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 September 30, 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: 000-14549 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 November 1, 2024 Common Stock, $0.01 par value 5,715,607 shares FIRST US BANCSHARES, INC. AND SUBSIDIARIES PAGE PART I. FINANCIAL INFORMATION 4 ITEM 1. FINANCIAL STATEMENTS 4 Interim Condensed Consolidated Balance Sheets at September 30, 2024 (Unaudited) and December 31, 2023 4 Interim Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited) 5 Interim Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited) 6 Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited) 7 Interim Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023 (Unaudited) 9 Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 10 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 42 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 56 ITEM 4. CONTROLS AND PROCEDURES 57 PART II. OTHER INFORMATION 58 ITEM 1. LEGAL PROCEEDINGS 58 ITEM 1A. RISK FACTORS 58 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 58 ITEM 5. OTHER INFORMATION 58 ITEM 6. EXHIBITS 59 Signature Page 60 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 and Per Share Data) September 30, December 31, 2024 2023 (Unaudited) ASSETS Cash and due from banks $ 10,867 $ 12,987 Interest-bearing deposits in banks 71,442 37,292 Total cash and cash equivalents 82,309 50,279 Federal funds sold and securities purchased under reverse repurchase agreements 15,524 9,475 Investment securities available-for-sale, at fair value 144,275 135,565 Investment securities held-to-maturity, at amortized cost 769 1,104 Federal Home Loan Bank stock, at cost 781 1,201 Loans and leases held for investment 803,308 821,791 Less: allowance for credit losses on loans and leases 10,116 10,507 Net loans and leases held for investment 793,192 811,284 Premises and equipment, net of accumulated depreciation 25,042 24,398 Cash surrender value of bank-owned life insurance 16,966 16,702 Accrued interest receivable 3,668 3,976 Goodwill and core deposit intangible, net 7,502 7,606 Other real estate owned 538 602 Other assets 9,669 10,748 Total assets $ 1,100,235 $ 1,072,940 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest-bearing $ 155,024 $ 153,591 Interest-bearing 826,125 796,600 Total deposits 981,149 950,191 Accrued interest expense 2,030 2,030 Other liabilities 7,711 9,327 Short-term borrowings - 10,000 Long-term borrowings 10,854 10,799 Total liabilities 1,001,744 982,347 Shareholders’ equity: Common stock, par value $ 0.01 per share, 10,000,000 shares authorized; 7,819,565 and 7,738,201 shares issued, respectively; 5,715,388 and 5,735,075 shares outstanding, respectively 78 75 Additional paid-in capital 15,349 14,972 Accumulated other comprehensive loss, net of tax ( 3,479 ) ( 6,431 ) Retained earnings 115,551 109,959 Less treasury stock: 2,104,177 and 2,003,126 shares at cost, respectively ( 29,008 ) ( 27,982 ) Total shareholders’ equity 98,491 90,593 Total liabilities and shareholders’ equity $ 1,100,235 $ 1,072,940 The accompanying notes are an integral part of these Interim Condensed Consolidated Financial 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 Nine Months Ended September 30, September 30, 2024 2023 2024 2023 (Unaudited) (Unaudited) Interest income: Interest and fees on loans $ 13,206 $ 12,584 $ 38,989 $ 35,330 Interest on investment securities 1,121 685 3,094 2,043 Interest on deposits in banks 603 598 1,478 1,362 Other 87 35 279 126 Total interest income 15,017 13,902 43,840 38,861 Interest expense: Interest on deposits 5,709 4,222 16,018 9,681 Interest on borrowings 123 197 421 940 Total interest expense 5,832 4,419 16,439 10,621 Net interest income 9,185 9,483 27,401 28,240 Provision for credit losses 152 184 152 753 Net interest income after provision for credit losses 9,033 9,299 27,249 27,487 Non-interest income: Service and other charges on deposit accounts 312 302 909 869 Lease income 260 241 770 707 Other income, net 329 294 922 889 Total non-interest income 901 837 2,601 2,465 Non-interest expense: Salaries and employee benefits 3,837 4,120 11,815 12,310 Net occupancy and equipment 958 897 2,806 2,625 Computer services 449 464 1,336 1,315 Insurance expense and assessments 348 423 1,153 1,156 Fees for professional services 299 331 1,004 735 Other expense 1,099 1,084 3,295 3,599 Total non-interest expense 6,990 7,319 21,409 21,740 Income before income taxes 2,944 2,817 8,441 8,212 Provision for income taxes 722 704 1,985 2,004 Net income $ 2,222 $ 2,113 $ 6,456 $ 6,208 Basic net income per share $ 0.38 $ 0.35 $ 1.10 $ 1.04 Diluted net income per share $ 0.36 $ 0.33 $ 1.04 $ 0.97 Dividends per share $ 0.05 $ 0.05 $ 0.15 $ 0.15 The accompanying notes are an integral part of these Interim Condensed Consolidated Financial Statements. 5 FIRST US BANCSHARES, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED ST ATEMENTS OF COMPREHENSIVE INCOME (Dollars in Thousands) Three Months Ended Nine Months Ended September 30, September 30, 2024 2023 2024 2023 (Unaudited) (Unaudited) Net income $ 2,222 $ 2,113 $ 6,456 $ 6,208 Other comprehensive income (loss): Unrealized holding gains (losses) on securities available-for-sale arising during period, net of tax expense (benefit) of $ 1,050 , ($ 58 ), $ 1,151 , and ($ 425 ), respectively 3,150 ( 167 ) 3,447 ( 1,271 ) Unrealized holding losses arising during the period on effective cash flow hedge derivatives, net of tax benefit of $ 66 , $ 0 , $ 66 and $ 18 , respectively ( 198 ) — ( 198 ) ( 50 ) Reclassification adjustments on cash flow hedge derivatives realized in net income, net of tax benefit of $ 21 , $ 39 , $ 99 and $ 116 , respectively ( 63 ) ( 118 ) ( 297 ) ( 345 ) Other comprehensive income (loss) 2,889 ( 285 ) 2,952 ( 1,666 ) Total comprehensive income $ 5,111 $ 1,828 $ 9,408 $ 