debt and Equity Securities . In accordance with ASC 320, all investment securities were evaluated for impairment individually. An investment security was considered impaired if the fair value of the security as of the balance sheet date was less than amortized cost. For each security determined to be impaired, an evaluation was made as to whether the impairment was other than temporary. The determination of whether a security was other than temporarily impaired required judgment related to whether or not there was intent to sell the security or whether it was more likely than not that the Company would be required to sell the security before recovery of its amortized cost basis. In addition, determinations were made as to whether a credit loss existed for each impaired security by comparing the present value of expected cash flows with the amortized cost basis. 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 portfolio-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. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is generally computed 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. 64 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 1. 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 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 credit 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. 65 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Reclassification Certain amounts presented in the prior period consolidated financial statements and related notes have been reclassified to conform to the 2023 presentation. These reclassifications had no effect on the Company’s net income, 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 stock equivalent shares that have been accrued as of the balance sheet date as deferred compensation for members of Bancshares’ Board of Directors under the Non-Employee Directors’ Deferred Compensation Plan (as defined below and discussed further in Note 12, "Deferred Compensation Plans"). 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 unexercised nonqualified stock option grants issued to employees and members of Bancshares’ Board of Directors pursuant to the Company’s Incentive Plan (as defined and discussed further in Note 13, "Stock Awards"). The following table reflects weighted average shares used to calculate basic and diluted net income per share for the years ended December 31, 2023 and 2022. Year Ended December 31, 2023 2022 Weighted average shares outstanding 5,851,702 5,969,575 Weighted average director deferred shares 112,857 114,483 Basic shares 5,964,559 6,084,058 Dilutive shares 411,900 419,650 Diluted shares 6,376,459 6,503,708 Year Ended December 31, 2023 2022 (Dollars in Thousands, Except Per Share Data) Net income $ 8,485 $ 6,864 Basic net income per share $ 1.42 $ 1.13 Diluted net income per share $ 1.33 $ 1.06 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. 66 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Segment Reporting In previous periods, the Company disclosed two reportable operating segments of Bancshares: the Bank and ALC. The reportable operating segments were determined using the internal management reporting system in place during those periods. Due to the legal dissolution of ALC during 2023, management's internal reporting system no longer includes two reportable operating segments as of December 31, 2023. Accordingly, no disclosure of separate reportable operating segments is included in this Annual Report on Form 10-K. Accounting Policies Recently Adopted Reference Rate Reform 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 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. Historically, the Company utilized LIBOR, among other indexes, as a reference rate for underwriting certain variable rate loans and interest rate hedging instruments. Since the issuance of this guidance, cessation of U.S. dollar LIBOR was extended to June 30, 2023. Accordingly, in December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which deferred the sunset date of ASC Topic 848 from December 31, 2022 to December 31, 2024. The amendments in this update provide optional expedients designed to provide relief from accounting analysis and the impacts that may otherwise be required for modifications to agreements necessitated by reference rate reform. The optional expedients provided by the update include guidance related to modifications of contracts within the scope of ASC 310, Receivables , and ASC 470, Debt , that indicates the modifications should be accounted for by prospectively adjusting the effective interest rate. As of December 31, 2023, the Company had no remaining contracts referencing LIBOR for which the pricing had not been reset using a different reference rate. Due to the prospective nature of the implementation of the revised guidance, the adoption did not have a material impact on the Company’s consolidated financial statements. Portfolio Layer Hedging Method 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 expand the current last-of-layer method of hedge accounting to allow multiple hedged layers of a single closed portfolio. The Company adopted ASU 2022-01 on January 1, 2023. Due to the prospective nature of the implementation of this revised guidance, the adoption of this standard update did not have a material impact on the Company's consolidated financial statements. Intangibles and Goodwill 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 did not have a material effect on the Company’s consolidated financial statements. 67 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Current Expected Credit Loss Accounting Guidance ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." Issued in June 2016, ASU 2016-13 removed the thresholds that entities previously applied 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 removed all recognition thresholds under previously used incurred loss models and required entities to recognize an allowance for lifetime expected credit losses. The standard also added 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. In addition, the standard made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not they will be required to sell. 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 ASU became effective for the Company on January 1, 2023, and the Company recorded a cumulative-effect transition adjustment totaling $ 2.4 million, which included an after-tax cumulative effect decrease to retained earnings totaling $ 1.8 million. This adjustment increased the Company’s allowance for credit losses on loans and leases by $ 2.1 million, and established an allowance for unfunded commitments of $ 0.3 million. The table below summarizes the impact on the allowance for credit losses on loans and leases of the adoption of ASC 326 on January 1, 2023: January 1, 2023 Adoption Date Construction, Land Development, and Other Real Estate 1-4 Family Real Estate Multi- Family Non- Farm Non- Residential Commercial and Industrial Direct Consumer Branch Retail Indirect Consumer Total (Dollars in Thousands) Allowance for credit losses on loans and leases: Beginning balance, prior to adoption $ 517 $ 832 $ 646 $ 1,970 $ 919 $ 866 $ 518 $ 3,154 $ 9,422 Impact of adoption ( 94 ) ( 39 ) ( 85 ) ( 147 ) ( 20 ) 47 628 1,833 2,123 Ending balance, after adoption $ 423 $ 793 $ 561 $ 1,823 $ 899 $ 913 $ 1,146 $ 4,987 $ 11,545 Troubled Debt Restructurings and Vintage Disclosures ASU 2022-02 , “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures. ” Issued in March 2022, ASU 2022-02 sought to improve the decision usefulness of information provided to investors concerning certain loan refinancings, restructurings and write-offs. The ASU eliminated the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL accounting model and enhanced 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 did not have a material impact on the Company’s consolidated financial statements. 