FIRST US BANCSHARES, INC. 10-Q

10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number: 0-14549 First US Bancshares, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 63-0843362 (State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.) 3291 U.S. Highway 280 Birmingham , AL 35243 (Address of Principal Executive Offices) (Zip Code) ( 205 ) 582-1200 (Registrant’s Telephone Number, Including Area Code) N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, $0.01 par value FUSB The Nasdaq Stock Market LLC Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Class Outstanding at May 3, 2024 Common Stock, $0.01 par value 5,788,672 shares FIRST US BANCSHARES, INC. AND SUBSIDIARIES PAGE PART I. FINANCIAL INFORMATION 4 ITEM 1. FINANCIAL STATEMENTS 4 Interim Condensed Consolidated Balance Sheets at March 31, 2024 (Unaudited) and December 31, 2023 4 Interim Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023 (Unaudited) 5 Interim Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2024 and 2023 (Unaudited) 6 Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2024 and 2023 (Unaudited) 7 Interim Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (Unaudited) 8 Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 9 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 39 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 52 ITEM 4. CONTROLS AND PROCEDURES 53 PART II. OTHER INFORMATION 54 ITEM 1. LEGAL PROCEEDINGS 54 ITEM 1A. RISK FACTORS 54 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 54 ITEM 5. OTHER INFORMATION 54 ITEM 6. EXHIBITS 55 Signature Page 56 2 FORWARD-LOOKING STATEMENTS Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, First US Bancshares, Inc. (“Bancshares” and, together with its subsidiaries, the “Company”), through its senior management, from time to time makes forward-looking statements concerning its expected future operations, performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe,” “continues” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based on current information and involve a number of risks and uncertainties. Certain factors that could affect the accuracy of such forward-looking statements and cause actual results to differ materially from those projected in such forward-looking statements are identified in the Company’s filings with the Securities and Exchange Commission (“SEC”), and forward-looking statements contained herein or in other public statements of the Company or its senior management should be considered in light of those factors. Such factors may include adverse developments in the financial services industry; the effects of any government shutdown; loan losses may be greater than anticipated; our ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future financial obligations; the increased lending risks associated with commercial real estate lending; liquidity risks; the impact of national and local market conditions on the Company’s business and operations; strong competition in the banking industry; the impact of changes in interest rates and monetary policy on the Company’s performance and financial condition; the impact of technological changes in the banking and financial service industries and potential information system failures; cybersecurity and data privacy threats; the costs of complying with extensive governmental regulation; the risk that internal controls and procedures might fail or be circumvented; the impact of changing tax laws on the Company’s financial results; the potential impact of climate change and related legislative and regulatory initiatives; the possibility that acquisitions may not produce anticipated results and result in unforeseen integration difficulties; the rate of growth (or lack thereof) in the economy generally and in the Company’s service areas; the volatility of our stock price and our dependence on the soundness of other financial institutions; and other risk factors described from time to time in the Company’s public filings, including, but not limited to, the Company’s most recent Annual Report on Form 10-K. Relative to the Company’s dividend policy, the payment of cash dividends is subject to the discretion of the Board of Directors and will be determined in light of then-current conditions, including the Company’s earnings, leverage, operations, financial conditions, capital requirements and other factors deemed relevant by the Board of Directors. In the future, the Board of Directors may change the Company’s dividend policy, including the frequency or amount of any dividend, in light of then-existing conditions. 3 PART I. FINANCI AL INFORMATION ITEM 1. FINANCI AL STATEMENTS FIRST US BANCSHARES, INC. AND SUBSIDIARIES INTERIM CONDENSED CONS OLIDATED BALANCE SHEETS (Dollars in Thousands, Except Share Amounts) March 31, December 31, 2024 2023 (Unaudited) ASSETS Cash and due from banks $ 18,557 $ 12,987 Interest-bearing deposits in banks 41,685 37,292 Total cash and cash equivalents 60,242 50,279 Federal funds sold 5,532 9,475 Investment securities available-for-sale, at fair value 125,380 135,565 Investment securities held-to-maturity, at amortized cost 983 1,104 Federal Home Loan Bank stock, at cost 1,494 1,201 Loans and leases held for investment 822,941 821,791 Less allowance for credit losses on loans and leases 10,436 10,507 Net loans and leases held for investment 812,505 811,284 Premises and equipment, net of accumulated depreciation 25,041 24,398 Cash surrender value of bank-owned life insurance 16,788 16,702 Accrued interest receivable 4,148 3,976 Goodwill and core deposit intangible, net 7,569 7,606 Other real estate owned 572 602 Other assets 10,287 10,748 Total assets $ 1,070,541 $ 1,072,940 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest-bearing $ 142,944 $ 153,591 Interest-bearing 800,324 796,600 Total deposits 943,268 950,191 Accrued interest expense 1,714 2,030 Other liabilities 7,416 9,327 Short-term borrowings 15,000 10,000 Long-term borrowings 10,817 10,799 Total liabilities 978,215 982,347 Shareholders’ equity: Common stock, par value $ 0.01 per share, 10,000,000 shares authorized; 7,794,911 and 7,738,201 shares issued, respectively; 5,787,441 and 5,735,075 shares outstanding, respectively 75 75 Additional paid-in capital 15,122 14,972 Accumulated other comprehensive loss, net of tax ( 6,621 ) ( 6,431 ) Retained earnings 111,777 109,959 Less treasury stock: 2,007,470 and 2,003,126 shares at cost, respectively ( 28,027 ) ( 27,982 ) Total shareholders’ equity 92,326 90,593 Total liabilities and shareholders’ equity $ 1,070,541 $ 1,072,940 The accompanying notes are an integral part of these Interim Condensed Consolidated Statements. 4 FIRST US BANCSHARES, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDAT ED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Share Data) Three Months Ended March 31, 2024 2023 (Unaudited) Interest income: Interest and fees on loans $ 12,853 $ 10,982 Interest on investment securities 865 683 Interest on deposits in banks 452 238 Other 107 57 Total interest income 14,277 11,960 Interest expense: Interest on deposits 5,099 2,137 Interest on borrowings 138 389 Total interest expense 5,237 2,526 Net interest income 9,040 9,434 Provision for credit losses — 269 Net interest income after provision for credit losses 9,040 9,165 Non-interest income: Service and other charges on deposit accounts 299 285 Lease income 257 231 Other income, net 309 313 Total non-interest income 865 829 Non-interest expense: Salaries and employee benefits 4,088 4,222 Net occupancy and equipment 894 835 Computer services 443 421 Insurance expense and assessments 391 327 Fees for professional services 341 245 Other expense 990 1,220 Total non-interest expense 7,147 7,270 Income before income taxes 2,758 2,724 Provision for income taxes 651 652 Net income $ 2,107 $ 2,072 Basic net income per share $ 0.36 $ 0.35 Diluted net income per share $ 0.34 $ 0.33 Dividends per share $ 0.05 $ 0.05 The accompanying notes are an integral part of these Interim Condensed Consolidated Statements. 5 FIRST US BANCSHARES, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED ST ATEMENTS OF COMPREHENSIVE INCOME (Dollars in Thousands) Three Months Ended March 31, 2024 2023 (Unaudited) Net income $ 2,107 $ 2,072 Other comprehensive income (loss): Unrealized holding losses on securities available-for-sale arising during period, net of tax benefit of $ 24 , and $ 105 , respectively ( 73 ) ( 313 ) Unrealized holding losses arising during the period on effective cash flow hedge derivatives, net of tax benefit of $ 0 and $ 18 , respectively — ( 50 ) Reclassification adjustments on cash flow hedge derivatives realized in net income, net of tax benefit of $ 39 and $ 37 , respectively ( 117 ) ( 110 ) Other comprehensive loss ( 190 ) ( 473 ) Total comprehensive income $ 1,917 $ 1,599 The accompanying notes are an integral part of these Interim Condensed Consolidated Statements. 6 FIRST US BANCSHARES, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEME NTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Dollars in Thousands, Except Share and Per Share Data) For the three months ended March 31, 2024 and 2023 (Unaudited) 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, 2022 5,812,258 $ 75 $ 14,510 $ ( 7,241 ) $ 104,460 $ ( 26,669 ) $ 85,135 Net income — — — — 2,072 — 2,072 Net change in fair value of securities available-for-sale, net of tax — — — ( 313 ) — — ( 313 ) Net change in fair value of derivative instruments, net of tax — — — ( 160 ) — — ( 160 ) Dividends declared: $ .05 per share — — — — ( 294 ) — ( 294 ) Impact of stock-based compensation plans, net 54,608 — 153 — — ( 25 ) 128 Impact of adopting current expected credit loss accounting model, net of tax — — — ( 1,811 ) ( 1,811 ) Balance, March 31, 2023 5,866,866 $ 75 $ 14,663 $ ( 7,714 ) $ 104,427 $ ( 26,694 ) $ 84,757 Balance, December 31, 2023 5,735,075 $ 75 $ 14,972 $ ( 6,431 ) $ 109,959 $ ( 27,982 ) $ 90,593 Net income 2,107 2,107 Net change in fair value of securities available-for-sale, net of tax — — — ( 73 ) — — ( 73 ) Net change in fair value of derivative instruments, net of tax — — — ( 117 ) — — ( 117 ) Dividends declared: $ .05 per share — — — — ( 289 ) — ( 289 ) Impact of stock-based compensation plans, net 52,366 — 150 — — ( 45 ) 105 Balance, March 31, 2024 5,787,441 $ 75 $ 15,122 $ ( 6,621 ) $ 111,777 $ ( 28,027 ) $ 92,326 The accompanying notes are an integral part of these Interim Condensed Consolidated Statements. 7 FIRST US BANCSHARES, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDA TED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Three Months Ended March 31, 2024 2023 (Unaudited) Cash flows from operating activities: Net income $ 2,107 $ 2,072 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 391 412 Provision for credit losses — 269 Deferred income tax expense (benefit) 395 ( 427 ) Proceeds from settlement of derivative contracts — 2,166 Reclassification of unrealized gains on terminated derivative contracts ( 313 ) ( 227 ) Stock-based compensation expense 157 153 Net (accretion) amortization of securities ( 36 ) 16 Amortization of intangible assets 37 55 Net loss on premises and equipment and other real estate 374 249 Changes in assets and liabilities: Increase in fair value of derivatives not designated as hedging instruments ( 75 ) — Increase in cash surrender value of bank owned life insurance ( 86 ) ( 73 ) (Increase) decrease in accrued interest receivable ( 172 ) 113 Decrease (increase) in other assets 136 ( 448 ) (Decrease) increase in accrued interest expense ( 316 ) 234 Decrease in other liabilities ( 1,774 ) ( 979 ) Net cash provided by operating activities 825 3,585 Cash flows from investing activities: Net decrease in federal funds sold 3,943 1,505 Purchases of investment securities, available-for-sale ( 5,791 ) — Proceeds from maturities and prepayments of investment securities, available-for-sale 15,915 3,355 Proceeds from maturities and prepayments of investment securities, held-to-maturity 121 179 Net increase in Federal Home Loan Bank stock ( 293 ) ( 231 ) Net increase in loans ( 1,820 ) ( 2,610 ) Proceeds from the sale of premises and equipment and other real estate 294 128 Purchases of premises and equipment ( 967 ) ( 139 ) Net cash provided by investing activities 11,402 2,187 Cash flows from financing activities: Net (decrease) increase in deposits ( 6,923 ) 27,860 Net increase in short-term borrowings 5,000 4,962 Net share-based compensation transactions ( 52 ) ( 25 ) Dividends paid ( 289 ) ( 294 ) Net cash (used in) provided by financing activities ( 2,264 ) 32,503 Net increase in cash and cash equivalents 9,963 38,275 Cash and cash equivalents, beginning of period 50,279 30,152 Cash and cash equivalents, end of period $ 60,242 $ 68,427 Supplemental disclosures: Cash paid for: Interest $ 5,553 $ 2,292 Income taxes 765 1,020 Non-cash transactions: Assets acquired in settlement of loans 364 490 The accompanying notes are an integral part of these Interim Condensed Consolidated Statements. 