4,542 The accompanying notes are an integral part of these Interim Condensed Consolidated Financial 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 September 30, 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, June 30, 2023 5,874,765 $ 75 $ 14,675 $ ( 8,622 ) $ 106,157 $ ( 26,560 ) $ 85,725 Net income — — — — 2,113 — 2,113 Net change in fair value of securities available-for-sale, net of tax — — — ( 167 ) — — ( 167 ) Net change in fair value of derivative instruments, net of tax — — — ( 118 ) — — ( 118 ) Dividends declared: $ 0.05 per share — — — — ( 294 ) — ( 294 ) Impact of stock-based compensation plans, net — — 149 — — — 149 Reissuance of treasury stock as compensation 16 — — — — — — Balance, September 30, 2023 5,874,781 $ 75 $ 14,824 $ ( 8,907 ) $ 107,976 $ ( 26,560 ) $ 87,408 Balance, June 30, 2024 5,744,254 $ 78 $ 15,200 $ ( 6,368 ) $ 113,615 $ ( 28,689 ) $ 93,836 Net income — — — — 2,222 — 2,222 Net change in fair value of securities available-for-sale, net of tax — — — 3,150 — — 3,150 Net change in fair value of derivative instruments, net of tax — — — ( 261 ) — — ( 261 ) Dividends declared: $ 0.05 per share — — — — ( 286 ) — ( 286 ) Impact of stock-based compensation plans, net 634 — 149 — — — 149 Impact of common stock share repurchases ( 29,500 ) — — — — ( 319 ) ( 319 ) Balance, September 30, 2024 5,715,388 $ 78 $ 15,349 $ ( 3,479 ) $ 115,551 $ ( 29,008 ) $ 98,491 The accompanying notes are an integral part of these Interim Condensed Consolidated Financial Statements. 7 FIRST US BANCSHARES, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Dollars in Thousands, Except Share and Per Share Data) For the nine months ended September 30, 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 — — — — 6,208 — 6,208 Net change in fair value of securities available-for-sale, net of tax — — — ( 1,271 ) — — ( 1,271 ) Net change in fair value of derivative instruments, net of tax — — — ( 395 ) — — ( 395 ) Dividends declared: $ 0.15 per share — — — — ( 881 ) — ( 881 ) Impact of stock-based compensation plans, net 53,141 — 448 — — ( 25 ) 423 Reissuance of treasury stock as compensation 9,382 — ( 134 ) — — 134 — Impact of adopting current expected credit loss accounting model, net of tax — — — — ( 1,811 ) — ( 1,811 ) Balance, September 30, 2023 5,874,781 $ 75 $ 14,824 $ ( 8,907 ) $ 107,976 $ ( 26,560 ) $ 87,408 Balance, December 31, 2023 5,735,075 $ 75 $ 14,972 $ ( 6,431 ) $ 109,959 $ ( 27,982 ) $ 90,593 Net income — — — — 6,456 — 6,456 Net change in fair value of securities available-for-sale, net of tax — — — 3,447 — — 3,447 Net change in fair value of derivative instruments, net of tax — — — ( 495 ) — — ( 495 ) Dividends declared: $ 0.15 per share — — — — ( 864 ) — ( 864 ) Impact of stock-based compensation plans, net 75,520 3 535 — — ( 48 ) 490 Reissuance of treasury stock as compensation 11,293 — ( 158 ) — — 158 — Impact of common stock share repurchases ( 106,500 ) — — — — ( 1,136 ) ( 1,136 ) Balance, September 30, 2024 5,715,388 $ 78 $ 15,349 $ ( 3,479 ) $ 115,551 $ ( 29,008 ) $ 98,491 The accompanying notes are an integral part of these Interim Condensed Consolidated Financial Statements. 8 FIRST US BANCSHARES, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDA TED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Nine Months Ended September 30, 2024 2023 (Unaudited) Cash flows from operating activities: Net income $ 6,456 $ 6,208 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,155 1,180 Provision for credit losses 152 753 Deferred income tax expense (benefit) 636 ( 566 ) Proceeds from settlement of derivative contracts — 2,166 Reclassification of unrealized gains on terminated derivative contracts ( 814 ) ( 848 ) Stock-based compensation expense 468 448 Net (accretion) amortization of securities ( 165 ) 40 Amortization of intangible assets 104 159 Net loss on premises and equipment and other real estate 111 613 Changes in assets and liabilities: Increase in cash surrender value of bank owned life insurance ( 264 ) ( 223 ) Decrease (increase) in accrued interest receivable 308 ( 511 ) (Increase) decrease in other assets ( 897 ) 556 Increase in accrued interest expense - 1,257 Decrease in other liabilities ( 1,938 ) ( 225 ) Net cash provided by operating activities 5,312 11,007 Cash flows from investing activities: Net (increase) decrease in federal funds sold and securities purchased under reverse repurchase agreements ( 6,049 ) 625 Purchases of investment securities, available-for-sale ( 27,524 ) ( 6,756 ) Proceeds from maturities and prepayments of investment securities, available-for-sale 23,576 9,267 Proceeds from maturities and prepayments of investment securities, held-to-maturity 335 587 Net decrease (increase) in Federal Home Loan Bank stock 420 ( 792 ) Net decrease (increase) in loans and leases held for investment 18,112 ( 43,533 ) Proceeds from the sale of premises and equipment, other real estate and repossessions 698 482 Purchases of premises and equipment ( 1,830 ) ( 979 ) Net cash provided by (used in) investing activities 7,738 ( 41,099 ) Cash flows from financing activities: Net increase in deposits 30,958 57,013 Net (decrease) increase in short-term borrowings ( 10,000 ) 9,962 Net share-based compensation transactions 22 ( 25 ) Repurchases of common stock ( 1,136 ) — Dividends paid ( 864 ) ( 881 ) Net cash provided by financing activities 18,980 66,069 Net increase in cash and cash equivalents 32,030 35,977 Cash and cash equivalents, beginning of period 50,279 30,152 Cash and cash equivalents, end of period $ 82,309 $ 66,129 Supplemental disclosures: Cash paid for: Interest $ 16,439 $ 9,364 Income taxes 2,550 2,374 Non-cash transactions: Assets acquired in settlement of loans 333 1,178 Reissuance of treasury stock as compensation 158 134 The accompanying notes are an integral part of these Interim Condensed Consolidated Financial Statements. 