68 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENT SECURITIES Details of investment securities available-for-sale and held-to-maturity as of December 31, 2023 and 2022 were as follows: Available-for-Sale December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (Dollars in Thousands) Mortgage-backed securities: Residential $ 47,221 $ 580 $ ( 3,073 ) $ 44,728 Commercial 9,446 — ( 406 ) 9,040 Obligations of U.S. government-sponsored agencies 11,849 158 ( 727 ) 11,280 Obligations of states and political subdivisions 1,621 — ( 63 ) 1,558 Corporate notes 17,757 — ( 2,800 ) 14,957 U.S. Treasury securities 56,999 — ( 2,997 ) 54,002 Total $ 144,893 $ 738 $ ( 10,066 ) $ 135,565 Held-to-Maturity December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (Dollars in Thousands) Mortgage-backed securities: Commercial $ 575 $ — $ ( 22 ) $ 553 Obligations of U.S. government-sponsored agencies 471 — ( 34 ) 437 Obligations of states and political subdivisions 58 — ( 7 ) 51 Total $ 1,104 $ — $ ( 63 ) $ 1,041 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 $ 2 $ ( 3,704 ) $ 43,957 Commercial 12,169 4 ( 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 2 ( 1,898 ) 15,921 U.S. Treasury securities 56,956 — ( 4,074 ) 52,882 Total $ 141,883 $ 8 $ ( 11,096 ) $ 130,795 69 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 610 — ( 40 ) 570 Obligations of states and political subdivisions 85 — ( 12 ) 73 Total $ 1,862 $ — $ ( 93 ) $ 1,769 The scheduled maturities of investment securities available-for-sale and held-to-maturity as of December 31, 2023 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 $ 12,994 $ 12,895 $ — $ — Maturing after one to five years 53,070 49,767 249 241 Maturing after five to ten years 58,413 52,506 660 620 Maturing after ten years 20,416 20,397 195 180 Total $ 144,893 $ 135,565 $ 1,104 $ 1,041 For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities generally mature earlier than their weighted-average contractual maturities because of principal prepayments. The following table reflects gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2023 and 2022: Available-for-Sale December 31, 2023 Less than 12 Months 12 Months or More Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in Thousands) Mortgage-backed securities: Residential $ 94 $ ( 1 ) $ 35,584 $ ( 3,072 ) Commercial 600 ( 5 ) 8,408 ( 401 ) Obligations of U.S. government-sponsored agencies — — 4,367 ( 727 ) Obligations of states and political subdivisions — — 1,558 ( 63 ) Corporate notes 771 ( 229 ) 14,186 ( 2,571 ) U.S. Treasury securities — — 54,002 ( 2,997 ) Total $ 1,465 $ ( 235 ) $ 118,105 $ ( 9,831 ) 70 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Held-to-Maturity December 31, 2023 Less than 12 Months 12 Months or More Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in Thousands) Mortgage-backed securities: Commercial $ — $ — $ 553 $ ( 22 ) Obligations of U.S. government-sponsored agencies — — 436 ( 34 ) Obligations of states and political subdivisions — — 52 ( 7 ) Total $ — $ — $ 1,041 $ ( 63 ) 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 ) 512 ( 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 215 ( 7 ) 356 ( 33 ) Obligations of states and political subdivisions 73 ( 12 ) — — Total $ 1,413 $ ( 60 ) $ 356 $ ( 33 ) Available-for-Sale Considerations For any securities classified as available-for-sale that are in an unrealized loss position as of the balance sheet date, the Company assesses whether or not it intends to sell the security, or more-likely-than-not will be required to sell the security, before recovery of its amortized cost basis which would require a write-down to fair value through net income. 71 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of December 31, 2023 , 108 available-for-sale debt securities had been in a loss position for more than 12 months, and three available-for-sale debt securities had been in a loss position for less than 12 months. As of December 31, 2022 , 38 available-for-sale debt securities had been in a loss position for more than 12 months, and 86 available-for-sale debt securities had been in a loss position for less than 12 months. The increase in the number of debt securities in a loss position for greater than 12 months was due to the sustained higher interest rate environment during the years ended December 31, 2023 and 2022. As of December 31, 2023, the Company had the current intent and ability to retain its investments for a period of time that management believes to be sufficient to allow for any anticipated recovery of fair value. As of December 31, 2023, the losses for all available-for-sale 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. Accordingly, no allowance for credit losses was considered necessary related to available-for-sale securities as of December 31, 2023. Furthermore, the Company did not recognize any other-than-temporary impairments as of December 31, 2022, in accordance with accounting guidance before the adoption of ASC 326. Held-to-Maturity Considerations Effective January 1, 2023, the Company adopted the CECL accounting model to evaluate credit losses in the held-to-maturity investment portfolio. Each quarter, management evaluates the portfolio on a collective basis by major security type to determine whether an allowance for credit losses is needed. Qualitative factors are used in the Company’s credit loss assessments, including current and forecasted economic conditions, the characteristics of the debt issuer, and the historic ability of the issuer to make contractual principal and interest payments. Specifically, with regard to mortgage-backed securities or obligations of U.S. government sponsored agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are either backed by the full faith and credit of the U.S. government or the agency. With regard to obligations of states and political subdivisions, management considers issuer bond ratings, historical loss rates for given bond ratings, and whether the issuers continue to make timely principal and interest payments under contractual terms of the securities. Based on these evaluations, no allowance for credit losses was recorded by the Company for the held-to-maturity investment portfolio upon adoption of the CECL accounting model or as of December 31, 2023. Furthermore, the Company did not recognize any other-than-temporary impairments as of December 31, 2022, in accordance with accounting guidance before the adoption of ASC 326. Pledged Securities Investment securities with a carrying value of $ 41.4 million and $ 54.7 million as of December 31, 2023 and 2022 , respectively, were pledged to secure public deposits and for other purposes. 4. LOANS AND LEASES 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. 72 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. As of December 31, 2023 and 2022, the composition of the loan portfolio by portfolio segment was as follows: December 31, 2023 December 31, 2022 (Dollars in Thousands) Real estate loans: Construction, land development and other land loans $ 88,140 $ 53,914 Secured by 1-4 family residential properties 76,200 87,995 Secured by multi-family residential properties 62,397 67,852 Secured by non-farm, non-residential properties 213,586 200,156 Commercial and industrial loans (1) 60,515 73,546 Consumer loans: Direct 5,938 9,851 Branch retail 8,670 13,992 Indirect 306,345 266,567 Total loans 821,791 773,873 Allowance for credit losses 10,507 9,422 Net loans $ 811,284 $ 764,451 (1) Includes equipment financing leases, totaling $ 12.6 million and $ 10.3 million as of December 31, 2023 and 2022 , respectively. The Company makes commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 53.6 % and 53.0 % of the portfolio was concentrated in loans secured by real estate as of December 31, 2023 and 2022, respectively. Loans with a carrying value of $ 98.6 million and $ 100.2 million were pledged as collateral to secure Federal Home Loan Bank ("FHLB") borrowings as of December 31, 2023 and 2022, respectively. In addition, loans with a carrying value of $ 294.4 million were pledged to secure borrowings with the Federal Reserve Bank ("FRB") as of December 31, 2023. No loans were pledged to the FRB as of December 31, 2022. Measures were undertaken by management in 2023 to pledge loans to the FRB in order to provide additional borrowing capacity to the Company in response to heightened liquidity concerns in the banking industry. 