8 FIRST US BANCSHARES, INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONS OLIDATED FINANCIAL STATEMENTS (Unaudited) 1. GENERAL 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 wholly owned banking subsidiary, First US Bank, an Alabama banking corporation (the “Bank”). Bancshares and the Bank are headquartered in Birmingham, Alabama. Previously, the Bank operated two wholly owned subsidiaries, Acceptance Loan Company and FUSB Reinsurance, Inc., both of which were legally dissolved in 2023, and all remaining assets and liabilities of these entities were transferred to the Bank prior to December 31, 2023. 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. The Bank is the Company’s only reportable operating segment upon which management makes decisions regarding how to allocate resources and assess performance. The unaudited interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2024. While certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2023 (the "Company's 2023 Form 10-K"). 2. BASIS OF PRESENTATION Reclassification Certain amounts in the prior period consolidated financial statements and the notes to the prior period consolidated financial statements have been reclassified to conform to the 2024 presentation. These reclassifications had no effect on the Company’s results of operations, financial position or net cash flow. Summary of Significant Accounting Policies Certain significant accounting policies followed by the Company are set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s 2023 Form 10-K. 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 9). 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 below and discussed further in Note 10). 9 The following table reflects the weighted average shares used to calculate basic and diluted net income per share for the periods presented. Three Months Ended March 31, 2024 2023 Weighted average shares outstanding 5,760,962 5,839,562 Weighted average director stock equivalent shares 113,519 114,783 Basic shares 5,874,481 5,954,345 Dilutive shares 402,650 419,650 Diluted shares 6,277,131 6,373,995 Three Months Ended March 31, 2024 2023 (Dollars in Thousands, Except Per Share Data) Net income $ 2,107 $ 2,072 Basic net income per share $ 0.36 $ 0.35 Diluted net income per share $ 0.34 $ 0.33 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 or settlement of derivative contracts. Accounting Standards Not Yet Adopted The following table provides a description of recent accounting standards that have not yet been adopted as of March 31, 2024. Standard Description Required Date of Adoption Effect on Financial Statements or other significant matters ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative This Update incorporates into the Codification 14 of the 27 disclosures referred by the SEC in Release No. 33-10532, Disclosure Update and Simplification. This update clarifies and improves the disclosure and presentation requirements of a variety of Topics in the Codification to align with the SEC's regulations. The date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective. The adoption of this guidance is not likely to have a material impact. Management will continue to evaluate through date of adoption. ASU 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures The ASU improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. January 1, 2025 The adoption of this guidance is not likely to have a material impact. Management will continue to evaluate through date of adoption. 10 3. INVESTMENT SECURITIES Details of investment securities available-for-sale and held-to-maturity as of March 31, 2024 and December 31, 2023 were as follows: Available-for-Sale March 31, 2024 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in Thousands) Mortgage-backed securities: Residential $ 45,179 $ 460 $ ( 3,086 ) $ 42,553 Commercial 14,610 3 ( 334 ) 14,279 Obligations of U.S. government-sponsored agencies 11,645 84 ( 720 ) 11,009 Obligations of states and political subdivisions 1,610 — ( 65 ) 1,545 Corporate notes 17,752 — ( 2,909 ) 14,843 U.S. Treasury securities 44,009 — ( 2,858 ) 41,151 Total $ 134,805 $ 547 $ ( 9,972 ) $ 125,380 Held-to-Maturity March 31, 2024 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in Thousands) Mortgage-backed securities: Commercial $ 468 $ — $ ( 20 ) $ 448 Obligations of U.S. government-sponsored agencies 462 — ( 36 ) 426 Obligations of states and political subdivisions 53 — ( 6 ) 47 Total $ 983 $ — $ ( 62 ) $ 921 Available-for-Sale December 31, 2023 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses 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 11 The scheduled maturities of investment securities available-for-sale and held-to-maturity as of March 31, 2024 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 $ 3,989 $ 3,878 $ — $ — Maturing after one to five years 50,154 46,853 184 176 Maturing after five to ten years 54,852 48,970 618 579 Maturing after ten years 25,810 25,679 181 166 Total $ 134,805 $ 125,380 $ 983 $ 921 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 tables reflect gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2024 and December 31, 2023. Available-for-Sale March 31, 2024 Less than 12 Months 12 Months or More Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in Thousands) Mortgage-backed securities: Residential $ 190 $ ( 5 ) $ 33,610 $ ( 3,081 ) Commercial 5,780 ( 12 ) 7,883 ( 322 ) Obligations of U.S. government-sponsored agencies — — 4,372 ( 720 ) Obligations of states and political subdivisions — — 1,545 ( 65 ) Corporate notes — — 14,843 ( 2,909 ) U.S. Treasury securities — — 41,151 ( 2,858 ) Total $ 5,970 $ ( 17 ) $ 103,404 $ ( 9,955 ) Held-to-Maturity March 31, 2024 Less than 12 Months 12 Months or More Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in Thousands) Mortgage-backed securities: Commercial $ — $ — $ 448 $ ( 20 ) Obligations of U.S. government-sponsored agencies — — 426 ( 36 ) Obligations of states and political subdivisions — — 47 ( 6 ) Total $ — $ — $ 921 $ ( 62 ) 12 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 ) 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 — — 437 ( 34 ) Obligations of states and political subdivisions — — 51 ( 7 ) Total $ — $ — $ 1,041 $ ( 63 ) 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. As of March 31, 2024 , 102 available-for-sale debt securities had been in a loss position for more than 12 months, and five available-for-sale debt securities had been in a loss position for less than 12 months. 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. 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 three months ended March 31, 2024. As of March 31, 2024, 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 March 31, 2024 and 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 March 31, 2024 or December 31, 2023. 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 as of March 31, 2024 or December 31, 2023. 13 Pledged Securities Investment securities with a carrying value of $ 47.2 million and $ 41.4 million as of March 31, 2024 and December 31, 2023 , 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. These properties may serve as the borrower’s primary residence, vacation home or investment property. Also included in this portfolio are home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Secured by multi-family residential properties – This portfolio segment includes mortgage loans secured by apartment buildings. Secured by non-farm, non-residential properties – This portfolio segment includes real estate loans secured by commercial and industrial properties, office or mixed-use facilities, strip shopping centers or other commercial property. These loans are generally guaranteed by the principals of the borrowing entity. Commercial and industrial 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 the Company previously had an established relationship 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. Loans in this category are no longer being funded, and therefore, the portfolio balance will continue to decrease. 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 March 31, 2024 and December 31, 2023, the composition of the loan portfolio by portfolio segment was as follows: March 31, 2024 December 31, 2023 Real estate loans: Construction, land development and other land loans $ 102,282 $ 88,140 Secured by 1-4 family residential properties 74,361 76,200 Secured by multi-family residential properties 62,145 62,397 Secured by non-farm, non-residential properties 212,465 213,586 Commercial and industrial loans and leases (1) 57,112 60,515 Consumer loans: Direct 5,590 5,938 Branch retail 7,794 8,670 Indirect 301,192 306,345 Total loans 822,941 821,791 Allowance for credit losses on loans and leases 10,436 10,507 Net loans $ 812,505 $ 811,284 14 (1) Includes equipment financing leases, which totaled $ 12.5 million and $ 12.6 million as of March 31, 2024 and December 31, 2023 , respectively. The Company makes commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 54.8 % and 53.6 % of the portfolio was concentrated in loans secured by real estate as of March 31, 2024 and December 31, 2023, respectively. Loans with a carrying value of $ 97.3 million and $ 98.6 million were pledged as collateral to secure Federal Home Loan Bank (“FHLB”) borrowings as of March 31, 2024 and December 31, 2023 , respectively. In addition, loans with a carrying value of $ 288.4 million and $ 294.4 million were pledged to secure borrowings with the Federal Reserve Bank ("FRB") as of March 31, 2024 and December 31, 2023, respectively. Related Party Loans In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with unrelated parties. Management believes that such loans do not represent more than a normal risk of collectability, nor do they present other unfavorable features. The aggregate balances of such related party loans and commitments were $ 1.4 million as of both March 31, 2024 and December 31, 2023. During the three months ended March 31, 2024 , there were no new loans to these parties and no repayments made. 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. Allowances 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 The Company records the allowance for credit losses on loans and leases as a contra-asset valuation account that is deducted from the amortized cost basis of loans and leases held for investment. Loans are charged off against the allowance when management believes that the uncollectibility of a loan balance is confirmed. Recoveries of previously charged off loans are also recorded to the allowance when collected. As of each quarter-end date, the Company evaluates the appropriateness of the allowance for credit losses on loans and leases and adjusts the allowance through the provision for (recovery of) credit losses. 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. The level of the allowance is influenced by loan and lease volumes and mix, historical credit loss experience, estimated 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 by management as 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 estimated 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. 15 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 each quarter-end date, 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 allowance for credit losses on unfunded lending commitments is recorded in other liabilities, and adjustments to the allowance are recorded through the provision for (recovery of) credit losses. Summary of Allowances for Credit Losses The following tables present changes in the allowance for credit losses on loans and leases, as well as unfunded lending commitments, during the three months ended March 31, 2024 and 2023: As of and for the Three Months Ended March 31, 2024 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 $ 565 $ 591 $ 415 $ 1,425 $ 513 $ 64 $ 436 $ 6,498 $ 10,507 Charge-offs — ( 2 ) — — — ( 22 ) ( 22 ) ( 344 ) ( 390 ) Recoveries — 23 — — — 100 54 30 207 Provision for (recovery of) credit losses 95 ( 80 ) ( 15 ) ( 75 ) ( 24 ) ( 74 ) ( 161 ) 446 112 Allowance for credit losses on loans and leases $ 660 $ 532 $ 400 $ 1,350 $ 489 $ 68 $ 307 $ 6,630 $ 10,436 Allowance for credit losses on unfunded lending commitments: Beginning balance $ 450 $ 1 $ 9 $ 2 $ 102 $ 5 $ — $ — $ 569 Provision for (recovery of) credit losses on unfunded lending commitments ( 100 ) ( 1 ) ( 1 ) 4 — ( 14 ) — — ( 112 ) Allowance for credit losses on unfunded lending commitments $ 350 $ — $ 8 $ 6 $ 102 $ ( 9 ) $ — $ — $ 457 As of and for the Three Months Ended March 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 on loans and leases: Beginning balance $ 517 $ 832 $ 646 $ 1,970 $ 919 $ 866 $ 518 $ 3,154 $ 9,422 Impact of adopting CECL accounting guidance ( 94 ) ( 39 ) ( 85 ) ( 147 ) ( 20 ) 47 628 1,833 2,123 Charge-offs — ( 8 ) — — — ( 215 ) ( 155 ) ( 156 ) ( 534 ) Recoveries — 16 — — — 198 77 28 319 Provision for (recovery of) credit losses on loans and leases 97 ( 32 ) ( 52 ) ( 61 ) ( 117 ) ( 4 ) — 438 269 Allowance for credit losses on loans and leases $ 520 $ 769 $ 509 $ 1,762 $ 782 $ 892 $ 1,068 $ 5,297 $ 11,599 Allowance for credit losses on unfunded lending