9 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 additional 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). 10 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 Nine Months Ended September 30, September 30, 2024 2023 2024 2023 Weighted average shares outstanding 5,733,480 5,874,769 5,752,991 5,858,812 Weighted average director stock equivalent shares 105,799 109,793 109,588 113,142 Basic shares 5,839,279 5,984,562 5,862,579 5,971,954 Dilutive shares 317,600 419,650 317,600 419,650 Diluted shares 6,156,879 6,404,212 6,180,179 6,391,604 Three Months Ended Nine Months Ended September 30, September 30, 2024 2023 2024 2023 (Dollars in Thousands, Except Per Share Data) Net income $ 2,222 $ 2,113 $ 6,456 $ 6,208 Basic net income per share $ 0.38 $ 0.35 $ 1.10 $ 1.04 Diluted net income per share $ 0.36 $ 0.33 $ 1.04 $ 0.97 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 September 30, 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 ASU 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 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures This ASU expands the disclosure requirements relating to reportable segments. The ASU does not change how an entity identifies reportable segments or the accounting for segments. The Company has only one reporting segment; however, the ASU requires additional disclosures for entities that have one reporting segment, including annual disclosure of the title and position of the chief operating decision maker (CODM), as well as interim and annual disclosures of significant segment expenses, and the measure or measures of the segment’s profit or loss that the CODM uses in assessing segment performance and deciding how to allocate resources. Annual financial statements as of and for the year ending December 31, 2024 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 This 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. Annual financial statements as of and for the year ending December 31, 2025 The adoption of this guidance is not likely to have a material impact. Management will continue to evaluate through date of adoption. 11 3. INVESTMENT SECURITIES Details of investment securities available-for-sale and held-to-maturity as of September 30, 2024 and December 31, 2023 were as follows: Available-for-Sale September 30, 2024 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in Thousands) Mortgage-backed securities: Residential $ 61,314 $ 1,416 $ ( 1,971 ) $ 60,759 Commercial 12,893 107 ( 179 ) 12,821 Obligations of U.S. government-sponsored agencies 11,439 298 ( 463 ) 11,274 Obligations of states and political subdivisions 1,588 — ( 33 ) 1,555 Corporate notes 17,755 5 ( 2,243 ) 15,517 U.S. Treasury securities 44,016 — ( 1,667 ) 42,349 Total $ 149,005 $ 1,826 $ ( 6,556 ) $ 144,275 Held-to-Maturity September 30, 2024 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in Thousands) Mortgage-backed securities: Commercial $ 313 $ — $ ( 9 ) $ 304 Obligations of U.S. government-sponsored agencies 414 — ( 21 ) $ 393 Obligations of states and political subdivisions 42 — ( 3 ) $ 39 Total $ 769 $ — $ ( 33 ) $ 736 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 12 The scheduled maturities of investment securities available-for-sale and held-to-maturity as of September 30, 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 $ 24,190 $ 23,702 $ — $ — Maturing after one to five years 28,234 26,885 287 280 Maturing after five to ten years 51,525 47,372 326 309 Maturing after ten years 45,056 46,316 156 147 Total $ 149,005 $ 144,275 $ 769 $ 736 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 fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2024 and December 31, 2023. Available-for-Sale September 30, 2024 Less than 12 Months 12 Months or More Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in Thousands) Mortgage-backed securities: Residential $ — $ — $ 30,705 $ ( 1,971 ) Commercial — — 5,769 ( 179 ) Obligations of U.S. government-sponsored agencies — — 4,616 ( 463 ) Obligations of states and political subdivisions — — 1,555 ( 33 ) Corporate notes — — 13,512 ( 2,243 ) U.S. Treasury securities — — 42,349 ( 1,667 ) Total $ — $ — $ 98,506 $ ( 6,556 ) Held-to-Maturity September 30, 2024 Less than 12 Months 12 Months or More Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in Thousands) Mortgage-backed securities: Commercial $ — $ — $ 304 $ ( 9 ) Obligations of U.S. government-sponsored agencies — — 393 ( 21 ) Obligations of states and political subdivisions — — 39 ( 3 ) Total $ — $ — $ 736 $ ( 33 ) 13 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 September 30, 2024 , 96 available-for-sale debt securities had been in a loss position for more than 12 months, and there were no available-for-sale debt securities that 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. As of September 30, 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 September 30, 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 September 30, 2024 or December 31, 2023. Held-to-Maturity Considerations Effective January 1, 2023, the Company adopted the current expected credit loss ("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 September 30, 2024 or December 31, 2023. Pledged Securities Investment securities with a carrying value of $ 39.6 million and $ 41.4 million as of September 30, 2024 and December 31, 2023 , respectively, were pledged to secure public deposits and for other purposes. 14 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. 