73 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2023 and 2022 were $ 1.4 million and $ 0.2 million, respectively. During the year ended December 31, 2023 , a line of credit agreement with a related party with an available balance of $ 0.1 million expired and was not renewed at the direction of the borrower. During the year ended December 31, 2023, there were new loans of $ 1.3 million to these parties, and no repayments made by active related parties. During the year ended December 31, 2022 , there were no new loans to these parties, and repayments by active related parties were $ 0.1 million. Allowance for Credit Losses Effective January 1, 2023, the Company adopted the CECL model to account for credit losses on financial instruments, including loans and leases held for investment, as well as off-balance sheet credit exposures including unfunded lending commitments. In accordance with the CECL accounting guidance, the Company recorded a cumulative-effect adjustment totaling $ 2.4 million, of which $ 1.8 million (net of tax) was recorded through retained earnings upon adoption of the model. This amount included estimates for credit losses associated with both loan and lease receivables, as well as unfunded lending commitments. Prospectively, following the date of adoption, all adjustments for credit losses are required to be recorded as a provision for (recovery of) credit losses in the Company’s consolidated statement of operations. Allowance for Credit Losses on Loans and Leases Determining the appropriateness of the allowance for credit losses on loans and leases is complex and requires judgment by management about the effects of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, or particular segments of the portfolio, in the context of factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. The level of the allowance is influenced by loan and lease volumes and mix, historical credit loss experience, average remaining life of portfolio segments, asset quality characteristics, delinquency status, and other conditions including reasonable and supportable forecasts of economic conditions and qualitative adjustment factors based on management’s understanding of various attributes that could impact life-of-loan losses as of the balance sheet date. The methodology to estimate losses includes two basic components: (1) an asset-specific component for individual loans that do not share similar risk characteristics with other loans, and (2) a pooled component for estimated expected credit losses for loans that share similar risk characteristics. Loans that do not share risk characteristics with other loans are evaluated on an individual basis. The process for determining whether a loan should be evaluated on an individual basis begins with a determination of credit rating. All loans graded substandard or worse with a total commitment of $ 0.5 million or more are evaluated on an individual basis. At management's discretion, other loans may be evaluated, including loans less than $ 0.5 million, if management determines that the loans exhibit unique risk characteristics. For loans individually evaluated, the allowance is based primarily on the fair value of the underlying collateral, less any costs to sell, as applicable, utilizing independent third-party appraisals, and assessment of borrower guarantees. The fair value is compared to the amortized cost basis of the loan to determine if an allowance for credit losses should be recognized. For estimating the component of the allowance for credit losses that share similar risk characteristics, loans are segregated into pooled loan categories that share risk characteristics. Loans are designated into pooled categories based on product types, business lines, collateral, and other risk characteristics. For all pooled loan categories, the Company uses a loss-rate methodology to calculate estimated life-of-loan and lease credit losses. This methodology focuses on historical credit loss rates applied over the estimated weighted average remaining life of each loan pool, adjusted by qualitative factors, to estimate life-of-loan losses for each pool. The qualitative factors utilized include, among others, reasonable and supportable forecasts of economic data, including inflation and unemployment levels, as well as interest rates. The Company’s cumulative-effect adjustment upon the adoption of CECL increased the Company’s allowance for credit losses on loans and leases by $ 2.1 million. Subsequent to January 1, 2023, the Company recorded additional increases to the allowance for credit losses on loans and leases totaling $ 42 thousand which were included in the provision for credit losses in the Company’s consolidated statement of operations during the year ended December 31, 2023. 74 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following tables present changes in the allowance for credit losses on loans and leases by portfolio segment during th e year ended December 31, 2023: As of and for the Year Ended December 31, 2023 Construction, Land Development, and Other Real Estate 1-4 Family Real Estate Multi- Family Non- Farm Non- Residential Commercial and Industrial Direct Consumer Branch Retail Indirect Consumer Total (Dollars in Thousands) Allowance for credit losses: Beginning balance, prior to the adoption of ASC 326 $ 517 $ 832 $ 646 $ 1,970 $ 919 $ 866 $ 518 $ 3,154 $ 9,422 Impact of adopting ASC 326 ( 94 ) ( 39 ) ( 85 ) ( 147 ) ( 20 ) 47 628 1,833 2,123 Charge-offs — ( 97 ) — — — ( 571 ) ( 445 ) ( 932 ) ( 2,045 ) Recoveries — 54 — — — 619 243 49 965 Provision for (recovery of) credit losses 142 ( 159 ) ( 146 ) ( 398 ) ( 386 ) ( 897 ) ( 508 ) 2,394 42 Ending balance $ 565 $ 591 $ 415 $ 1,425 $ 513 $ 64 $ 436 $ 6,498 $ 10,507 The following table presents changes in the allowance for loan and lease losses by portfolio segment during the year ended December 31, 2022, as determined in accordance with ASC 310, prior to the adoption of ASC 326. As of and for the Year Ended December 31, 2022 Construction, Land Development, and Other Real Estate 1-4 Family Real Estate Multi- Family Non- Farm Non- Residential Commercial and Industrial Direct Consumer Branch Retail Indirect Consumer Total (Dollars in Thousands) Allowance for loan and lease losses: Beginning balance $ 628 $ 690 $ 437 $ 1,958 $ 860 $ 1,004 $ 304 $ 2,439 $ 8,320 Charge-offs — ( 40 ) — — — ( 1,958 ) ( 633 ) ( 382 ) ( 3,013 ) Recoveries 2 39 — 5 0 565 151 45 807 Provision for (recovery of) loan and lease losses ( 113 ) 143 209 7 59 1,255 696 1,052 3,308 Ending balance $ 517 $ 832 $ 646 $ 1,970 $ 919 $ 866 $ 518 $ 3,154 $ 9,422 The following table details the allowance for loan and lease losses and recorded investment in loans by loan classification and by impairment evaluation as of December 31, 2022, as determined in accordance with ASC 310, prior to the adoption of ASC 326: As of the Year Ended December 31, 2022 Construction, Land Development, and Other Real Estate 1-4 Family Real Estate Multi- Family Non- Farm Non- Residential Commercial and Industrial Direct Consumer Branch Retail Indirect Consumer Total (Dollars in Thousands) Ending balance of allowance attributable to loans: Individually evaluated for impairment $ — $ 7 $ — $ — $ 252 $ — $ — $ — $ 259 Collectively evaluated for impairment 517 825 646 1,970 667 886 518 3,154 $ 9,183 Total allowance for loan and lease losses $ 517 $ 832 $ 646 $ 1,970 $ 919 $ 886 $ 518 $ 3,154 $ 9,442 Ending balance of loans receivable: Individually evaluated for impairment $ — $ 582 $ — $ 2,492 $ 2,429 $ 18 $ — $ — $ 5,521 Collectively evaluated for impairment 53,914 87,413 67,852 197,664 71,117 9,833 13,992 266,567 768,352 Total loans receivable $ 53,914 $ 87,995 $ 67,852 $ 200,156 $ 73,546 $ 9,851 $ 13,992 $ 266,567 $ 773,873 75 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table presents impaired loans as of December 31, 2022 as determined under ASC 310 prior to the adoption of ASC 326. Impaired loans generally included nonaccrual loans and other loans deemed to be impaired but that continued to accrue interest. 