commitments: Beginning balance $ — $ — $ — $ — $ — $ — $ — $ — $ — Impact of adopting CECL accounting guidance 172 39 3 2 — 68 8 — 292 Provision for (recovery of) credit losses on unfunded lending commitments — — — — — — — — — Allowance for credit losses on unfunded lending commitments $ 172 $ 39 $ 3 $ 2 $ — $ 68 $ 8 $ — $ 292 16 Credit Quality Indicators The Company utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, construction, land, multi-family real estate, other commercial real estate, and commercial and industrial loans are graded based on pre-determined risk metrics and categorized into one of nine risk grades. These risk grades can be summarized into categories described as pass, special mention, substandard, doubtful and loss, as described in further detail below. • Pass (Risk Grades 1-5): Loans in this category include obligations in which the probability of default is considered low. • Special Mention (Risk Grade 6): Loans in this category exhibit potential credit weaknesses or downward trends deserving management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Although a special mention asset has a higher probability of default than pass-rated categories, its default is not imminent. • Substandard (Risk Grade 7): Loans in this category have defined weaknesses that jeopardize the orderly liquidation of debt. A substandard loan is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified as substandard. • Doubtful (Risk Grade 8): Loans classified as doubtful have all of the weaknesses found in substandard loans, with the added characteristic that the weaknesses make collection of debt in full, based on currently existing facts, conditions and values, highly questionable or improbable. Serious problems exist such that partial loss of principal is likely; however, because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Such pending factors may include proposed merger, acquisition or liquidation procedures, capital injection, perfection of liens on additional collateral and refinancing plans. Loans classified as doubtful may include loans to borrowers that have demonstrated a history of failing to live up to agreements. The Company did not have any loans classified as Doubtful (Risk Grade 8) as of March 31, 2024 or December 31, 2023. • Loss (Risk Grade 9): Loans are classified in this category when borrowers are deemed incapable of repayment of unsecured debt. Loans to such borrowers are considered uncollectable and of such little value that continuance as active assets of the Company is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not prudent to defer writing off these assets, even though partial recovery may be realized in the future. The Company did not have any loans classified as Loss (Risk Grade 9) as of March 31, 2024 or December 31, 2023. 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. 17 The tables below illustrate the carrying amount of loans and leases by credit quality indicator and year of origination as of March 31, 2024: March 31, 2024 Loans at Amortized Cost Basis by Origination Year 2024 2023 2022 2021 2020 Prior Total (Dollars in Thousands) Commercial: Construction, land development and other land loans Pass $ 1,088 $ 8,391 $ 47,121 $ 44,385 $ 785 $ 512 $ 102,282 Special Mention — — — — — — — Substandard — — — — — — — Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 1,088 $ 8,391 $ 47,121 $ 44,385 $ 785 $ 512 $ 102,282 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Secured by multi-family residential properties Pass $ 64 $ 404 $ 29,669 $ 5,909 $ 5,662 $ 20,437 $ 62,145 Special Mention — — — — — — — Substandard — — — — — — — Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 64 $ 404 $ 29,669 $ 5,909 $ 5,662 $ 20,437 $ 62,145 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Secured by non-farm, non-residential properties Pass $ 70 $ 27,290 $ 36,186 $ 24,554 $ 55,913 $ 64,971 $ 208,984 Special Mention — — 314 494 341 406 1,555 Substandard — — — 72 150 1,704 1,926 Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 70 $ 27,290 $ 36,500 $ 25,120 $ 56,404 $ 67,081 $ 212,465 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Commercial and industrial loans and leases Pass $ 1,117 $ 10,577 $ 4,901 $ 14,224 $ 2,798 $ 22,741 $ 56,358 Special Mention — — — — — — — Substandard — — 114 95 51 494 754 Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 1,117 $ 10,577 $ 5,015 $ 14,319 $ 2,849 $ 23,235 $ 57,112 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Total commercial Pass $ 2,339 $ 46,662 $ 117,877 $ 89,072 $ 65,158 $ 108,661 $ 429,769 Special Mention — — 314 494 341 406 1,555 Substandard — — 114 167 201 2,198 2,680 Doubtful — — — — — — — Loss — — — — — — — $ 2,339 $ 46,662 $ 118,305 $ 89,733 $ 65,700 $ 111,265 $ 434,004 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — 18 March 31, 2024 Loans at Amortized Cost Basis by Origination Year 2024 2023 2022 2021 2020 Prior Total (Dollars in Thousands) Consumer: Secured by 1-4 family residential properties Performing $ 1,227 $ 4,109 $ 18,852 $ 14,765 $ 6,596 $ 27,989 $ 73,538 Non-performing — — — — — 823 823 Subtotal $ 1,227 $ 4,109 $ 18,852 $ 14,765 $ 6,596 $ 28,812 $ 74,361 Current period gross charge-offs $ — $ — $ — $ — $ — $ 2 $ 2 Direct Performing $ 706 $ 2,008 $ 990 $ 1,155 $ 454 $ 277 $ 5,590 Non-performing — — — — — — — Subtotal $ 706 $ 2,008 $ 990 $ 1,155 $ 454 $ 277 $ 5,590 Current period gross charge-offs $ — $ — $ — $ 20 $ 2 $ — $ 22 Branch retail Performing $ — $ — $ — $ 1,863 $ 2,466 $ 3,465 $ 7,794 Non-performing — — — — — — — Subtotal $ — $ — $ — $ 1,863 $ 2,466 $ 3,465 $ 7,794 Current period gross charge-offs $ — $ — $ — $ 4 $ 1 $ 17 $ 22 Indirect Performing $ 8,815 $ 84,771 $ 85,681 $ 63,593 $ 48,029 $ 10,230 $ 301,119 Non-performing — — — 54 19 — 73 Subtotal $ 8,815 $ 84,771 $ 85,681 $ 63,647 $ 48,048 $ 10,230 $ 301,192 Current period gross charge-offs $ — $ — $ 83 $ 99 $ 109 $ 53 $ 344 Total consumer Performing $ 10,748 $ 90,888 $ 105,523 $ 81,376 $ 57,545 $ 41,961 $ 388,041 Non-performing — — — 54 19 823 896 $ 10,748 $ 90,888 $ 105,523 $ 81,430 $ 57,564 $ 42,784 $ 388,937 Current period gross charge-offs $ — $ — $ 83 $ 123 $ 112 $ 72 $ 390 19 The tables below illustrate the carrying amount of loans and leases 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 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 $ — $ — $ — $ — $ — $ — $ — 20 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 consumer 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 consumer 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 21 The following table provides an aging analysis of past due loans by class as of March 31, 2024: As of March 31, 2024 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 $ — $ — $ — $ — $ 102,282 $ 102,282 $ — Secured by 1-4 family residential properties 727 — 20 747 73,614 74,361 — Secured by multi-family residential properties — — — — 62,145 62,145 — Secured by non-farm, non-residential properties — — 1,289 1,289 211,176 212,465 — Commercial and industrial loans 37 — 169 206 56,906 57,112 — Consumer loans: — Direct 21 — — 21 5,569 5,590 — Branch retail 9 29 — 38 7,756 7,794 — Indirect 277 82 73 432 300,760 301,192 — Total $ 1,071 $ 111 $ 1,551 $ 2,733 $ 820,208 $ 822,941 $ — As a percentage of total loans 0.13 % 0.01 % 0.19 % 0.33 % 99.67 % 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 % 22 The tables below present the amortized cost of loans on nonaccrual status and loans past due 90 days or more and still accruing interest as of March 31, 2024 and December 31, 2023. Also presented is the balance of loans on nonaccrual status at March 31, 2024 and December 31, 2023 for which there was no related allowance for credit losses recorded. Loans on Non-Accrual Status March 31, 2024 (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 859 439 — Secured by multi-family residential properties — — — Secured by non-farm, non-residential properties 1,289 1,289 — Commercial and industrial loans 172 51 — Consumer loans: — Direct — — — Branch retail — — — Indirect 73 — — Total loans $ 2,393 $ 1,779 $ — 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 tables present the amortized cost basis of collateral dependent loans as of March 31, 2024 and December 31, 2023, which loans are individually evaluated to determine credit losses: March 31, 2024 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 468 — 468 Secured by multi-family residential properties — — — Secured by non-farm, non-residential properties 1,705 — 1,705 Commercial and industrial — 99 99 Direct consumer — — — Total loans individually evaluated $ 2,173 $ 99 $ 2,272 23 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 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 2024 or 2023 resulted in the permanent reduction of the recorded investment in the loan. During the three months ended March 31, 2024 and 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. 5. OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS Other Real Estate Owned Other real estate and certain other assets acquired in foreclosure are reported at the net realizable value of the property, less estimated costs to sell. The following table summarizes foreclosed property activity as of the three months ended March 31, 2024 and 2023 : March 31, 2024 March 31, 2023 (Dollars in Thousands) Beginning balance $ 602 $ 686 Additions (1) — — Sales proceeds — — Gross gains — — Gross losses — — Net gains — — Impairment ( 30 ) ( 69 ) Ending balance $ 572 $ 617 (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 a result of continued declining property values based on updated appraisals or other indications of value, such as offers to purchase. Net realizable value less estimated costs to sell of foreclosed residential real estate held by the Company was zero and $ 20 thousand as of March 31, 2024 and March 31, 2023 , respectively. In addition, the Company held $ 20 thousand and zero in consumer mortgage loans collateralized by residential real estate that were in the process of foreclosure as of March 31, 2024 and 2023, respectively. 24 Repossessed Assets The Company also acquires assets through the repossession of the underlying collateral of loans in default. The following table summarizes repossessed asset activity as of the three months ended March 31, 2024 and 2023 : March 31, 2024 March 31, 2023 (Dollars in Thousands) Beginning balance $ 435 $ 83 Transfers from loans 364 490 Sales proceeds ( 294 ) ( 128 ) Gross gains — — Gross losses ( 344 ) ( 180 ) Net losses ( 344 ) ( 180 ) Impairment — — Ending balance $ 161 $ 265 Repossessed assets are included in Other Assets in the Company’s condensed 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 $ 7.4 million as of both March 31, 2024 and December 31, 2023. Goodwill impairment was neither indicated nor recorded during the three months ended March 31, 2024 or the year ended December 31, 2023. 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 three months ended March 31, 2024 or the year ended December 31, 2023. The Company’s goodwill and other intangible assets (carrying basis and accumulated amortization) as of March 31, 2024 and December 31, 2023 were as follows: March 31, 2024 December 31, 2023 (Dollars in Thousands) Goodwill $ 7,435 $ 7,435 Core deposit intangible: Gross carrying amount 2,048 2,048 Accumulated amortization ( 1,914 ) ( 1,877 ) Core deposit intangible, net 134 171 Total $ 7,569 $ 7,606 The Company’s estimated remaining amortization expense on intangible assets as of March 31, 2024 was as follows: Amortization Expense (Dollars in Thousands) 2024 $ 85 2025 49 Total $ 134 The net carrying amount of the Company’s core deposit premiums is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from use and eventual disposition. That assessment is based on the carrying amount of the intangible assets subject to amortization at the date on which it is tested for recoverability. Intangible assets subject to amortization are tested by the Company for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. 25 7. BORROWINGS Short-Term Borrowings Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, and short-term FHLB advances with original maturities of one year or less. • Federal funds purchased, which represent unsecured lines of credit that generally mature within one to 90 days , are available to the Bank through arrangements with correspondent banks and the FRB. As of both March 31, 2024 and December 31, 2023 , 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. There were no securities sold under repurchase agreements as of both March 31, 2024 and December 31, 2023. • Short-term FHLB advances are secured borrowings available to the Bank as an alternative funding source. As of March 31, 2024 and December 31, 2023, the Bank had $ 15.0 million and $ 10.0 million, respectively, in outstanding FHLB advances with original maturities of less than one year. 