15 As of September 30, 2024 and December 31, 2023, the composition of the loan portfolio by portfolio segment was as follows: September 30, 2024 December 31, 2023 Real estate loans: Construction, land development and other land loans $ 53,098 $ 88,140 Secured by 1-4 family residential properties 70,067 76,200 Secured by multi-family residential properties 100,627 62,397 Secured by non-farm, non-residential properties 224,611 213,586 Commercial and industrial loans and leases (1) 44,872 60,515 Consumer loans: Direct 5,018 5,938 Branch retail 6,233 8,670 Indirect 298,782 306,345 Total loans 803,308 821,791 Allowance for credit losses on loans and leases 10,116 10,507 Net loans $ 793,192 $ 811,284 (1) Includes equipment financing leases, which totaled $ 14.9 million as of September 30, 2024 and $ 12.6 million as of December 31, 2023 . The Company makes commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 55.8 % and 53.6 % of the portfolio was concentrated in loans secured by real estate as of September 30, 2024 and December 31, 2023, respectively. Loans with a carrying value of $ 93.5 million and $ 98.6 million were pledged as collateral to secure Federal Home Loan Bank (“FHLB”) borrowings as of September 30, 2024 and December 31, 2023 , respectively. In addition, loans with a carrying value of $ 287.5 million and $ 294.4 million were pledged to secure borrowings with the Federal Reserve Bank ("FRB") as of September 30, 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 $ 10.7 million and $ 1.4 million as of September 30, 2024 and December 31, 2023, respectively. The increase comparing the balance at September 30, 2024 to December 31, 2023 resulted primarily from new board membership. During the nine months ended September 30, 2024 , there were new loans of $ 140 thousand to active related parties, and repayments of $ 1.4 million made by these parties. During the year ended December 31, 2023, there were new loans of $ 1.3 million to active related parties, and no repayments made by these 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 16 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. 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 nine months ended September 30, 2024 and 2023: As of and for the Nine Months Ended September 30, 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 ) — — ( 113 ) ( 53 ) ( 57 ) ( 992 ) ( 1,217 ) Recoveries 20 46 — — — 249 125 134 574 Provision for (recovery of) credit losses ( 249 ) ( 171 ) 261 322 342 ( 209 ) ( 427 ) 383 252 Allowance for credit losses on loans and leases $ 336 $ 464 $ 676 $ 1,747 $ 742 $ 51 $ 77 $ 6,023 $ 10,116 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 ( 115 ) ( 1 ) 50 25 ( 59 ) — — — ( 100 ) Allowance for credit losses on unfunded lending commitments $ 335 $ — $ 59 $ 27 $ 43 $ 5 $ — $ — $ 469 17 As of and for the Nine Months Ended September 30, 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 — ( 96 ) — — — ( 521 ) ( 359 ) ( 500 ) ( 1,476 ) Recoveries — 39 — — — 499 195 40 773 Provision for (recovery of) credit losses on loans and leases 157 18 ( 156 ) ( 201 ) ( 369 ) ( 404 ) ( 147 ) 1,640 538 Allowance for credit losses on loans and leases $ 580 $ 754 $ 405 $ 1,622 $ 530 $ 487 $ 835 $ 6,167 $ 11,380 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 181 ( 23 ) 8 8 110 ( 61 ) ( 8 ) — 215 Allowance for credit losses on unfunded lending commitments $ 353 $ 16 $ 11 $ 10 $ 110 $ 7 $ — $ — $ 507 18 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 September 30, 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 September 30, 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. 19 The tables below illustrate the carrying amount of loans and leases by credit quality indicator and year of origination as of September 30, 2024: September 30, 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 $ 168 $ 3,259 $ 39,266 $ 9,821 $ 47 $ 471 $ 53,032 Special Mention — — — 66 — — 66 Substandard — — — — — — — Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 168 $ 3,259 $ 39,266 $ 9,887 $ 47 $ 471 $ 53,098 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Secured by multi-family residential properties Pass $ 7,832 $ 7,836 $ 41,809 $ 17,599 $ 5,611 $ 19,940 $ 100,627 Special Mention — — — — — — — Substandard — — — — — — — Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 7,832 $ 7,836 $ 41,809 $ 17,599 $ 5,611 $ 19,940 $ 100,627 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Secured by non-farm, non-residential properties Pass $ 15,805 $ 25,775 $ 35,724 $ 35,913 $ 55,214 $ 52,848 $ 221,279 Special Mention — — 315 — 337 — 652 Substandard — — — 489 148 2,043 2,680 Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 15,805 $ 25,775 $ 36,039 $ 36,402 $ 55,699 $ 54,891 $ 224,611 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — Commercial and industrial loans and leases Pass $ 11,926 $ 5,832 $ 3,781 $ 5,588 $ 3,599 $ 10,371 $ 41,097 Special Mention — — 32 70 — — 102 Substandard — 3,313 — 3 — 357 3,673 Doubtful — — — — — — — Loss — — — — — — — Subtotal $ 11,926 $ 9,145 $ 3,813 $ 5,661 $ 3,599 $ 10,728 $ 44,872 Current period gross charge-offs $ — $ — $ 54 $ — $ 43 $ 16 $ 113 Total commercial Pass $ 35,731 $ 42,702 $ 120,580 $ 68,921 $ 64,471 $ 83,630 $ 416,035 Special Mention — — 347 136 337 — 820 Substandard — 3,313 — 492 148 2,400 6,353 Doubtful — — — — — — — Loss — — — — — — — $ 35,731 $ 46,015 $ 120,927 $ 69,549 $ 64,956 $ 86,030 $ 423,208 Current period gross charge-offs $ — $ — $ 54 $ — $ 43 $ 16 $ 113 20 September 30, 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 $ 2,986 $ 3,891 $ 18,168 $ 14,627 $ 6,092 $ 23,611 $ 69,375 Non-performing — — — — — 692 692 Subtotal $ 2,986 $ 3,891 $ 18,168 $ 14,627 $ 6,092 $ 24,303 $ 70,067 Current period gross charge-offs $ — $ — $ — $ — $ — $ 2 $ 2 Direct Performing $ 2,142 $ 1,256 $ 539 $ 637 $ 323 $ 121 $ 5,018 Non-performing — — — — — — — Subtotal $ 2,142 $ 1,256 $ 539 $ 637 $ 323 $ 121 $ 5,018 Current period gross charge-offs $ — $ — $ 1 $ 34 $ 3 $ 15 $ 53 Branch retail Performing $ — $ — $ — $ 1,418 $ 2,015 $ 2,800 $ 6,233 Non-performing — — — — — — — Subtotal $ — $ — $ — $ 1,418 $ 2,015 $ 2,800 $ 6,233 Current