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. Presented are the carrying amount, unpaid principal balance and related allowance of impaired loans as of December 31, 2022 by portfolio segment: 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 568 568 — 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 18 18 — 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 14 14 7 Secured by multi-family residential properties — — — Secured by non-farm, non-residential properties — — — Commercial and industrial 353 353 252 Direct consumer — — — Total impaired loans with an allowance recorded $ 367 $ 367 $ 259 Total impaired loans Loans secured by real estate Construction, land development and other land loans $ — $ — $ — Secured by 1-4 family residential properties 582 582 7 Secured by multi-family residential properties — — — Secured by non-farm, non-residential properties 2,492 2,492 — Commercial and industrial 2,429 2,429 252 Direct consumer 18 18 — Total impaired loans $ 5,521 $ 5,521 $ 259 Allowance for Credit Losses on Unfunded Lending Commitments Unfunded lending commitments are off-balance sheet arrangements that represent unconditional commitments of the Company to lend to a borrower that are unfunded as of the balance sheet date. These may include unfunded loan commitments, standby letters of credit, and financial guarantees. The CECL accounting guidance requires that an estimate of expected credit loss be measured on commitments in which an entity is exposed to credit risk via a present contractual obligation to extend credit unless the obligation is unconditionally cancellable by the issuer. For the Company, unconditional lending commitments generally include unfunded term loan agreements, home equity lines of credit, lines of credit, and demand deposit account overdraft protection. The Company’s cumulative-effect adjustment upon the adoption of CECL included a reserve for unfunded commitments of $ 0.3 million. Subsequent to January 1, 2023, the Company recorded additional increases to the reserve for unfunded commitments totaling $0.3 million which were included in the provision for credit losses in the Company's consolidated 76 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) statement of operations during the year ended December 31, 2023. As of December 31, 2023, the reserve, which is recorded in other liabilities on the Company’s consolidated balance sheets, totaled $ 0.6 million. No reserve for unfunded commitments was recorded by the Company as of December 31, 2022. 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, 2023 or 2022. • 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, 2023 or 2022. 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. 77 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tables below illustrate the carrying amount of loans by credit quality indicator and year of origination as of December 31, 2023: December 31, 2023 Loans at Amortized Cost Basis by Origination Year 2023 2022 2021 2020 2019 Prior Total (Dollars in Thousands) Commercial: Construction, land development and other land loans Pass $ 7,913 $ 37,068 $ 41,800 $ 804 $ — $ 555 $ 88,140 Special Mention — — — — — — — Substandard — — — — — — — Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 7,913 $ 37,068 $ 41,800 $ 804 $ — $ 555 $ 88,140 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Secured by multi-family residential properties Pass $ 407 $ 29,683 $ 5,950 $ 5,676 $ 7,063 $ 13,618 $ 62,397 Special Mention — — — — — — — Substandard — — — — — — — Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 407 $ 29,683 $ 5,950 $ 5,676 $ 7,063 $ 13,618 $ 62,397 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Secured by non-farm, non-residential properties Pass $ 26,521 $ 36,141 $ 23,551 $ 56,404 $ 18,127 $ 46,261 $ 207,005 Special Mention — 532 1,776 344 — 1,448 4,100 Substandard — — — 152 — 2,329 2,481 Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 26,521 $ 36,673 $ 25,327 $ 56,900 $ 18,127 $ 50,038 $ 213,586 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Commercial and industrial loans and leases Pass $ 10,948 $ 6,187 $ 14,586 $ 2,593 $ 1,565 $ 22,614 $ 58,493 Special Mention — 159 782 174 38 — 1,153 Substandard — 116 191 59 260 243 869 Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 10,948 $ 6,462 $ 15,559 $ 2,826 $ 1,863 $ 22,857 $ 60,515 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Total commercial Pass $ 45,789 $ 109,079 $ 85,887 $ 65,477 $ 26,755 $ 83,048 $ 416,035 Special Mention — 691 2,558 518 38 1,448 5,253 Substandard — 116 191 211 260 2,572 3,350 Doubtful — — — — — — — Loss — — — — — — — $ 45,789 $ 109,886 $ 88,636 $ 66,206 $ 27,053 $ 87,068 $ 424,638 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — 78 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2023 Loans at Amortized Cost Basis by Origination Year 2023 2022 2021 2020 2019 Prior Total (Dollars in Thousands) Consumer: Secured by 1-4 family residential properties Performing $ 4,230 $ 20,172 $ 14,986 $ 6,675 $ 8,950 $ 20,334 $ 75,347 Non-performing — — — — — 853 853 Subtotal $ 4,230 $ 20,172 $ 14,986 $ 6,675 $ 8,950 $ 21,187 $ 76,200 Current period gross charge-offs $ — $ — $ — $ — $ — $ 97 $ 97 Direct Performing $ 2,383 $ 1,157 $ 1,485 $ 575 $ 225 $ 113 $ 5,938 Non-performing — — — — — — — Subtotal $ 2,383 $ 1,157 $ 1,485 $ 575 $ 225 $ 113 $ 5,938 Current period gross charge-offs $ 2 $ 5 $ 316 $ 118 $ 42 $ 88 $ 571 Branch retail Performing $ — $ — $ 2,160 $ 2,696 $ 1,572 $ 2,242 $ 8,670 Non-performing — — — — — — — Subtotal $ — $ — $ 2,160 $ 2,696 $ 1,572 $ 2,242 $ 8,670 Current period gross charge-offs $ — $ — $ 108 $ 140 $ 57 $ 140 $ 445 Indirect Performing $ 88,688 $ 89,376 $ 66,147 $ 50,883 $ 5,485 $ 5,712 $ 306,291 Non-performing — — 54 — — — 54 Subtotal $ 88,688 $ 89,376 $ 66,201 $ 50,883 $ 5,485 $ 5,712 $ 306,345 Current period gross charge-offs $ 6 $ 235 $ 332 $ 270 $ 39 $ 50 $ 932 Total consumer Performing $ 95,301 $ 110,705 $ 84,778 $ 60,829 $ 16,232 $ 28,401 $ 396,246 Non-performing — — 54 — — 853 907 $ 95,301 $ 110,705 $ 84,832 $ 60,829 $ 16,232 $ 29,254 $ 397,153 Current period gross charge-offs $ 8 $ 240 $ 756 $ 528 $ 138 $ 375 $ 2,045 The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31, 2022, presented in accordance with ASC 310, prior to the adoption of ASC 326. 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 $ 53,914 $ — $ — $ 53,914 Secured by multi-family residential properties 67,852 — — 67,852 Secured by non-farm, non-residential properties 197,004 651 2,501 200,156 Commercial and industrial loans 70,500 — 3,046 73,546 Total $ 389,270 $ 651 $ 5,547 $ 395,468 As a percentage of total loans 98.43 % 0.17 % 1.40 % 100.00 % 79 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 $ 86,871 $ 1,124 $ 87,995 Consumer loans: Direct 9,805 46 9,851 Branch retail 13,960 32 13,992 Indirect 266,496 71 266,567 Total $ 377,132 $ 1,273 $ 378,405 As a percentage of total loans 99.66 % 0.34 % 100.00 % The following table provides an aging analysis of past due loans by class as of December 31, 2023: As of December 31, 2023 30-59 Days Past Due 60-89 Days Past Due 90 Days Or Greater Total Past Due Current Total Loans Recorded Investment > 90 Days And Accruing (Dollars in Thousands) Loans secured by real estate: Construction, land development and other land loans $ — $ — $ — $ — $ 88,140 $ 88,140 $ — Secured by 1-4 family residential properties 820 177 23 1,020 75,180 76,200 — Secured by multi-family residential properties — — — — 62,397 62,397 — Secured by non-farm, non-residential properties — — 1,302 1,302 212,284 213,586 — Commercial and industrial loans 89 34 147 270 60,245 60,515 — Consumer loans: Direct 42 — — 42 5,896 5,938 — Branch retail 39 1 — 40 8,630 8,670 Indirect 316 33 54 403 305,942 306,345 — Total $ 1,306 $ 245 $ 1,526 $ 3,077 $ 818,714 $ 821,791 $ — As a percentage of total loans 0.15 % 0.03 % 0.19 % 0.37 % 99.63 % 100.00 % 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 90 Days Or Greater Total Past Due Current Total Loans Recorded Investment > 90 Days And Accruing (Dollars in Thousands) Loans secured by real estate: Construction, land development and other land loans $ — $ — $ — $ — $ 53,914 $ 53,914 $ — Secured by 1-4 family residential properties 801 87 78 966 87,029 87,995 — Secured by multi-family residential properties — — — — 67,852 67,852 — Secured by non-farm, non-residential properties 137 — — 137 200,019 200,156 — Commercial and industrial loans 61 — 300 361 73,185 73,546 — Consumer loans: Direct 251 50 30 331 9,520 9,851 — Branch retail 258 85 32 375 13,617 13,992 Indirect 186 55 71 312 266,255 266,567 — Total $ 1,694 $ 277 $ 511 $ 2,482 $ 771,391 $ 773,873 $ — As a percentage of total loans 0.21 % 0.04 % 0.07 % 0.32 % 99.68 % 100.00 % 80 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The table below presents the amortized cost of loans on nonaccrual status and loans past due 90 days or more and still accruing interest as of December 31, 2023. Also presented is the balance of loans on nonaccrual status at December 31, 2023 for which there was no related allowance for credit losses recorded. Loans on Non-Accrual Status December 31, 2023 (Dollars in Thousands) Total nonaccrual loans Nonaccrual loans with no allowance for credit losses Loans past due 90 days or more and still accruing Loans secured by real estate: Construction, land development and other land loans $ — $ — $ — Secured by 1-4 family residential properties 891 462 — Secured by multi-family residential properties — — — Secured by non-farm, non-residential properties 1,302 1,314 — Commercial and industrial loans 152 77 — Consumer loans: Direct — — — Branch retail — — — Indirect 55 — — Total loans $ 2,400 $ 1,853 $ — The following table provides an analysis of nonaccruing loans by portfolio