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 March 31, 2024 and December 31, 2023 , 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, after which the interest rate will be reset quarterly to a benchmark interest rate per annum which, 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 used the net proceeds of the Notes for general corporate purposes, which included repurchasing of the Company’s common stock, and supporting organic growth plans, including the maintenance of the Bank's capital ratios. Net of unamortized debt issuance costs, the Notes were recorded as long-term borrowings totaling $ 10.8 million and $ 10.7 million as of March 31, 2024 and December 31, 2023 , respectively. The table below provides additional information related to the Notes as of and for the three months ended March 31, 2024 and 2023 . March 31, March 31, 2024 2023 (Dollars in Thousands) Balance at period-end $ 10,817 $ 10,744 Average balance during the period $ 10,811 $ 10,738 Maximum month-end balance during the period $ 10,817 $ 10,744 Average rate paid during the period, including amortization of debt issuance costs 4.20 % 4.20 % Weighted average remaining maturity (in years) 7.50 8.50 Available Credit As an additional funding source, the Company has available unused lines of credit with correspondent banks, the FRB and the FHLB. Certain of these funding sources are subject to underlying collateral. As of March 31, 2024 and December 31, 2023, the Company’s available unused lines of credit consisted of the following: Available Unused Lines of Credit Collateral Requirements March 31, 2024 December 31, 2023 Correspondent banks None $ 48.0 million $ 48.0 million FHLB advances (1) Subject to collateral $ 276.8 million $ 279.4 million FRB (2) Subject to collateral $ 158.8 million $ 161.7 million 26 (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 $ 60.9 million and $ 61.7 million as of March 31, 2024 and December 31, 2023, respectively. The Company’s collateral exposure with the FHLB in the form of advances and letters of credit was $ 45.0 million and $ 40.0 million as of March 31, 2024 and December 31, 2023, respectively, leaving an excess of collateral of $ 15.9 million and $ 21.7 million, respectively, 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) The Company has access to the FRB's discount window, which allows borrowing on pledged collateral that includes eligible investment securities and loans 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. 8. INCOME TAXES The provision for income taxes was $ 0.7 million for the both the three months ended March 31, 2024 and 2023, respectively. The Company’s effective tax rate was 23.6 % and 23.9 % , respectively, for the same periods. The effective tax rate is impacted by recurring permanent differences, such as those associated with bank-owned life insurance and tax-exempt investment and loan income. The Company had a net deferred tax asset of $ 5.0 million and $ 5.3 million as of March 31, 2024 and December 31, 2023, respectively. The net deferred tax asset, which is included on the interim condensed consolidated balance sheet in other assets, is impacted by changes in the fair value of securities available-for-sale and cash flow hedges, changes in net operating loss carryforwards, changes in the allowance for credit losses, and other book-to-tax temporary differences. The net deferred tax asset increased by $ 0.6 million as a result of the cumulative effect adjustment to adopt ASC 326, effective January 1, 2023. 9. DEFERRED COMPENSATION PLANS Supplemental Retirement Benefits The Company has entered into supplemental retirement compensation benefits agreements with certain directors and former executive officers. The measurement of the liability under these agreements includes estimates involving life expectancy, length of time before retirement and the expected returns on the bank-owned life insurance policies used to fund those agreements. Should these estimates prove to be materially wrong, the cost of these agreements could change accordingly. The related deferred compensation obligation to these directors and executive officers included in other liabilities was $ 2.9 million as of both March 31, 2024 and December 31, 2023. Non-Employee Directors' Deferred Compensation Plan Non-employee directors may elect to defer payment of all or any portion of their 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, as applicable. Neither Bancshares nor the Bank makes any contribution to participants’ accounts under the Deferral Plan. As of March 31, 2024 and December 31, 2023, a total of 114,949 and 113,042 shares of Bancshares common stock, respectively, were being held as stock equivalents in connection with the Deferral Plan. All deferred fees and shares of Bancshares common stock are reflected as compensation expense in the period earned. The Company classifies all deferred directors’ fees allocated to be paid in shares as equity as additional paid-in capital. The Company may use issued shares or shares of treasury stock to satisfy these obligations when due. 10. STOCK AWARDS In 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 March 31, 2024, only stock options and restricted stock have been granted. Stock-based compensation expense related to stock awards totaled $ 0.1 million for both the three months ended March 31, 2024 and 2023, respectively. 27 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. The Company did no t grant any stock option awards during the three months ended March 31, 2024 or 2023. The following table summarizes the Company’s stock option activity for the periods presented. Three Months Ended March 31, 2024 March 31, 2023 Number of Shares Average Exercise Price Number of Shares Average Exercise Price Options: Outstanding, beginning of period 411,900 $ 9.77 419,650 $ 9.79 Granted — — — — Exercised 8,750 8.09 — — Expired 500 8.00 — — Forfeited — — — — Options outstanding, end of period 402,650 $ 9.81 419,650 $ 9.79 Options exercisable, end of period 402,650 $ 9.81 419,650 $ 9.79 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 $ 0.2 million and zero as of March 31, 2024 and 2023, respectively. Restricted Stock During the three months ended March 31, 2024 and 2023, 55,300 shares and 57,300 shares, respectively, of restricted stock were granted. The Company recognizes the cost of services received in exchange for restricted stock awards based on the grant date closing price of the stock, with compensation expense recognized on a straight-line basis over the award’s vesting period. 11. LEASES The 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 years , some of which include options to extend the leases for up to five years , and some of which include an option to terminate the lease within one year . The Company 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 interim condensed consolidated statements of operations, for the three months ended March 31, 2024 and 2023: Location in the Condensed Three Months Ended Consolidated Statements of Operations March 31, 2024 March 31, 2023 (Dollars in Thousands) Operating lease income (1) Lease income $ 257 $ 234 Operating lease expense (2) Net occupancy and equipment $ 156 $ 108 (1) Operating lease income includes rental income from owned properties (2) Includes short-term lease costs. For the three months ended March 31, 2024 and 2023 , short-term lease costs were nominal in amount. 28 The following table provides supplemental lease information for operating leases on the interim condensed consolidated balance sheet as of March 31, 2024 and December 31, 2023: Location in the Condensed Consolidated Balance Sheet March 31, 2024 December 31, 2023 (Dollars in Thousands) Operating lease right-of-use assets Other assets $ 1,940 $ 2,019 Operating lease liabilities Other liabilities $ 1,980 $ 2,055 Weighted-average remaining lease term (in years) 6.12 6.37 Weighted-average discount rate 4.10 % 4.10 % The following table provides supplemental lease information for the interim condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 March 31, 2023 (Dollars in Thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 98 $ 107 The following table is a schedule of remaining future minimum lease payments for operating leases that had an initial or remaining non-cancellable lease term in excess of one year as of March 31, 2024: Minimum Rental Payments (Dollars in Thousands) 2024 $ 297 2025 295 2026 302 2027 308 2028 269 2029 and thereafter 930 Total future minimum lease payments $ 2,401 Less: Imputed interest 421 Total operating lease liabilities $ 1,980 12. DERIVATIVE FINANCIAL INSTRUMENTS 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 generally involves modifying the repricing characteristics of certain assets and liabilities to mitigate negative impacts on net interest margin and/or cash flow. Derivative instruments utilized by the Company generally include interest rate swap contracts or option contracts, such as caps and floors. The fair values of derivative instruments are carried in the Company’s consolidated balance sheets as assets and/or liabilities. The Company does not use derivatives for speculative purposes and generally enters into transactions that have a qualifying hedge relationship. When hedge accounting is used, derivatives are classified as either cash flow hedges or fair value hedges. 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. As of March 31, 2024, the Company had active hedges in place that were receiving hedge accounting treatment, as well as derivative instruments that were not receiving hedge accounting treatment. In addition, the Company’s net interest income continued to benefit from certain derivative contracts that were terminated in prior periods, but that were originally designated for hedge accounting purposes. In accordance with original hedge relationship, unrealized gains recorded upon termination are being reclassified to interest income or interest expense over the original terms of the derivative contracts. 29 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 contracts has a $ 10.0 million notional amount, or $ 30 million in aggregate. 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 SOFR, on the notional amounts, with monthly net settlements. The three swap contracts are scheduled to terminate at different maturity dates, including December 1, 2025 , December 1, 2026 , and June 1, 2027 . As of both March 31, 2024 and December 31, 2023, the hedge relationships for all three swaps were designated effective, and accordingly, changes in the fair value of the contracts were included as adjustment to the underlying fixed rate consumer loans. Hedges Terminated in 2023 In February 2023, the Company voluntarily terminated four interest rates swap contracts, 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. Remaining unrealized gains associated with these terminated cash flow hedges totaled $ 0.5 million and $ 0.7 million as of March 31, 2024 and December 31, 2023, respectively. 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. Remaining unrealized gains associated with the fair value hedges totaled $ 0.3 million and $ 0.4 million as of March 31, 2024 and December 31, 2023, respectively. Hedge Terminated in 2022 In May 2022, the Company voluntarily terminated one interest rate swap contract 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. Remaining unrealized gains associated with this terminated cash flow hedge totaled $ 48 thousand and $ 84 thousand as of March 31, 2024 and December 31, 2023, respectively. Derivatives Not Designated as Hedging Instruments In March 2024, the Company entered into two interest rate floor contracts, each with a notional amount of $ 25 million, or $ 50 million in aggregate. The interest rate floor contracts were not designated as hedging instruments, and accordingly, changes in the fair value of the contracts are being recorded as non-interest income or expense. Both of the derivative contracts are intended to mitigate the Company’s risk of loss associated with shifts downward in the SOFR. One of the contracts will provide cash flow to the Company in the event the SOFR decreases below 4.0 % before the contract’s designated termination date of March 27, 2025 , while the other contract will provide cash flow to the Company in the event the SOFR decreases below 3.0 % prior to the contract’s designated termination date of March 27, 2026 . Presentation The table below reflects the notional amount and fair value of active derivative instruments included on the Company’s consolidated balance sheets on a net basis as of March 31, 2024 and December 31, 2023. As of March 31, 2024 As of December 31, 2023 Estimated Estimated Notional Fair Value Notional Fair Value Amount Gain (Loss) (1) Amount Gain (Loss) (1) (Dollars in Thousands) Derivatives designated as hedging instruments: Fair value hedges: Interest rate swaps related to fixed rate indirect consumer loans $ 30,000 $ 273 $ 30,000 $ ( 119 ) Total fair value hedges 273 ( 119 ) Total derivatives designated as hedging instruments, net 273 ( 119 ) Derivatives not designated as hedging instruments: Interest rate floors $ 50,000 75 $ — — Total derivatives not designated as hedging instruments, net $ 75 $ — 30 (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 instruments on the Company’s interim condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023 . 