period gross charge-offs $ — $ — $ — $ 10 $ 18 $ 29 $ 57 Indirect Performing $ 36,558 $ 76,085 $ 77,626 $ 57,593 $ 42,325 $ 8,525 $ 298,712 Non-performing — — 31 — 39 — 70 Subtotal $ 36,558 $ 76,085 $ 77,657 $ 57,593 $ 42,364 $ 8,525 $ 298,782 Current period gross charge-offs $ — $ 80 $ 194 $ 427 $ 217 $ 74 $ 992 Total consumer Performing $ 41,686 $ 81,232 $ 96,333 $ 74,275 $ 50,755 $ 35,057 $ 379,338 Non-performing — — 31 — 39 692 762 $ 41,686 $ 81,232 $ 96,364 $ 74,275 $ 50,794 $ 35,749 $ 380,100 Current period gross charge-offs $ — $ 80 $ 195 $ 471 $ 238 $ 120 $ 1,104 21 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 $ — $ — $ — $ — $ — $ — $ — 22 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 23 The following table provides an aging analysis of past due loans by class as of September 30, 2024: As of September 30, 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 $ — $ — $ — $ — $ 53,098 $ 53,098 $ — Secured by 1-4 family residential properties 461 — — 461 69,606 70,067 — Secured by multi-family residential properties — — — — 100,627 100,627 — Secured by non-farm, non-residential properties — 81 1,250 1,331 223,280 224,611 — Commercial and industrial loans 403 — 8 411 44,461 44,872 — Consumer loans: — Direct 12 — 12 5,006 5,018 — Branch retail 61 — 61 6,172 6,233 — Indirect 338 34 70 442 298,340 298,782 — Total $ 1,275 $ 115 $ 1,328 $ 2,718 $ 800,590 $ 803,308 $ — As a percentage of total loans 0.16 % 0.01 % 0.17 % 0.34 % 99.66 % 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 % 24 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 September 30, 2024 and December 31, 2023. Also presented is the balance of loans on nonaccrual status at September 30, 2024 and December 31, 2023 for which there was no related allowance for credit losses recorded. Loans on Non-Accrual Status September 30, 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 1,411 416 — Secured by multi-family residential properties — — — Secured by non-farm, non-residential properties 1,250 1,250 — Commercial and industrial loans 3,321 3,312 — Consumer loans: — Direct — — — Branch retail — — — Indirect 69 — — Total loans $ 6,051 $ 4,978 $ — 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 September 30, 2024 and December 31, 2023, which loans are individually evaluated to determine credit losses: September 30, 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 1,427 — 1,427 Secured by multi-family residential properties — — — Secured by non-farm, non-residential properties 1,643 — 1,643 Commercial and industrial — 5,856 5,856 Direct consumer — — — Total loans individually evaluated $ 3,070 $ 5,856 $ 8,926 25 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 nine months ended September 30, 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 nine months ended September 30, 2024 and 2023 : September 30, 2024 September 30, 2023 (Dollars in Thousands) Beginning balance $ 602 $ 686 Additions (1) 26 — Sales proceeds — — Gross gains — — Gross losses — — Net gains — — Impairment ( 90 ) ( 69 ) Ending balance $ 538 $ 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 as of both September 30, 2024 and 2023. In addition, the Company did no t hold any consumer mortgage loans collateralized by residential real estate that were in the process of foreclosure as of both September 30, 2024 and 2023, respectively. Repossessed Assets The Company also acquires assets through the repossession of the underlying collateral of loans in default. Total repossessed assets as of September 30, 2024 and 2023 were $ 49 thousand and $ 0.3 million, respectively 26 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 September 30, 2024 and December 31, 2023. Goodwill impairment was neither indicated nor recorded during the nine months ended September 30, 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 nine months ended September 30, 2024 or the year ended December 31, 2023. The Company’s goodwill and other intangible assets (carrying basis and accumulated amortization) as of September 30, 2024 and December 31, 2023 were as follows: September 30, 2024 December 31, 2023 (Dollars in Thousands) Goodwill $ 7,435 $ 7,435 Core deposit intangible: Gross carrying amount 2,048 2,048 Accumulated amortization ( 1,981 ) ( 1,877 ) Core deposit intangible, net 67 171 Total $ 7,502 $ 7,606 The Company’s estimated remaining amortization expense on intangible assets as of September 30, 2024 was as follows: Amortization Expense (Dollars in Thousands) 2024 $ 18 2025 49 Total $ 67 The net carrying amount of the Company’s core deposit premiums is not considered recoverable if it exceeds the sum of the undiscounted cash flows expected to result from use and eventual disposition. That assessment is based on the carrying amount of the intangible assets subject to amortization at the date on which it is tested for recoverability. Intangible assets subject to amortization are tested by the Company for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. 