segment as of December 31, 2022, presented in accordance with ASC 310, prior to the adoption of ASC 326. Loans on Non-Accrual Status December 31, 2022 (Dollars in Thousands) Loans secured by real estate: Construction, land development and other land loans $ — Secured by 1-4 family residential properties 914 Secured by multi-family residential properties — Secured by non-farm, non-residential properties — Commercial and industrial loans 605 Consumer loans: Direct 29 Branch retail 32 Indirect 71 Total loans $ 1,651 81 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table presents the amortized cost basis of collateral dependent loans as of December 31, 2023, which loans are individually evaluated to determine credit losses: December 31, 2023 Real Estate Other Total (Dollars in Thousands) Loans secured by real estate Construction, land development and other land loans $ — $ — $ — Secured by 1-4 family residential properties 485 — 485 Secured by multi-family residential properties — — — Secured by non-farm, non-residential properties 2,333 — 2,333 Commercial and industrial — 112 112 Direct consumer — — — Total loans individually evaluated $ 2,818 $ 112 $ 2,930 The following table details the average recorded investment and the amount of interest income recognized and received for the year ended December 31, 2022, respectively, related to impaired loans as determined under ASC 310 prior to the adoption of ASC 326: 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 $ 87 $ — $ — Secured by 1-4 family residential properties 614 14 6 Secured by multi-family residential properties — — — Secured by non-farm, non-residential properties 1,529 49 48 Commercial and industrial 1,279 8 5 Direct consumer 19 1 1 Total $ 3,528 $ 72 $ 60 Loan Modifications Made to Borrowers Experiencing Financial Difficulty From time to time, the Company may modify the terms of loan agreements with borrowers that are experiencing financial difficulties. Modification of the terms of such loans typically include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. No modifications in 2023 resulted in the permanent reduction of the recorded investment in the loan. During the year ended December 31, 2023, the Company did not modify any loans to borrowers experiencing financial difficulty, and there were no payment defaults on loans that were modified in the previous twelve months. Troubled Debt Restructurings Prior to the Adoption of ASC 326 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 year ended December 31, 2022. 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 82 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 December 31, 2022, the Company did not have any non-accruing loans that were previously restructured and that remained on non-accrual status. For the year ended December 31, 2022, the Company had no loans that were restored to accrual status based on a sustained period of repayment performance. The following table provides the number of loans remaining in each loan category that the Company had previously modified in a troubled debt restructuring, as well as the pre- and post-modification principal balance as of December 31, 2022, as determined under ASC 310 prior to the adoption of ASC 326. December 31, 2022 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 1 $ 23 $ 12 Secured by non-farm, non-residential properties 2 621 612 Commercial loans 1 71 22 Total 4 $ 715 $ 646 83 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS Other Real Estate Owned Other real estate and certain other assets acquired in foreclosure are reported at the net realizable value of the property, less estimated costs to sell. The following table summarizes foreclosed property activity during the years ended December 31, 2023 and 2022: December 31, 2023 December 31, 2022 (Dollars in Thousands) Beginning balance $ 686 $ 2,149 Additions (1) — 411 Sales proceeds ( 15 ) ( 2,232 ) Gross gains 1 386 Gross losses ( 6 ) ( 27 ) Net gains ( 5 ) 359 Impairment ( 64 ) ( 1 ) Ending balance $ 602 $ 686 (1) Additions to other real estate owned (“OREO”) may include transfers from loans, transfers from closed 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 the result of continued declining property values based on updated appraisals or other indications of value, such as offers to purchase. Net realizable value less estimated costs to sell of foreclosed residential real estate held by the Company was zero and $ 20.0 thousand as of December 31, 2023 and 2022 , respectively. In addition, the Company did no t hold any consumer mortgage loans collateralized by residential real estate that were in the process of foreclosure as of both December 31, 2023 and 2022. 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, 2023 and 2022: December 31, 2023 December 31, 2022 (Dollars in Thousands) Beginning balance $ 83 $ 154 Transfers from loans 1,178 887 Sales proceeds ( 453 ) ( 506 ) Gross gains — — Gross losses ( 535 ) ( 452 ) Net losses ( 535 ) ( 452 ) Impairment — — Ending balance $ 273 $ 83 Repossessed assets are included in other assets in the Company’s consolidated balance sheets. 6. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is tested for impairment annually, or more often if circumstances warrant. If, as a result of impairment testing, it is determined that the fair value of goodwill is lower than its carrying amount, goodwill must be written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements. Goodwill totaled 84 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $ 7.4 million as of both December 31, 2023 and 2022. Goodwill impairment was neither indicated nor recorded during the years ended December 31, 2023 or 2022. 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. No write-downs of core deposit premiums were recorded by the Company during the years ended December 31, 2023 and 2022. The Company’s goodwill and other intangible assets (carrying basis and accumulated amortization) as of December 31, 2023 and 2022 were as follows: December 31, 2023 December 31, 2022 (Dollars in Thousands) (Dollars in Thousands) Goodwill $ 7,435 $ 7,435 Core deposit intangible assets: Gross carrying amount 2,048 2,048 Accumulated amortization ( 1,877 ) ( 1,682 ) Core deposit intangible, net 171 366 Total $ 7,606 $ 7,801 The Company’s estimated remaining amortization expense on intangible assets as of December 31, 2023 was as follows: Amortization Expense (Dollars in Thousands) 2024 122 2025 49 Total $ 171 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 the carrying amount may not be recoverable. 7. PREMISES AND EQUIPMENT Premises and equipment and applicable depreciable lives are summarized as follows: December 31, 2023 2022 (Dollars in Thousands) Land $ 5,390 $ 5,390 Premises 24,798 24,880 Furniture, fixtures and equipment 16,065 15,792 Construction in progress 159 — Total cost of premises and equipment 46,412 46,062 Less accumulated depreciation ( 22,014 ) ( 21,623 ) Total premises and equipment, net $ 24,398 $ 24,439 Depreciation expense of $ 1.6 million was recorded in both 2023 and 2022 . 85 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. DEPOSITS As of December 31, 2023, the scheduled maturities of the Company’s time deposits were as follows: (Dollars in Thousands) 2024 $ 173,298 2025 129,099 2026 19,610 2027 3,801 2028 and after 2,704 Total $ 328,512 Time deposits greater than $250 thousand totaled $ 48.0 million and $ 29.5 million as of December 31, 2023 and 2022, respectively. Included in deposits, the Company held brokered certificates of deposit totaling $ 82.7 million as of December 31, 2023 and $ 62.5 million as of December 31, 2022. Deposits from related parties held by the Company totaled $ 4.9 million and $ 4.1 million as of December 31, 2023 and 2022 , respectively. 9. 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 FRB. As of both December 31, 2023 and 2022 , 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, 2023 and 2022 totaled zero and $ 38 thousand, respectively. • Short-term FHLB advances are secured borrowings available to the Bank as an alternative funding source. As of December 31, 2023 and 2022, the Bank had $ 10.0 million and $ 20.0 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, 2023 and 2022 , the Company did no t 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, 86 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. Net of unamortized debt issuance costs, the Notes were recorded as long-term borrowings totaling $ 10.8 million and $ 10.7 million, as of December 31, 2023 and 2022, respectively. 