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 interim condensed consolidated statements of operations. Location in the Condensed Three Months Ended Consolidated Statements of Operations March 31, 2024 March 31, 2023 (Dollars in Thousands) Interest income Interest and fees on loans $ 260 $ 168 Interest expense Interest on deposits 120 136 Interest expense Interest on borrowings 36 36 Non-interest expense Other non-interest expense ( 24 ) - Net increase (decrease) to income before income taxes $ 392 $ 340 13. OTHER OPERATING INCOME AND EXPENSE Other Operating Income Other operating income for the three months ended March 31, 2024 and 2023 consisted of the following: Three Months Ended March 31, 2024 March 31, 2023 (Dollars in Thousands) Bank-owned life insurance $ 131 $ 114 ATM fee income 85 112 Other income 93 87 Total $ 309 $ 313 Other Operating Expense Other operating expense for the three months ended March 31, 2024 and 2023 consisted of the following: Three Months Ended March 31, 2024 March 31, 2023 (Dollars in Thousands) Postage, stationery and supplies $ 178 $ 161 Telephone/data communication 192 169 Collection and recoveries 26 91 Directors fees 96 95 Software amortization 90 124 Other real estate/foreclosure expense, net 31 6 Other expense 377 574 Total $ 990 $ 1,220 Other expense for the three months ended March 31, 2024 was reduced by $ 0.2 million associated with recovery of check fraud losses that were incurred during the fourth quarter of 2023. 31 14. 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: March 31, 2024 December 31, 2023 (Dollars in Thousands) Standby letters of credit $ — $ — Standby performance letters of credit $ 651 $ 669 Commitments to extend credit $ 125,335 $ 141,121 Standby letters of credit and standby performance letters of credit are contingent commitments issued by the Bank generally to guarantee the performance of a customer to a third party. The Bank has recourse against the customer for any amount that it is required to pay to a third party under a standby letter of credit or standby performance letter of credit. Revenues are recognized over the lives of the standby letters of credit and standby performance letters of credit. As of March 31, 2024 and December 31, 2023, the potential amounts of future payments that the Bank could be required to make under its standby letters of credit and standby performance letters of credit, which represent the Bank’s total credit risk in these categories, are included in the table above. A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon the extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. At each quarter end date, the Company calculates an allowance for unfunded lending commitments, including those described in the table above. The Company's allowance for unfunded commitments totaled $ 0.5 million and $ 0.6 million as of March 31, 2024 and December 31, 2023, respectively. Additional discussion related to the calculation of the allowance for unfunded 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 March 31, 2024 and December 31, 2023. 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. 32 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company follows a uniform framework for estimating and classifying the fair value of financial instruments. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. The following disclosures should not be considered a representation of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance. Fair Value Hierarchy Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair value. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: • Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange or Nasdaq. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. • Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. • Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The Company rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. Trading account assets and securities available-for-sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occurred at the beginning of a reporting period. There were no such transfers during the three months ended March 31, 2024 or the year ended December 31, 2023. 33 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 Contracts Interest rate derivative contracts are used by the Company to mitigate risk associated with changes in interest rates. The fair value of these contracts 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 March 31, 2024 and December 31, 2023. Fair Value Measurements as of March 31, 2024 Using Totals At March 31, 2024 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 $ 42,553 $ — $ 42,553 $ — Commercial 14,279 — 14,279 — Obligations of U.S. government-sponsored agencies 11,009 — 11,009 — Obligations of states and political subdivisions 1,545 — 1,545 — Corporate notes 14,843 — 14,843 — U.S. Treasury securities 41,151 41,151 — — Interest rate derivative contracts: Other assets - interest rate swaps 273 — 273 — Other assets - interest rate floors 75 — 75 — 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 — — Interest rate derivative contracts: Other liabilities - interest rate swaps 119 — 119 — 34 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 March 31, 2024 and December 31, 2023, 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 Company that have been closed. When an asset is designated as held-for-sale, the Company ceases depreciation of the asset, and the asset is recorded at the lower of its carrying amount or fair value less estimated cost to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically unobservable inputs for determining fair value. The following table presents the balances of impaired loans, OREO and other assets held-for-sale measured at fair value on a non-recurring basis as of March 31, 2024 and December 31, 2023: Fair Value Measurements as of March 31, 2024 Using Totals At March 31, 2024 Quoted Prices in Active Markets For Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (Dollars in Thousands) Impaired loans $ — $ — $ — $ — OREO and other assets held-for-sale 572 — — 572 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 35 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 March 31, 2024 and December 31, 2023. The tables includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input and the weighted average within the range utilized as of March 31, 2024 and December 31, 2023 are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input. Level 3 Significant Unobservable Input Assumptions Fair Value March 31, 2024 Valuation Technique Unobservable Input Quantitative Range of Unobservable Inputs (Weighted Average) (Dollars in Thousands) Non-recurring fair value measurements: Impaired loans $ — Multiple data points, including discount to appraised value of collateral based on recent market activity Appraisal comparability adjustment (discount) 9 %- 10 % 9.5 % OREO and other assets held-for-sale $ 572 Discount to appraised value of property based on recent market activity for sales of similar properties Appraisal comparability adjustment (discount) 9 %- 10 % 9.5 % 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 % 36 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. 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 debt: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of the determination date. 37 Off-balance sheet instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements. The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of March 31, 2024 and December 31, 2023 were as follows: March 31, 2024 Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 (Dollars in Thousands) Assets: Cash and cash equivalents $ 60,242 $ 60,242 $ 60,242 $ — $ — Investment securities available-for-sale 125,380 125,380 41,151 84,229 — Investment securities held-to-maturity 983 921 — 921 — Federal funds sold 5,532 5,532 — 5,532 — Federal Home Loan Bank stock 1,494 1,494 — — 1,494 Loans, net of allowance for credit losses 812,505 771,776 — — 771,776 Other assets - interest rate swaps 273 273 — 273 — Other assets - interest rate floors 75 75 — 75 — Liabilities: Deposits 943,268 873,743 — 873,743 — Short-term borrowings 15,000 15,000 — 15,000 — Long-term borrowings 10,817 9,560 — 9,560 — 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 loan and lease 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 - interest rate swaps 119 119 119 38 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DESCRIPTION OF THE BUSINESS First US Bancshares, Inc., a Delaware corporation (“Bancshares” and, together with its 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 wholly owned banking subsidiary, First US Bank, an Alabama banking corporation (the “Bank”). Bancshares and the Bank are headquartered in Birmingham, Alabama. Previously, the Bank operated two wholly owned subsidiaries, Acceptance Loan Company and FUSB Reinsurance, Inc., both of which were legally dissolved in 2023, and all remaining assets and liabilities of these entities were transferred to the Bank prior to December 31, 2023. 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. The Bank is the Company’s only reportable operating segment upon which management makes decisions regarding how to allocate resources and assess performance. Delivery of the best possible financial services to customers remains an overall operational focus of the Company. The Company recognizes that attention to detail and responsiveness to customers’ desires are critical to customer satisfaction. The Company continues to upgrade technology, both in its financial services and in the training of its 154 full-time equivalent employees (as of March 31, 2024), to ensure customer satisfaction and convenience. The preparation of the Company’s consolidated financial statements requires management to make subjective judgments associated with critical accounting 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. A description of the Company's critical accounting estimates, which significantly affect the determination of the Company’s consolidated financial position, results of operations and cash flows, is set forth in Part II, Item 7 - Critical Accounting Estimates in the Company's 2023 Form 10-K. The emphasis of this discussion is a comparison of assets, liabilities and shareholders’ equity as of March 31, 2024 to December 31, 2023, while comparing income and expense for the three months ended March 31, 2024 and 2023. All yields and ratios presented and discussed herein are recorded and presented on the accrual basis and not on the tax-equivalent basis, unless otherwise indicated. This information should be read in conjunction with the Company’s unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company's 2023 Form 10-K. As used in the following discussion, the words “we,” “us,” “our” and the “Company” refer to Bancshares and its consolidated subsidiaries, unless the context indicates otherwise. RECENT MARKET CONDITIONS During the three months ended March 31, 2024, the banking industry continued to be impacted by economic volatility that has persisted since early 2023. Following a reduction in January 2024, the U.S. inflation rate increased in the latter two months of the quarter and remained elevated over the Federal Reserve Bank’s (“FRB”) long run target of 2%. Throughout the first quarter of 2024, the FRB maintained the target federal funds rate in a range from 5.25% to 5.50% where it has remained since July 2023. Recent economic indicators suggested that economic activity in the U.S. continued to expand at a solid pace during the first quarter of 2024 and job gains remained strong. In assessing monetary policy, FRB officials continued to indicate a commitment to maintaining the federal funds target range until greater confidence is gained that inflation is moving sustainably toward 2%. U.S. Treasury rates increased notably during the first quarter of 2024 due to changing sentiment in interest rate expectations, and as of March 31, 2024, the U.S. Treasury curve remained inverted. Competitive pressures in the banking industry also remained elevated due to the higher interest rate environment, particularly with respect to deposit pricing. The elevated interest rate environment, combined with higher inflation levels sustained for a longer period of time, could put additional strain on borrowers, as well as the Company’s own costs of goods and services, including the cost of salaries and benefits. These uncertainties, combined with ongoing geopolitical uncertainty, provide a difficult operating environment throughout the banking industry. Management continues to carefully navigate the Company’s course through these challenges, and believes the Company is well positioned to respond effectively in multiple operating environments. However, additional 39 inflationary pressure, higher interest rates, and a fiercely competitive environment could put downward pressure on the Company’s positioning and results of operations. EXECUTIVE OVERVIEW The Company earned net income