7. BORROWINGS Short-Term Borrowings Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, and short-term FHLB advances with original maturities of one year or less. • Federal funds purchased, which represent unsecured lines of credit that generally mature within one to 90 days , are available to the Bank through arrangements with correspondent banks and the FRB. As of both September 30, 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 September 30, 2024 and December 31, 2023. • Short-term FHLB advances are secured borrowings available to the Bank as an alternative funding source. As of September 30, 2024 and December 31, 2023, the Bank had zero and $ 10.0 million, respectively, in outstanding FHLB advances with original maturities of less than one year. 27 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 September 30, 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 $ 10.9 million and $ 10.8 as of September 30, 2024 and December 31, 2023 , respectively. The table below provides additional information related to the Notes as of and for the nine months ended September 30, 2024 and 2023 . September 30, September 30, 2024 2023 (Dollars in Thousands) Balance at period-end $ 10,854 $ 10,781 Average balance during the period $ 10,848 $ 10,775 Maximum month-end balance during the period $ 10,854 $ 10,781 Average rate paid during the period, including amortization of debt issuance costs 4.16 % 4.16 % Weighted average remaining maturity (in years) 7.00 8.00 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 September 30, 2024 and December 31, 2023, the Company’s available unused lines of credit consisted of the following: Available Unused Lines of Credit Collateral Requirements September 30, 2024 December 31, 2023 Correspondent banks None $ 48.0 million $ 48.0 million FHLB advances (1) Subject to collateral $ 294.8 million $ 279.4 million FRB (2) Subject to collateral $ 165.2 million $ 161.7 million (1) These amounts represent the total remaining credit the Company has from the FHLB, but this credit can only be utilized to the extent that underlying collateral exists. The total lendable collateral value of assets pledged (including loans and investment securities) associated with FHLB advances and letters of credit totaled $ 54.8 million and $ 61.7 million as of September 30, 2024 and December 31, 2023, respectively. The Company’s collateral exposure with the FHLB in the form of advances and letters of credit was $ 30.0 million and $ 40.0 million as of September 30, 2024 and December 31, 2023, respectively, leaving an excess of collateral of $ 24.8 million and $ 21.7 million available to utilize for additional credit as of the respective dates. The Company also has the ability to pledge additional assets to increase the availability of borrowings. (2) 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. 28 8. INCOME TAXES The provision for income taxes was $ 2.0 million for both the nine months ended September 30, 2024 and 2023. The Company’s effective tax rate was 23.5 % and 24.4 % , respectively, for the same periods. The effective tax rate is impacted by recurring permanent differences, such as those associated with bank-owned life insurance and tax-exempt investment and loan income. The Company had a net deferred tax asset of $ 3.8 million and $ 5.3 million as of September 30, 2024 and December 31, 2023 , respectively. The net deferred tax asset, which is included on the interim condensed consolidated balance sheets 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. 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 $ 2.7 million and $ 2.9 million as of September 30, 2024 and December 31, 2023, respectively. 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 September 30, 2024 and December 31, 2023, a total of 106,897 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 September 30, 2024, only stock options and restricted stock have been granted. Stock-based compensation expense related to stock awards totaled $ 0.4 million for both the nine months ended September 30, 2024 and 2023, respectively. 29 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 nine months ended September 30, 2024 or 2023. The following table summarizes the Company’s stock option activity for the periods presented. Nine Months Ended September 30, 2024 September 30, 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 86,700 8.14 — — Expired 7,600 8.09 — — Forfeited — — — — Options outstanding, end of period 317,600 $ 10.26 419,650 $ 9.79 Options exercisable, end of period 317,600 $ 10.26 419,650 $ 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 $ 0.5 million and $ 0.1 as of September 30, 2024 and 2023, respectively. Restricted Stock During the nine months ended September 30, 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 and nine months ended September 30, 2024 and 2023: Location in the Condensed Three Months Ended Nine Months Ended Consolidated Statements of Operations September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (Dollars in Thousands) (Dollars in Thousands) Operating lease income (1) Lease income $ 260 $ 241 $ 770 $ 707 Operating lease expense (2) Net occupancy and equipment $ 147 $ 108 $ 460 $ 324 (1) Operating lease income includes rental income from owned properties. (2) Includes short-term lease costs. For the three and nine months ended September 30, 2024 and 2023 , short-term lease costs were nominal in amount. 30 The following table provides supplemental lease information for operating leases on the interim condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023: Location in the Condensed Consolidated Balance Sheet September 30, 2024 December 31, 2023 (Dollars in Thousands) Operating lease right-of-use assets Other assets $ 2,003 $ 2,019 Operating lease liabilities Other liabilities $ 2,052 $ 2,055 Weighted-average remaining lease term (in years) 5.62 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 nine months ended September 30, 2024 and 2023: Nine Months Ended September 30, 2024 September 30, 2023 (Dollars in Thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 295 $ 323 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 September 30, 2024: Minimum Rental Payments (Dollars in Thousands) 2024 $ 100 2025 295 2026 302 2027 308 2028 269 2029 and thereafter 930 Total future minimum lease payments $ 2,204 Less: Imputed interest 152 Total operating lease liabilities $ 2,052 12. DERIVATIVE FINANCIAL INSTRUMENTS The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposures to business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amounts, sources, and duration of assets and liabilities. The Company uses interest rate 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. Interest rate derivative instruments utilized by the Company generally include interest rate swap contracts or option contracts, such as caps and floors. The Company’s existing credit derivatives result from participations of loan participation arrangements, and therefore, are not used to manage interest rate risk in the Company’s assets or liabilities.