2023 2022 (Dollars in Thousands) Balance at year-end $ 10,799 $ 10,726 Average balance during the year $ 10,766 $ 10,689 Maximum month-end balance during the year $ 10,799 $ 10,726 Average rate paid during the year, including amortization of debt issuance costs 4.20 % 4.20 % Weighted average remaining maturity (in years) 7.75 8.75 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, 2023 and 2022 , the Company’s available unused lines of credit consisted of the following: Available Unused Lines of Credit Collateral Requirements December 31, 2023 December 31, 2022 Correspondent banks None $ 48.0 million $ 45.0 million FHLB advances (1) Subject to collateral $ 279.4 million $ 246.8 million FRB (2) Subject to collateral $ 161.7 million $ 1.2 million (1) These amounts represent the total remaining credit the Company has from the FHLB, but this credit can only be utilized to the extent that underlying collateral exists. The total lendable collateral value of assets pledged (including loans and investment securities) associated with FHLB advances and letters of credit totaled $ 61.7 million and $ 68.2 million as of December 31, 2023 and 2022, respectively. The Company’s collateral exposure with the FHLB in the form of advances and letters of credit was $ 40.0 million and $ 50.0 million as of December 31, 2023 and 2022, respectively, leaving an excess of collateral of $ 21.7 million and $ 18.2 million available to utilize for additional credit as of the respective dates. The Company also has the ability to pledge additional assets to increase the availability of borrowings. (2) As of December 31, 2023, the Company had access to both the FRB's discount window and its Bank Term Funding Program (BTFP), the latter of which was established during the first quarter of 2023 in response to the liquidity events that occurred in the banking industry. Both the discount window and the BTFP allowed borrowing on pledged collateral that includes eligible investment securities and, in certain circumstances, eligible loans; however, advances under the BTFP could only be requested until March 11, 2024. In response to the heightened liquidity concerns in the banking industry, in 2023, the Company completed the establishment of additional borrowing capacity through the discount window, primarily via the pledging of the majority of the Company’s indirect loan portfolio as collateral. The discount window allows borrowing under 90-day terms The amounts shown in the table represent the Company's unused borrowing capacity as of the applicable date based on collateral pledged to the FRB's discount window. No collateral was pledged by the Company under the BTFP as of December 31, 2023. 87 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES The consolidated provisions for income taxes for the years ended December 31, 2023 and 2022 were as follows: 2023 2022 (Dollars in Thousands) Federal Current $ 2,121 $ 2,025 Deferred 70 ( 291 ) Total federal 2,191 1,734 State Current 532 490 Deferred 63 ( 76 ) Total state 595 414 Total $ 2,786 $ 2,148 The consolidated tax expense differed from the amount computed by applying the Company’s federal statutory income tax rate of 21.0 % in 2023 and 2022 as described in the following table: 2023 2022 (Dollars in Thousands) Income tax expense at federal statutory rate $ 2,368 $ 1,892 Increase (decrease) resulting from: Tax-exempt interest ( 55 ) ( 76 ) Bank-owned life insurance ( 64 ) ( 62 ) State income tax expense, net of federal income taxes 406 329 Apportionment and state rate changes 13 ( 6 ) Other 118 71 Total $ 2,786 $ 2,148 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, 2023 and 2022 are presented below: 2023 2022 (Dollars in Thousands) Deferred tax assets: Allowance for credit losses $ 2,719 $ 2,333 Deferred compensation 817 895 Deferred commissions and fees 372 407 Unrealized loss on securities available-for-sale 2,332 2,715 Other 1,000 905 Total gross deferred tax assets 7,240 7,255 Deferred tax liabilities: Premises and equipment 1,284 1,288 Core deposit intangible 42 91 Limited partnerships 96 94 Unrealized gain on cash flow hedges 188 301 Other 288 341 Total gross deferred tax liabilities 1,898 2,115 Net deferred tax asset, included in other assets $ 5,342 $ 5,140 The Company did no t have any federal or state net operating loss carryforwards as of December 31, 2023 or December 31, 2022 . 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, 2020 through 2023 . 88 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of December 31, 2023 , the Company had no unrecognized tax benefits related to federal or state income tax matters and does no t anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to December 31, 2023. As of December 31, 2023 , the Company had accrued no interest and no penalties related to uncertain tax positions. 11. 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 2023 and 2022 , 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 2023 or 2022. The Company’s matching contributions to the 401(k) Plan totaled $ 0.4 million in both 2023 and 2022. 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 170,910 and 184,987 shares of Company stock as of December 31, 2023 and 2022 , respectively. These shares are allocated to participants in the 401(k) Plan and, accordingly, are included in the earnings per share calculations. 12. 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 $ 2.9 million and $ 3.1 million as of December 31, 2023 and 2022, 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, 2023 and 2022, a total of 113,042 shares and 114,190 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. 13. STOCK AWARDS In 2013, Bancshares’ shareholders authorized the Company, under the direction of the Compensation Committee of the Board of Directors, to provide share-based compensation awards to eligible employees, directors and consultants of the Company and its affiliates pursuant to the 2013 Incentive Plan. Available award types included stock options, stock appreciation rights, restricted stock and restricted stock units, and performance share awards. The 2013 Incentive Plan, as amended in 2019, expired in March 2023. In April 2023, Bancshares’ shareholders approved the 2023 Incentive Plan, which authorizes the Compensation Committee to grant substantially the same types of share-based awards to eligible employees, directors and consultants. Collectively, the 2013 Incentive Plan and the 2023 Incentive Plan are herein referred to as the Company’s “Incentive Plan.” In accordance with the Incentive Plan, shares of common stock available for issuance pursuant to 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. Since the origination of the Incentive Plan, through December 31, 2023, only stock options and restricted stock have been granted. Stock-based compensation expense related to stock awards totaled $ 0.5 million and $ 0.4 million for the years ended December 31, 2023 and 2022, respectively. 89 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 no t grant any stock option awards during the years ended December 31, 2023 and 2022. The following table summarizes the Company’s stock option activity for the periods presented. Year Ended December 31, 2023 December 31, 2022 Number of Shares Average Exercise Price Number of Shares Average Exercise Price Options: Outstanding, beginning of year 419,650 $ 9.79 420,250 $ 9.79 Granted — — — — Exercised 500 8.00 — — Forfeited 7,250 10.82 600 10.86 Options outstanding, end of year 411,900 $ 9.77 419,650 $ 9.79 Options exercisable, end of year 411,900 $ 9.77 416,249 $ 9.77 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 $ 0.5 million as of December 31, 2023 and $ 0.1 million as of December 31, 2022. Restricted Stock During the years ended December 31, 2023 and 2022, 57,300 shares and 45,938 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. 14. 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, 2023, the Company declared dividends totaling $ 1.2 million, or $ 0.20 per share, compared to $ 0.8 million, or $ 0.14 per share, during the year ended December 31, 2022. 90 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2023 and 2022, 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, 2023 and 2022. 