of $2.1 million, or $0.34 per diluted common share, during the three months ended March 31, 2024, compared to $2.1 million, or $0.33 per diluted common share, for the three months ended March 31, 2023. Summarized condensed consolidated statements of operations are included below for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, March 31, 2024 2023 (Dollars in Thousands, Except Per Share Data) Interest income $ 14,277 $ 11,960 Interest expense 5,237 2,526 Net interest income 9,040 9,434 Provision for credit losses — 269 Net interest income after provision for credit losses 9,040 9,165 Non-interest income 865 829 Non-interest expense 7,147 7,270 Income before income taxes 2,758 2,724 Provision for income taxes 651 652 Net income $ 2,107 $ 2,072 Basic net income per share $ 0.36 $ 0.35 Diluted net income per share $ 0.34 $ 0.33 Dividends per share $ 0.05 $ 0.05 The discussion that follows summarizes the most significant activity that drove changes in the Company’s operating results during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. Net Interest Income and Margin Net interest income decreased by $0.4 million, or 4.2%, comparing the three months ended March 31, 2024 to the three months ended March 31, 2023.The reduction in net interest income resulted from net interest margin compression that totaled 48 basis points as interest-bearing liabilities repriced at a faster pace than interest-bearing assets comparing the two periods. While margin compression has persisted since the first quarter of 2023, it slowed substantially in the first quarter of 2024 due to continued repricing of earning assets at more favorable rates, combined with growth in average earning assets and efforts to hold deposit expense at reasonable levels. Net interest margin was 3.65% in the first quarter of 2024, compared to 3.67% in the fourth quarter of 2023, and 4.13% in first quarter of 2023. Provision for Credit Losses No net provision for credit losses was recorded during the three months ended March 31, 2024, compared to $0.3 million during the three months ended March 31, 2023. The Company’s determination that no net credit loss provisioning was required during the first quarter of 2024 was due to modest overall loan growth during the quarter, combined with a decrease in both unfunded lending commitments and indirect loan fundings. The indirect portfolio generally requires higher allowances for credit losses than most other loan categories in the Company’s portfolio. As of March 31, 2024, the Company’s allowance for credit losses on loans and leases as a percentage of total loans was 1.27%, compared to 1.28% as of December 31, 2023. 40 Non-interest Income Non-interest income remained relatively consistent, totaling $0.9 million and $0.8 million for the three months ended March 31, 2024 and 2023, respectively. Non-interest Expense Non-interest expense totaled $7.1 million for the three months ended March 31, 2024, compared to $7.3 million for the three months ended March 31, 2023. The decrease comparing the two periods resulted from the recovery of check fraud losses, combined with an overall reduction in salaries and benefits due to reductions in staffing levels attained through strategic initiatives implemented by the Company in prior years. Total Assets As of March 31, 2024, the Company’s assets totaled $1,070.5 million, compared to $1,072.9 million as of December 31, 2023, a decrease of 0.2%. Loans Total loans increased by $1.2 million, or 0.1%, as of March 31, 2024, compared to December 31, 2023. The loan volume increase was driven primarily by growth in multi-family construction lending, which was partially offset by reductions in other loan categories. Asset Quality Nonperforming assets, including loans in non-accrual status and OREO, totaled $3.0 million as of both March 31, 2024 and December 31, 2023. As a percentage of total assets, nonperforming assets totaled 0.28% as of both March 31, 2024 and December 31, 2023. Annualized net charge-offs as a percentage of average loans during the first quarter of 2024 totaled 0.09%, compared to 0.11% during the corresponding period of 2023. Deposit Growth Deposits totaled $943.3 million as of March 31, 2024, compared to $950.2 million as of December 31, 2023. The decrease was due primarily to reductions in non-interest bearing and interest-bearing direct deposit accounts, partially offset by increases in interest-bearing time deposits. The shift to interest-bearing time deposits is consistent with deposit holders seeking to maximize interest earnings, a condition that has persisted in the current interest rate environment. The increase in interest-bearing time deposits was partially offset by a reduction in wholesale brokered time deposits of $5.5 million during the three months ended March 31, 2024. Core deposits, which exclude time deposits of $250 thousand or more and all wholesale brokered deposits, totaled $807.3 million, or 85.6% of total deposits, as of March 31, 2024, compared to $819.5 million, or 86.2% of total deposits, as of December 31, 2023. Deployment of Funds As of March 31, 2024, the Company held cash and federal funds sold balances totaling $65.8 million, or 6.1% of total assets, compared to $59.8 million, or 5.6% of total assets, as of December 31, 2023. Investment securities, including both the available-for-sale and held-to-maturity portfolios, totaled $126.4 million as of March 31, 2024, compared to $136.7 million as of December 31, 2023. The decrease in investment securities resulted from the maturity of U.S. treasury bonds that occurred late in the first quarter. Subsequent to March 31, 2024, these funds were reinvested in higher yielding securities. As of March 31, 2024, the expected average life of securities in the investment portfolio was 4.2 years, compared to 3.9 years as of December 31, 2023. In the current elevated interest rate environment, management continues to seek opportunities to reconfigure the investment portfolio with higher yielding assets as cash flows become available. Shareholders’ Equity Shareholders’ equity increased by $1.7 million, or 1.9%, as of March 31, 2024, compared to December 31, 2023. The increase in shareholders’ equity during the first quarter resulted primarily from earnings, net of dividends paid. In addition, the rising interest rate environment, particularly during the latter part of the first quarter of 2024, led to a decrease in valuations of investment securities and drove an overall increase in accumulated other comprehensive loss of $0.2 million during the quarter. Securities valuation decreases were, in part, mitigated by the maturity of lower interest rate securities that totaled $13.0 million during the three months ended March 31, 2024. 41 Cash Dividends The Company declared cash dividends totaling $0.05 per share on its common stock during both the three months ended March 31, 2024 and 2023. Regulatory Capital During the three months ended March 31, 2024, 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 March 31, 2024, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 11.11%. Its total capital ratio was 12.32%, and its Tier 1 leverage ratio was 9.37%. Liquidity As of March 31, 2024, 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 with other banking institutions, Federal Home Loan Bank (FHLB) advances, the discount window of the Federal Reserve Bank (FRB), and brokered deposits. Interest Rate Risk Management During the three months ended March 31, 2024, the Company purchased $50 million notional in interest rate floors to assist in mitigating a portion of the Company’s risk in down rate scenarios. Anticipated Banking Center Growth As part of the Company’s overall growth strategy, progress was made during the three months ended March 31, 2024 toward the anticipated opening of a new banking center in the Bearden area of Knoxville, Tennessee that will replace the Bank’s existing Knoxville-Bearden location. It is anticipated that the new location, which is expected to open during the second quarter of 2024, will provide more favorable exposure to potential customers, while at the same time improving access to most of the Bank’s existing customers in the area. In addition, during the three months ended March 31, 2024, the Company purchased a banking center office in Daphne, Alabama from another financial institution. This location is expected to serve as the Bank’s initial deposit gathering facility in the Daphne/Mobile area. It is anticipated that the location will open to the public in the fourth quarter of 2024. As of March 31, 2024, both the anticipated Knoxville and Daphne banking centers had received all necessary regulatory approvals. RESULTS OF OPERATIONS Net Interest Income Net interest income is calculated as the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company’s earning assets consist of loans, taxable and tax-exempt investments, Federal Home Loan Bank stock, federal funds sold by the Bank and interest-bearing deposits in banks. Interest-bearing liabilities consist of interest-bearing demand deposits and savings and time deposits, as well as short- and long-term borrowings. The following tables show the average balances of each principal category of assets, liabilities and shareholders’ equity for the three months ended March 31, 2024 and 2023. Additionally, the tables provide an analysis of interest revenue or expense associated with each category, along with the accompanying yield or rate percentage. Net interest margin is calculated for each period presented as net interest income divided by average total interest-earning assets. 42 Three Months Ended Three Months Ended March 31, 2024 March 31, 2023 Average Balance Interest Annualized Yield/ Rate % Average Balance Interest Annualized Yield/ Rate % ASSETS Interest-earning assets: Total loans (1) $ 821,984 $ 12,853 6.29 % $ 770,871 $ 10,982 5.78 % Taxable investment securities 133,689 862 2.59 % 129,840 680 2.12 % Tax-exempt investment securities 1,030 3 1.17 % 1,059 3 1.15 % Federal Home Loan Bank stock 914 18 7.92 % 1,634 28 6.95 % Federal funds sold 6,607 89 5.42 % 2,591 29 4.54 % Interest-bearing deposits in banks 33,004 452 5.51 % 20,526 238 4.70 % Total interest-earning assets 997,228 14,277 5.76 % 926,521 11,960 5.24 % Noninterest-earning assets 67,790 62,818 Total $ 1,065,018 $ 989,339 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing deposits: Demand deposits $ 201,261 252 0.50 % $ 227,382 195 0.35 % Savings deposits 260,420 1,884 2.91 % 193,878 553 1.16 % Time deposits 336,822 2,963 3.54 % 270,780 1,389 2.08 % Total interest-bearing deposits 798,503 5,099 2.57 % 692,040 2,137 1.25 % Noninterest-bearing demand deposits 149,613 — — 166,548 — — Total deposits 948,116 5,099 2.16 % 858,588 2,137 1.01 % Borrowings 14,545 138 3.82 % 37,221 389 4.24 % Total funding costs 962,661 5,237 2.19 % 895,809 2,526 1.14 % Other noninterest-bearing liabilities 10,712 9,693 Shareholders’ equity 91,645 83,837 Total $ 1,065,018 $ 989,339 Net interest income (2) $ 9,040 $ 9,434 Net interest margin 3.65 % 4.13 % ( 1) For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. These loans averaged $2.4 million and $1.5 million for the three months ended March 31, 2024 and 2023, respectively. (2) Loan fees are included in interest amounts presented. Loan fees totaled $0.1 million for both the three months ended March 31, 2024 and 2023. 43 The following tables summarize the impact of variances in volume and rate of interest-earning assets and interest-bearing liabilities on components of net interest income. Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Compared to Compared to Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 Increase (Decrease) Increase (Decrease) Due to Change In: Due to Change In: Volume Average Yield/Rate Net Volume Average Yield/Rate Net (Dollars in Thousands) Interest earned on: Total loans $ 728 $ 1,143 $ 1,871 $ 942 $ 1,193 $ 2,135 Taxable investment securities 20 162 182 (2 ) 197 195 Tax-exempt investment securities — — — (7 ) (2 ) (9 ) Federal Home Loan Bank stock (12 ) 2 (10 ) 7 13 20 Federal funds sold 45 15 60 — 29 29 Interest-bearing deposits in banks 145 69 214 (19 ) 228 209 Total interest-earning assets 926 1,391 2,317 921 1,658 2,579 Interest expense on: Demand deposits (22 ) 79 57 (12 ) 81 69 Savings deposits 190 1,141 1,331 (2 ) 415 413 Time deposits 339 1,235 1,574 71 1,069 1,140 Borrowings (237 ) (14 ) (251 ) 125 107 232 Total interest-bearing liabilities 270 2,441 2,711 182 1,672 1,854 Increase (decrease) in net interest income $ 656 $ (1,050 ) $ (394 ) $ 739 $ (14 ) $ 725 Interest income increased by $2.3 million, comparing the three months ended March 31, 2024 to the three months ended March 31, 2023. Of the increase, $1.4 million was attributable to higher average yields on interest-earning assets, while $0.9 million was attributable to growth in interest-earning assets comparing the two periods. The increase in average yield was attributable to the rise in market interest rates that began in 2022, continued in 2023 and held relatively consistent in 2024. The increase in interest income was offset by an increase in interest expense of $2.7 million, comparing the three months ended March 31, 2024 to the three months ended March 31, 2023. Of the increase, $2.4 million was attributable to the rise in market interest rates, while $0.3 million was attributable to growth in interest-bearing liabilities, primarily savings and time deposits. 