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. 31 As of September 30, 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. Cash Flow Hedges In August 2024, the Company entered into two forward starting interest rate swap contracts with the objective of protecting the Company against variability in expected future cash flows attributed to changes in the SOFR interest rate on the designated notional of interest-bearing liabilities. Each of the contracts has a $ 20 million notional amount, or $ 40 million in aggregate. The interest rate swaps were designated as derivative instruments in cash flow hedges. In accordance with the related contracts, the Company pays a fixed interest rate and receives a variable interest rate based on the SOFR, on the notional amounts, with quarterly net settlements. The swap contracts are scheduled to terminate on September 6, 2027 and March 15, 2028 . As of September 30, 2024, the hedge relationships for both swaps were designated effective, and accordingly, changes in the fair value of the contracts were included as an adjustment to accumulated other comprehensive income. Fair Value 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 $ 30.0 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. In accordance with the related contracts, 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 September 30, 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. Interest Rate Floors In March 2024, the Company entered into two interest rate floor contracts, each with a notional amount of $ 25.0 million, or $ 50.0 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 over the term of each contract. Both of the derivative contracts are intended to mitigate the Company’s risk of loss associated with downward shifts 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 . Credit Derivatives In September 2024, the Company entered into a credit risk participation agreement with a lead participant bank with which the Company shares a participation loan. For participating in the agreement, the Company received a one-time fee which was included in other liabilities. The derivative is not eligible for hedge accounting treatment. Accordingly, valuation changes are recorded directly to non-interest income or expense. Previously Terminated Hedges 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 $ 0.4 million and $ 0.7 million as of September 30, 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 zero and $ 0.4 million as of September 30, 2024 and December 31, 2023, respectively. 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 was reclassified to reduce interest expense over the original term of the swap contract. Remaining unrealized gains associated with this terminated cash flow hedge totaled zero and $ 84 thousand as of September 30, 2024 and December 31, 2023, respectively. 32 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 September 30, 2024 and December 31, 2023. As of September 30, 2024 As of December 31, 2023 Estimated Estimated Fair Value Fair Value Notional Amount Gain (Loss) (1) Notional Amount Gain (Loss) (1) (Dollars in Thousands) Derivatives designated as hedging instruments: Fair value hedges: Interest rate swaps related to fixed rate indirect consumer loans $ 30,000 $ ( 283 ) $ 30,000 $ ( 119 ) Total fair value hedges ( 283 ) ( 119 ) Cash flow hedges: Interest rate swaps related to interest-bearing liabilities $ 40,000 $ ( 264 ) $ — — Total cash flow hedges ( 264 ) — Total derivatives designated as hedging instruments, net ( 547 ) ( 119 ) Derivatives not designated as hedging instruments: Interest rate floors $ 50,000 109 $ — — Credit risk participation agreement $ 6,998 ( 4 ) $ — — Total derivatives not designated as hedging instruments, net $ 105 $ — (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 and nine months ended September 30, 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 Nine Months Ended Consolidated Statements of Operations September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (Dollars in Thousands) (Dollars in Thousands) Interest income Interest and fees on loans $ 209 $ 258 $ 729 $ 603 Interest expense Interest on deposits 93 120 333 376 Interest expense Interest on borrowings 12 36 84 108 Non-interest income Other non-interest income 27 — 27 — Non-interest expense Other non-interest expense 72 — 10 — Net increase to income before income taxes $ 413 $ 414 $ 1,183 $ 1,087 33 13. OTHER OPERATING INCOME AND EXPENSE Other Operating Income Other operating income for the three and nine months ended September 30, 2024 and 2023 consisted of the following: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (Dollars in Thousands) Bank-owned life insurance $ 136 $ 119 $ 400 $ 348 ATM fee income 90 93 272 315 Gain on sales of premises and equipment and other assets — 18 — 18 Other income 103 64 250 208 Total $ 329 $ 294 $ 922 $ 889 Other Operating Expense Other operating expense for the three and nine months ended September 30, 2024 and 2023 consisted of the following: Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 (Dollars in Thousands) Postage, stationery and supplies $ 106 $ 151 $ 420 $ 472 Telephone/data communication 197 128 582 479 Collection and recoveries 47 71 107 252 Directors fees 81 94 262 284 Software amortization 62 86 239 313 Other real estate/foreclosure expense, net 31 9 92 30 Other expense 575 545 1,593 1,769 Total $ 1,099 $ 1,084 $ 3,295 $ 3,599 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: September 30, 2024 December 31, 2023 (Dollars in Thousands) Standby letters of credit $ — $ — Standby performance letters of credit $ 916 $ 669 Commitments to extend credit $ 120,135 $ 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 September 30, 2024 and December 31, 2023, the potential amounts of future payments that the 34 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 September 30, 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 September 30, 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, and 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. 