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. The following tables provide the Bank’s actual regulatory capital amounts and ratios under regulatory capital standards in effect (Basel III) at December 31, 2023 and 2022: 2023 Actual Regulatory Capital Minimum To Be Well Amount Ratio Requirement Capitalized (Dollars in Thousands) Common equity Tier 1 capital (to risk-weighted assets) $ 98,220 10.88 % 7.00 % 6.50 % Tier 1 capital (to risk-weighted assets) 98,220 10.88 % 8.50 % 8.00 % Total capital (to risk-weighted assets) 109,296 12.11 % 10.50 % 10.00 % Tier 1 leverage (to average assets) 98,220 9.36 % 4.00 % 5.00 % 2022 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 % No significant conditions or events have occurred since December 31, 2023 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. 91 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 15. LEASES The Company is involved in a number of operating leases, primarily for branch locations. Branch leases have remaining lease terms ranging from one year to nine y ears , 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 also 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, 2023 and 2022: Year Ended Location December 31, 2023 December 31, 2022 (Dollars in Thousands) Operating lease income (1) Lease income $ 949 $ 864 Operating lease expense (2) Net occupancy and equipment $ 460 $ 434 (1) Operating lease income includes rental income from owned properties. (2) Includes short-term lease costs. For the years ended December 31, 2023 and 2022 , short-term lease costs were nominal in amount. The following table provides supplemental lease information for operating leases on the Consolidated Balance Sheets as of December 31, 2023 and 2022: Location December 31, 2023 December 31, 2022 (Dollars in Thousands) (Dollars in Thousands) Operating lease right-of-use assets Other assets $ 2,019 $ 1,883 Operating lease liabilities Other liabilities $ 2,055 $ 1,961 Weighted-average remaining lease term (in years) 6.37 5.03 Weighted-average discount rate 4.10 % 3.30 % 92 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table provides supplemental lease information for the Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022: Year Ended December 31, 2023 December 31, 2022 (Dollars in Thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 455 $ 427 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, 2023: Minimum Rental Payments (Dollars in Thousands) 2024 $ 395 2025 295 2026 302 2027 308 2028 269 2029 and thereafter 930 Total future minimum lease payments $ 2,499 Less: Imputed interest 444 Total $ 2,055 16. DERIVATIVE FINANCIAL INSTRUMENTS 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. Active Hedges In June 2023, the Company entered into three forward interest rate swap contracts on a pool of fixed rate indirect consumer loans. Each of the three hedge contracts has a $ 10.0 million notional amount. The interest rate swaps were designated as derivative instruments in fair value hedges with the objective of effectively converting a pool of fixed rate indirect consumer loans to a variable rate throughout the hedge durations in accordance with the portfolio layer method. Under the contractual arrangements, for each swap, the Company pays a fixed interest rate and receives a variable interest rate based on the Secured Overnight Financing Rate (SOFR), on the notional amounts, with monthly net settlements. Hedges Terminated in 2023 In February 2023, the Company voluntarily terminated four interest rate swap agreements each with notional amounts of $ 10.0 million, or an aggregate amount of $ 40.0 million. Two of the swaps were previously designated as cash flow hedges, while two were previously designated as fair value hedges. The termination of the cash flow hedges resulted in a net unrealized gain totaling $ 1.1 million. The unrealized gain was initially recorded in accumulated other comprehensive income, net of tax, and is being reclassified to reduce interest expense over the original terms of the swap contracts. The termination of the fair value hedges resulted in an unrealized gain totaling $ 1.0 million which is being reclassified to increase interest income over the original terms of the swap contracts. 93 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Hedge Terminated in 2022 In May 2022, the Company voluntarily terminated one interest rate swap agreement with a notional amount of $ 10.0 million. The swap was previously designated as a cash flow hedge. The termination resulted in a net unrealized gain of $ 0.3 million. The unrealized gain was initially recorded in accumulated other comprehensive income, net of tax, and is being reclassified to reduce interest expense over the original term of the swap contract. 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, 2023 and 2022. As of December 31, 2023 As of December 31, 2022 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 Interest rate swaps related to fixed rate indirect consumer loans 30,000 ( 119 ) — Total fair value hedges ( 119 ) 1,101 Cash flow hedges: Interest rate swaps related to variable-rate money market deposit accounts — — 20,000 1,205 Total cash flow hedges — 1,205 Total hedges designated as hedging instruments, net $ ( 119 ) $ 2,306 (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 following table presents the net effects of derivative hedging instruments on the Company’s Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 . The effects, which include the reclassification of unrealized gains on terminated swap contracts, are presented as either an increase or decrease to income before income taxes in the relevant caption of the Company’s Consolidated Statements of Operations. Location in the Year Ended December 31, Consolidated Statements 2023 2022 of Operations (Dollars in Thousands) Interest income Interest and fees on loans $ 869 $ 75 Interest expense Interest on deposits 496 ( 5 ) Interest expense Interest on short-term borrowings 144 56 Net increase to income before income taxes $ 1,509 $ 126 94 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. OTHER OPERATING INCOME AND EXPENSE Other operating income for the years ended December 31, 2023 and 2022 consisted of the following: Year Ended December 31, 2023 2022 (Dollars in Thousands) Bank-owned life insurance $ 471 $ 451 ATM fee income 415 532 Net loss on sale and prepayment of investment securities — ( 83 ) Gain on sales of premises and equipment and other assets 17 301 Other income 332 232 Total $ 1,235 $ 1,433 Other operating expense for the years ended December 31, 2023 and 2022 consisted of the following: Year Ended December 31, 2023 2022 (Dollars in Thousands) Postage, stationery and supplies $ 620 $ 614 Telephone/data communication 722 682 Collection and recoveries 292 261 Directors fees 471 479 Software amortization 412 460 Other real estate/foreclosure expense, net 68 ( 331 ) Other expense 2,557 2,259 Total $ 5,142 $ 4,424 18. GUARANTEES, COMMITMENTS AND CONTINGENCIES Credit The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments. In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit, letters of credit and others, that are not included in the consolidated financial statements. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. A summary of these commitments and contingent liabilities is presented below: December 31, 2023 2022 (Dollars in Thousands) Standby letters of credit $ — $ — Standby performance letters of credit $ 669 $ 556 Commitments to extend credit $ 141,121 $ 186,169 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, 2023 and December 31, 2022, 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. 95 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. In accordance with the adoption of ASC 326 on January 1, 2023, the Company recorded an allowance for credit losses on unfunded lending commitments of $ 0.3 million. The allowance, which is included in other liabilities in the Company’s balance sheet, totaled $ 0.6 million as of December 31, 2023. Additional discussion related to the calculation of the allowance for credit losses on unfunded lending commitments is included in Note 4, "Loans and Leases". Self-Insurance The Company is self-insured for a significant portion of employee health benefits. However, the Company maintains stop-loss coverage with third-party insurers to limit the Company’s individual claim and total exposure related to self-insurance. The Company estimates a 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, 2023 and December 31, 2022. 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. 19. 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. 