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. Statements by FRB officials have indicated that the FRB remains committed to maintaining the federal funds rate at this level until greater confidence is gained that inflation is moving sustainably toward the FRB’s long-run goal of 2%. Due to the pace of interest rate increases that occurred in the period from March 2022 to July 2023, the Company’s net interest margin declined in 2023 as the cost of interest-bearing liabilities increased at a faster pace than interest-earning assets. While net interest margin continued to decline during the three months ended March 31, 2024, the pace of decline slowed to two basis points comparing the first quarter of 2024 to the fourth quarter of 2023. While this slowing of margin compression is notable, the sustained higher interest rate environment has continued to intensify competition for deposits within the Company’s service territories during the first three months of 2024. This increased competition, coupled with continued economic volatility, adds uncertainty into the market. Should market interest rates continue to increase or decrease at significant levels, the Company’s net interest income could be negatively impacted. 44 Provision for Credit Losses No provision for credit losses was recorded during the three months ended March 31, 2024, compared to a provision $0.3 million during the three months ended March 31, 2023. The calculation of the provision for credit losses included a recovery of previously recorded credit losses on unfunded lending commitments that was fully offset by provisioning for credit losses on loans and leases. The Company’s determination that no net credit loss provisioning was required during the three months ended March 31, 2024 was due to modest overall loan growth during the quarter, combined with a decrease in both unfunded lending commitments and indirect loan fundings. The indirect portfolio generally requires higher allowances for credit losses than most other loan categories in the Company’s portfolio. As of March 31, 2024, the Company’s allowance for credit losses on loans and leases as a percentage of total loans was 1.27%, compared to 1.28% as of December 31, 2023. Net charge-offs were relatively consistent, totaling $0.2 million for both the three months ended March 31, 2024 and 2023. However, the ongoing 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. Non-Interest Income Non-interest income represents fees and income derived from sources other than interest-earning assets. The following table presents the major components of non-interest income for the periods indicated: Three Months Ended March 31, 2024 2023 $ Change % Change (Dollars in Thousands) Service charges and other fees on deposit accounts $ 299 $ 285 $ 14 4.9 % Bank-owned life insurance 131 114 17 14.9 % Lease income 257 231 26 11.3 % ATM fee income 85 112 (27 ) (24.1 )% Other income 93 87 6 6.9 % Total non-interest income $ 865 $ 829 $ 36 4.3 % The Company’s non-interest income increased by $36 thousand comparing the three months ended March 31, 2024 to the three months ended March 31, 2023. Non-Interest Expense Non-interest expense represents expenses incurred from sources other than interest-bearing liabilities. The following table presents the major components of non-interest expense for the periods indicated: Three Months Ended March 31, 2024 2023 $ Change % Change (Dollars in Thousands) Salaries and employee benefits $ 4,088 $ 4,222 $ (134 ) (3.2 )% Net occupancy and equipment 894 835 59 7.1 % Computer services 443 421 22 5.2 % Insurance expense and assessments 391 327 64 19.6 % Fees for professional services 341 245 96 39.2 % Postage, stationery and supplies 178 161 17 10.6 % Telephone/data communications 192 169 23 13.6 % Collection and recoveries 26 91 (65 ) (71.4 )% Directors fees 96 95 1 1.1 % Software amortization 90 124 (34 ) (27.4 )% Other real estate/foreclosure expense, net 31 6 25 416.7 % Other expense 377 574 (197 ) (34.3 )% Total non-interest expense $ 7,147 $ 7,270 $ (123 ) (1.7 )% Non-interest expense totaled $7.1 million during the three months ended March 31, 2024, compared to $7.3 million during the three months ended March 31, 2023. The decrease comparing the corresponding periods resulted from the recovery of check fraud losses, combined with an overall reduction in salaries and benefits resulting from reductions in staff levels attained through strategic initiatives implemented by the Company in prior years. These reductions were partially offset by increases in certain other categories as shown above. 45 Provision for Income Taxes The provision for income taxes was $0.7 million for both the three months ended March 31, 2024 and 2023, respectively, and the Company’s effective tax rate was 23.6% and 23.9%, 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 4.2 years and 3.9 years as of March 31, 2024 and December 31, 2023, 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 March 31, 2024, available-for-sale securities totaled $125.4 million, or 99.2% of the total investment portfolio, compared to $135.6 million, or 99.2% of the total investment portfolio, as of December 31, 2023. Available-for-sale securities consisted of residential and commercial mortgage-backed securities, U.S. Treasury securities, corporate bonds, obligations of U.S. government-sponsored agencies, and obligations of state and political subdivisions. Held-to-maturity securities are recorded at amortized cost and represent securities that the Company both intends and has the ability to hold to maturity. As of March 31, 2024, held-to-maturity securities totaled $1.0 million, or 0.8% of the total investment portfolio, compared to $1.1 million, or 0.8% of the total investment portfolio, as of December 31, 2023. Held-to-maturity securities consisted of commercial mortgage-backed securities, obligations of U.S. government-sponsored agencies, and obligations of state and political subdivisions. Despite the elevated interest rate environment, during the three months ended March 31, 2024, gross unrealized losses decreased modestly due primarily to the maturity of $15.9 million in the available-for-sale category. Gross unrealized losses in the available-for-sale portfolio totaled $10.0 million as of March 31, 2024, compared to $10.1 million as of December 31, 2023. Unrealized losses within the available-for-sale portfolio were recognized, net of tax, in accumulated other comprehensive loss. As of March 31, 2024, the Company evaluated both the available-for-sale and held-to-maturity portfolios for credit losses and 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. 46 Loans and Leases The Company’s total loan portfolio increased by $1.2 million, or 0.1%, as of March 31, 2024, compared to December 31, 2023. The tables below summarize loan balances by portfolio category, as well as the allowance for credit losses, as of the end of each of the most recent five quarters as of March 31, 2024: Quarter Ended 2024 2023 March 31, December 31, September 30, June 30, March 31, (Dollars in Thousands) Real estate loans: Construction, land development and other land loans $ 102,282 $ 88,140 $ 90,051 $ 91,231 $ 69,398 Secured by 1-4 family residential properties 74,361 76,200 83,876 85,101 86,622 Secured by multi-family residential properties 62,145 62,397 56,506 54,719 63,368 Secured by non-farm, non-residential properties 212,465 213,586 199,116 204,270 198,266 Commercial and industrial loans 57,112 60,515 59,369 60,568 65,708 Consumer loans: Direct 5,590 5,938 6,544 7,593 8,435 Branch retail 7,794 8,670 9,648 10,830 12,222 Indirect 301,192 306,345 310,190 300,182 271,870 Total loans 822,941 821,791 815,300 814,494 775,889 Allowance for credit losses 10,436 10,507 11,380 11,536 11,599 Net loans $ 812,505 $ 811,284 $ 803,920 $ 802,958 $ 764,290 47 Allowance for Credit Losses on Loans and Leases The tables below summarize changes in the allowance for credit losses on loans and leases for each of the most recent five quarters as of March 31, 2024: Quarter Ended 2024 2023 March 31, December 31, September 30, June 30, March 31, (Dollars in Thousands) Balance at beginning of period $ 10,507 $ 11,380 $ 11,536 $ 11,599 $ 9,422 Charge-offs: Real estate loans: Construction, land development and other land loans — — — — — Secured by 1-4 family residential properties (2 ) (1 ) (41 ) (47 ) (8 ) Secured by multi-family residential properties — — — — — Secured by non-farm, non-residential properties — — — — — Commercial and industrial loans — — — — — Consumer loans: Direct (22 ) (50 ) (106 ) (200 ) (215 ) Branch retail (22 ) (86 ) (93 ) (111 ) (155 ) Indirect (344 ) (432 ) (199 ) (145 ) (156 ) Total charge-offs (390 ) (569 ) (439 ) (503 ) (534 ) Recoveries: Real estate loans: Construction, land development and other land loans — — — — — Secured by 1-4 family residential properties 23 14 16 7 16 Secured by multi-family residential properties — — — — — Secured by non-farm, non-residential properties — — — — — Commercial and industrial loans — — — — — Consumer loans: Direct 100 122 151 149 198 Branch retail 54 48 49 69 77 Indirect 30 9 7 5 28 Total recoveries 207 193 223 230 319 Net charge-offs (183 ) (376 ) (216 ) (273 ) (215 ) Impact of adopting CECL — — — — 2,123 Provision for credit losses 112 (497 ) 60 210 269 Ending balance $ 10,436 $ 10,507 $ 11,380 $ 11,536 $ 11,599 Ending balance as a percentage of loans 1.27 % 1.28 % 1.40 % 1.42 % 1.49 % Net charge-offs as a percentage of average loans 0.09 % 0.19 % 0.10 % 0.14 % 0.11 % 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 March 31, 2024 and December 31, 2023, the Company’s reserve for unfunded commitments, which is recorded in other liabilities in the Company’s consolidated balance sheets, totaled $0.5 million and $0.6 million, respectively. 48 Nonperforming Assets Nonperforming assets at the end of the five most recent quarters as of March 31, 2024 were as follows: Quarter Ended 2024 2023 March 31, December 31, September 30, June 30, March 31, (Dollars in Thousands) Non-accrual loans $ 2,393 $ 2,400 $ 2,432 $ 979 $ 1,214 Other real estate owned 572 602 617 617 617 Total $ 2,965 $ 3,002 $ 3,049 $ 1,596 $ 1,831 Nonperforming assets as a percentage of total assets 0.28 % 0.28 % 0.29 % 0.15 % 0.18 % Allocation of Allowance for Credit Losses on Loans and Leases While no portion of the allowance for credit losses is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, the following table shows an allocation of the allowance for credit losses as of March 31, 2024 and December 31, 2023: As of and for the Three Months Ended As of and for the Year Ended March 31, 2024 December 31, 2023 Allowance Allocation Allowance as Percentage of Total Loans Net Charge-offs as a Percentage of Average Loans Allowance Allocation 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 $ 660 0.65 % — $ 565 0.64 % — Secured by 1-4 family residential properties 532 0.72 % -0.12 % 591 0.78 % 0.05 % Secured by multi-family residential properties 400 0.64 % — 415 0.66 % — Secured by non-farm, non-residential properties 1,350 0.64 % — 1,425 0.67 % — Commercial and industrial loans 489 0.86 % — 513 0.85 % — Consumer loans: Direct 68 1.22 % -5.53 % 64 1.06 % -0.06 % Branch retail 307 3.94 % -1.65 % 436 5.03 % 1.82 % Indirect 6,630 2.20 % 0.42 % 6,498 2.12 % 0.31 % Total allowance for credit losses $ 10,436 1.27 % 0.09 % $ 10,507 1.28 % 0.14 % Deposits Total deposits decreased to $943.3 million as of March 31, 2024, from $950.2 million as of December 31, 2023, a decrease of 0.7%. Core deposits, which exclude time deposits of $250 thousand or more and all brokered deposits, provide a relatively stable funding source that supports earning assets. Core deposits totaled $807.3 million, or 85.6% of total deposits, as of March 31, 2024, compared to $819.5 million, or 86.2% of total deposits, as of December 31, 2023. 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 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. 49 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 an alternative source of funds. As of March 31, 2024, other interest-bearing liabilities totaled 3.1% of total interest-bearing liabilities, compared to 2.5% as of December 31, 2023. Shareholders’ Equity As of March 31, 2024, shareholders’ equity totaled $92.3 million, or 8.6% of total assets, compared to $90.6 million, or 8.4% of total assets, as of December 31, 2023. The increase in shareholders’ equity during the three months ended March 31, 2024 resulted primarily from earnings, net of dividends paid. In addition, the rising interest rate environment during the first quarter of 2024 led to a further decrease in valuations of available-for-sale investment securities and drove an overall increase in accumulated other comprehensive loss that partially offset the increase in shareholders’ equity. During the both the three months ended March 31, 2024 and 2023, the Company declared dividends totaling $0.05 per common share, or approximately $0.3 million in aggregate amount. 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. 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 $266.1 million as of March 31, 2024 and $241.2 million as of December 31, 2023. Investment securities forecasted to mature or reprice in one year or less were estimated to be $9.0 million and $12.9 million of the investment portfolio as of March 31, 2024 and December 31, 2023, 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 4.2 years and 3.9 years as of March 31, 2024 and December 31, 2023, 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 $15.0 million and $10.0 million of outstanding borrowings under FHLB advances as of March 31, 2024 and December 31, 2023, 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 as of both March 31, 2024 and December 31, 2023. The Company had up to $276.8 million and $279.4 million in remaining unused credit from the FHLB (subject to available collateral, which may include eligible investment securities and loans) as of March 31, 2024 and December 31, 2023, respectively. In addition, the Company had $48.0 million in unused established federal funds lines as of both March 31, 2024 and December 31, 2023. The Company also has access to the FRB’s discount window. The discount window allows borrowing on pledged collateral that includes eligible investment securities and 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 FRB's discount window, primarily via the pledging of the majority of the Company’s indirect loan portfolio as collateral. Including the pledging of these loans, along with selected securities, the Company had $158.8 and $161.7 million in borrowing capacity with the FRB’s discount window as of March 31, 2024 and December 31, 2023, respectively. 50 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 March 31, 2024 and December 31, 2023. March 31, 2024 December 31, 2023 (Dollars in Thousands) (Unaudited) (Unaudited) Liquidity from cash and federal funds sold: Cash and cash equivalents $ 60,242 $ 50,279 Federal funds sold 5,532 9,475 Liquidity from cash and federal funds sold 65,774 59,754 Liquidity from pledgeable investment securities: Investment securities available-for sale, at fair value 125,380 135,565 Investment securities held-to-maturity, at amortized cost 983 1,104 Less: securities pledged (47,233 ) (41,375 ) Less: estimated collateral value discounts (11,080 ) (11,129 ) Liquidity from pledgeable investment securities 68,050 84,165 Liquidity from unused lendable collateral (loans) at FHLB 15,878 21,696 Liquidity from unused lendable collateral (loans and securities) at FRB 158,782 161,729 Unsecured lines of credit with banks 48,000 48,000 Total readily available liquidity $ 356,484 $ 375,344 The table above calculates readily available liquidity by combining cash and cash equivalents, federal funds sold and unencumbered investment security values on the Company’s consolidated balance sheet with off-balance sheet liquidity that is readily available through unused collateral pledged to the FHLB and FRB, as well as unsecured lines of credit with other banks. Liquidity from pledgable 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. Management uses these measures to evaluate the Company's liquidity position. Pledgable 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 pledgable investment securities represent total investment securities as recorded on the consolidated balance sheet, less reductions for securities already pledged and discounts expected to be taken by the lender to determine collateral value. The unused lendable collateral value at the FHLB presented in the table represents only the amount immediately available to the Company from loans already pledged by the Company to the FHLB as of each consolidated balance sheet date presented. As of March 31, 2024 and December 31, 2023, the Company's total remaining credit availability with the FHLB was $276.8 million and $279.4 million, respectively, subject to the pledging of additional collateral which may include eligible investment securities and loans. In addition, the Company has access to additional sources of liquidity that generally could be obtained over a period of time. For example, the Company has access to unsecured brokered deposits through the wholesale funding markets. Management believes the Company’s on-balance sheet and other readily available liquidity provide strong indicators of the Company’s ability to fund obligations in a stressed liquidity environment. Excluding wholesale brokered deposits, as of March 31, 2024, the Company had approximately 29 thousand deposit accounts with an average balance of approximately $29.6 thousand per account. Estimated uninsured 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 $192.5 million, or 20.4% of total deposits, as of March 31, 2024. As of December 31, 2023, estimated uninsured deposits totaled $200.3 million, or 21.1% of total deposits. Management believes that the Company has adequate sources of liquidity to cover its contractual obligations and commitments over the next twelve months. 51 ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK The primary purpose of managing interest rate risk is to invest capital effectively and preserve the value created by the Company’s core banking business. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to maximize net interest income performance under varying interest rate environments, subject to liquidity and interest rate risk guidelines. Effective interest rate sensitivity management ensures that both assets and liabilities respond to changes in interest rates within an acceptable timeframe, thereby minimizing the effect of such interest rate movements on short- and long-term net interest margin and net interest income. Financial simulation models are the primary tools used by the Asset/Liability Committee of the Bank’s board of directors to measure interest rate exposure. Using a wide range of scenarios, management is provided with extensive information on the potential impact on net interest income caused by changes in interest rates. In these simulations, assumptions are made about the direction and volatility of interest rates, the slope of the yield curve and the changing composition of the Company’s balance sheet resulting from both strategic plans and customer behavior. Simulation models also incorporate management’s assumptions regarding such factors as loan and deposit growth, pricing, prepayment speeds and spreads between interest rates paid on deposits and charged on loans. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk. Assessing Short-Term Interest Rate Risk – Net Interest Margin Simulation On a quarterly basis, management simulates how changes in short- and long-term interest rates will impact future profitability, as reflected by changes in the Bank’s net interest margin and net interest income. The tables below depict how, as of March 31, 2024, pre-tax net interest margin and net interest income are forecasted to change over timeframes of one year and two years under the six 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% 9 7 +2% 15 12 +3% 19 14 -1% (13 ) (11 ) -2% (25 ) (23 ) -3% (38 ) (36 ) Cumulative Change in Net Interest Income from Level Interest Rate Forecast (dollars in thousands, pre-tax): 1 Year 2 Years +1% $ 926 $ 1,502 +2% 1,620 2,491 +3% 2,059 3,032 -1% (1,375 ) (2,353 ) -2% (2,738 ) (4,950 ) -3% (4,065 ) (7,790 ) During the three months ended March 31, 2024, the Company acquired $50 million notional interest rate floors to improve positioning in down rate scenarios. 52 ITEM 4. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Bancshares maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Bancshares’ reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to Bancshares’ management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Bancshares’ management carried out an evaluation, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Bancshares’ disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of March 31, 2024, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Based on that evaluation, Bancshares’ management concluded, as of March 31, 2024, that Bancshares’ disclosure controls and procedures were effective at the reasonable assurance level to ensure that the information required to be disclosed in Bancshares’ periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Changes in Internal Control Over Financial Reporting There were no changes in Bancshares’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 53 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to certain ordinary course litigation, and the Company intends to vigorously defend itself in all such litigation. In the opinion of the Company, based on review and consultation with legal counsel, the outcome of such ordinary course litigation should not have a material adverse effect on the Company’s consolidated financial statements or results of operations. ITEM 1A. RISK FACTORS A list of factors that could materially affect the Company’s business, financial condition and/or operating results is included in Part I, Item 1A, “Risk Factors” in the Company's 2023 Form 10-K. There have been no material changes to such risk factors. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. ITEM 2. UNREGISTERED SALES OF EQUI TY SECURITIES AND USE OF PROCEEDS The following table sets forth purchases made by or on behalf of Bancshares or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, of shares of Bancshares’ common stock during the first quarter of 2024: Issuer Purchases of Equity Securities Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Programs (2) Maximum Number of Shares that May Yet Be Purchased Under the Programs (2) January 1 – January 31 863 $ 10.64 — 459,313 February 1 – February 29 92 $ 10.42 — 459,313 March 1 – March 31 285 $ 9.66 — 459,313 Total 1,240 $ 10.40 — 459,313 (1) 1,240 shares were purchased in open-market transactions by an independent trustee for Bancshares’ 401(k) Plan during the first quarter of 2024. (2) No shares were repurchased during the first quarter pursuant to Bancshares’ publicly announced share repurchase program, which was initially approved by the Board of Directors on January 19, 2006 and authorized the repurchase of up to 642,785 shares of common stock. In December 2019 and April 2021, the Board approved the repurchase of additional shares of common stock under the share repurchase program, and the Board has periodically extended the expiration date of the program, most recently to December 31, 2024. As of March 31, 2024, Bancshares was authorized to repurchase up to 459,313 shares of common stock under the share repurchase program. ITEM 5. OTHER INFORMATION (a) None. (b) None. (c) During the period covered by this report, none of the Company’s directors or executive officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (each as defined in Item 408 of Regulation S-K under the Securities Exchange Act of 1934, as amended). 54 ITEM 6. EXHIBITS Exhibit No. Description 3.1 Certificate of Incorporation of United Security Bancshares, Inc. (incorporated by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q (File No. 000-14549), filed on November 12, 1999). 3.1A Certificate of Amendment to the Certificate of Incorporation of United Security Bancshares, Inc., effective as of October 11, 2016 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 000-14549), filed on October 11, 2016). 3.2 Amended and Restated Bylaws of First US Bancshares, Inc., effective as of November 16, 2022 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 000-14549), filed on November 16, 2022). 10.1 First US Bancshares, Inc. 2024 Cash Incentive Program (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-14549), filed on February 12, 2024). 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 32* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101 The following financial statements from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in Inline XBRL: (i) Interim Condensed Consolidated Balance Sheets, (ii) Interim Condensed Consolidated Statements of Comprehensive Income, (iii) Interim Condensed Consolidated Statements of Operations, (iv) Interim Condensed Consolidated Statements of Changes in Shareholders' Equity, (v) Interim Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Interim Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags. 104 The cover page from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in Inline XBRL. ________________ *Filed herewith 55 SIGNAT URES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST US BANCSHARES, INC. DATE: May 10, 2024 By: /s/ Thomas S. Elley Thomas S. Elley Its Senior Executive Vice President, Treasurer and Assistant Secretary, Chief Financial Officer and Principal Accounting Officer (Duly Authorized Officer and Principal Financial Officer) 56