96 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ● 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, 2023 or 2022. Fair Value Measurements on a Recurring Basis Securities Available-for-Sale Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities. Level 2 securities include government sponsored 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, 2023 and 2022. Fair Value Measurements as of December 31, 2023 Using Totals At December 31, 2023 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 $ 44,728 $ — $ 44,728 $ — Commercial 9,040 — 9,040 — Obligations of U.S. government-sponsored agencies 11,280 — 11,280 — Obligations of states and political subdivisions 1,558 — 1,558 — Corporate notes 14,957 14,957 — U.S. Treasury securities 54,002 54,002 — — Other liabilities - derivatives 119 — 119 — 97 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Fair Value Measurements as of December 31, 2022 Using Totals At December 31, 2022 Quoted Prices in Active Markets For Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (Dollars in Thousands) Investment securities, available-for-sale Mortgage-backed securities: Residential $ 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 on a Non-recurring Basis Impaired Loans Loans are considered impaired when, 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. These loans are evaluated separately in accordance with the Company’s policies for calculating the allowance for credit losses on loans and leases. The fair value of impaired loans with specific allocations of the allowance for credit losses on loans and leases is typically based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Appraised values are discounted by management 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 adjustments are usually significant and typically result in Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge of the borrower’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and 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, 2023 and 2022, 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. 98 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2023 and 2022: Fair Value Measurements as of December 31, 2023 Using Totals At December 31, 2023 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 $ 51 $ — $ — $ 51 OREO and other assets held-for-sale 602 — — 602 Fair Value Measurements as of December 31, 2022 Using Totals At December 31, 2022 Quoted Prices in Active Markets For Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (Dollars in Thousands) Impaired loans $ 108 $ — $ — $ 108 OREO and other assets held-for-sale 686 — — 686 Non-recurring Fair Value Measurements Using Significant Unobservable Inputs The following tables present information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of December 31, 2023 and 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, 2023 and 2022 are both included. Following the tables 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, 2023 Valuation Technique Unobservable Input Quantitative Range of Unobservable Inputs (Weighted Average) (Dollars in Thousands) Non-recurring fair value measurements: Impaired loans $ 51 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 $ 602 Discount to appraised value of property based on recent market activity for sales of similar properties Appraisal comparability adjustment (discount) 9 %- 10 % 9.5 % 99 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Level 3 Significant Unobservable Input Assumptions Fair Value December 31, 2022 Valuation Technique Unobservable Input Quantitative Range of Unobservable Inputs (Weighted Average) (Dollars in Thousands) Non-recurring fair value measurements: Impaired loans $ 108 Multiple data points, including discount to appraised value of collateral based on recent market activity Appraisal comparability adjustment (discount) 9 %- 10 % ( 9.5 )% OREO and other assets held-for-sale $ 686 Discount to appraised value of property based on recent market activity for sales of similar properties Appraisal comparability adjustment (discount) 9 %- 10 % ( 9.5 )% Impaired loans Impaired loans are valued based on multiple data points indicating the fair value for each loan. The primary data point is the appraisal value of the underlying collateral, to which a discount is applied. Management establishes this discount or comparability adjustment based on recent sales of similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted. OREO OREO under a binding contract for sale is valued based on contract price. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity, considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet. Other Assets Held-for-Sale Assets designated as held-for-sale that are under a binding contract are valued based on the contract price. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity, considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet. There were no other assets held for sale as of December 31, 2023. 100 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. 101 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, 2023 and 2022 were as follows: December 31, 2023 Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 (Dollars in Thousands) Assets: Cash and cash equivalents $ 50,279 $ 50,279 $ 50,279 $ — $ — Investment securities available-for-sale 135,565 135,565 54,002 81,563 — Investment securities held-to-maturity 1,104 1,041 — 1,041 — Federal funds sold 9,475 9,475 — 9,475 — Federal Home Loan Bank stock 1,201 1,201 — — 1,201 Loans, net of allowance for credit losses 811,284 773,800 — — 773,800 Liabilities: Deposits 950,191 882,746 — 882,746 — Short-term borrowings 10,000 10,000 — 10,000 — Long-term borrowings 10,799 9,814 9,814 Other liabilities - derivatives 119 119 — 119 — 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 Other assets - derivatives 2,306 2,306 — 2,306 — Liabilities: Deposits 870,025 788,161 — 788,161 — Short-term borrowings 20,038 20,038 — 220,038 — Long-term borrowings 10,726 9,702 9,702 20. FIRST US BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION Balance Sheets Year Ended December 31, 2023 2022 (Dollars in Thousands) Assets: Cash on deposit $ 1,856 $ 2,855 Investment in subsidiaries 99,395 93,414 Other assets 343 78 Total assets $ 101,594 $ 96,347 Liabilities: Other liabilities $ 201 $ 485 Long-term borrowings 10,799 10,726 Shareholders’ equity 90,594 85,136 Total liabilities and shareholders’ equity $ 101,594 $ 96,347 102 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Statements of Operations Year Ended December 31, 2023 2022 (Dollars in Thousands) Income: Dividend income, First US Bank $ 3,460 $ 3,463 Total income 3,460 3,463 Expense 1,362 1,320 Gain before equity in undistributed income of subsidiaries 2,098 2,143 Equity in undistributed income of subsidiaries 6,387 4,721 Net income $ 8,485 $ 6,864 Statements of Cash Flows Year Ended December 31, 2023 2022 (Dollars in Thousands) Cash flows from operating activities: Net income $ 8,485 $ 6,864 Adjustments to reconcile net income to net cash provided by operating activities: Distributions in excess of undistributed income of subsidiaries ( 6,387 ) ( 4,721 ) Change in other assets and liabilities ( 475 ) 135 Net cash provided by operating activities 1,623 2,278 Cash flows from financing activities: Net share-based compensation transactions ( 25 ) — Dividends paid ( 1,175 ) ( 832 ) Treasury stock repurchases ( 1,422 ) ( 4,481 ) Net cash provided by (used in) in financing activities ( 2,622 ) ( 5,313 ) Net increase (decrease) in cash ( 999 ) ( 3,035 ) Cash at beginning of year 2,855 5,890 Cash at end of year $ 1,856 $ 2,855 103 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21. QUARTERLY DATA (UNAUDITED) Year Ended December 31, 2023 2022 Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter (Dollars in Thousands) Interest income $ 13,945 $ 13,902 $ 12,999 $ 11,960 $ 11,621 $ 10,670 $ 9,525 $ 9,381 Interest expense 4,835 4,419 3,676 2,526 1,730 1,155 699 672 Net interest income 9,110 9,483 9,323 9,434 9,891 9,515 8,826 8,709 Provision for credit losses ( 434 ) 184 300 269 527 1,165 895 721 Net interest income after provision for credit losses 9,544 9,299 9,023 9,165 9,364 8,350 7,931 7,988 Non-interest: Income 916 837 799 829 678 1,088 856 829 Expense 7,401 7,319 7,151 7,270 7,106 7,032 6,878 7,056 Income before income taxes 3,059 2,817 2,671 2,724 2,936 2,406 1,909 1,761 Provision for income taxes 782 704 648 652 708 546 494 400 Net income after taxes $ 2,277 $ 2,113 $ 2,023 $ 2,072 $ 2,228 $ 1,860 $ 1,415 $ 1,361 Earnings per common share: Basic earnings $ 0.38 $ 0.35 $ 0.34 $ 0.35 $ 0.37 $ 0.31 $ 0.23 $ 0.22 Diluted earnings $ 0.36 $ 0.33 $ 0.31 $ 0.33 $ 0.35 $ 0.29 $ 0.22 $ 0.20 104 Item 9. Changes in and Disagreements With Accou ntants on Accounting and Financial Disclosure. None.