35 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 nine months ended September 30, 2024 or the year ended December 31, 2023. 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. 36 The following table presents assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023. Fair Value Measurements as of September 30, 2024 Using Totals At September 30, 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 $ 60,759 $ — $ 60,759 $ — Commercial 12,821 — 12,821 — Obligations of U.S. government-sponsored agencies 11,274 — 11,274 — Obligations of states and political subdivisions 1,555 — 1,555 — Corporate notes 15,517 — 15,517 — U.S. Treasury securities 42,349 42,349 — — Derivative contracts: Other assets - interest rate floors 109 — 109 — Other liabilities - interest rate swaps 547 547 Other liabilities - credit risk participation agreement 4 4 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 — — Derivative contracts: Other liabilities - interest rate swaps 119 — 119 — 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. 37 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 September 30, 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 September 30, 2024 and December 31, 2023: Fair Value Measurements as of September 30, 2024 Using Totals At September 30, 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 $ 3,908 $ — $ — $ 3,908 OREO and other assets held-for-sale 538 — — 538 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 38 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 September 30, 2024 and December 31, 2023. The tables include 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 September 30, 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 September 30, 2024 Valuation Technique Unobservable Input Quantitative Range of Unobservable Inputs (Weighted Average) (Dollars in Thousands) Non-recurring fair value measurements: Impaired loans $ 3,908 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 $ 538 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 % 39 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 and cash equivalents: The carrying amount of cash and cash equivalents approximates fair value. Federal funds sold and securities purchased under reverse repurchase agreements: Federal funds sold and securities purchased under reverse repurchase agreements all contain maturities of 30 days or less , and therefore, their carrying amounts approximate 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. 40 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 September 30, 2024 and December 31, 2023 were as follows: September 30, 2024 Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 (Dollars in Thousands) Assets: Cash and cash equivalents $ 82,309 $ 82,309 $ 82,309 $ — $ — Investment securities available-for-sale 144,275 144,275 42,349 101,926 — Investment securities held-to-maturity 769 736 — 736 — Federal funds sold and securities purchased under reverse repurchase agreements 15,524 15,524 — 15,524 — Federal Home Loan Bank stock 781 781 — — 781 Loans, net of allowance for credit losses 793,192 751,685 — — 751,685 Other assets - interest rate floors 109 109 — 109 — Liabilities: Deposits 981,149 923,979 — 923,979 — Short-term borrowings — — — — — Long-term borrowings 10,854 9,582 — 9,582 — Other liabilities - interest rate swaps 547 547 — 547 — Other liabilities - credit risk participation agreement 4 4 — 4 — December 31, 2023 Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 (Dollars in Thousands) Assets: Cash and cash equivalents $ 50,279 $ 50,279 $ 50,279 $ — $ — Investment securities available-for-sale 135,565 135,565 54,002 81,563 — Investment securities held-to-maturity 1,104 1,041 — 1,041 — Federal funds sold 9,475 9,475 — 9,475 — Federal Home Loan Bank stock 1,201 1,201 — — 1,201 Loans, net of allowance for credit losses 811,284 773,800 — — 773,800 Liabilities: Deposits 950,191 882,746 — 882,746 — Short-term borrowings 10,000 10,000 — 10,000 — Long-term borrowings 10,799 9,814 9,814 Other liabilities - interest rate swaps 119 119 119 41 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 additional 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 September 30, 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 September 30, 2024 to December 31, 2023, while comparing income and expense for the nine months ended September 30, 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 nine months ended September 30, 2024, the banking industry continued to be impacted by economic volatility and the higher interest rate environment that has persisted since 2022. The U.S. inflation rate, as measured by the consumer price index, slowed for a sixth consecutive month in September 2024 to 2.4%. While the inflation rate remained elevated above the Federal Reserve Bank’s (“FRB”) longer run target of 2%, the trend downward led the Open Market Committee of the FRB to reduce the federal funds rate by 50 basis points, bringing the target federal funds rate to a range of 4.75% to 5.00% as of September 30, 2024. This signaled at least a partial shift in focus by the FRB to managing employment levels more closely, while continuing to monitor inflation levels. The U.S. unemployment rate trended lower during the third quarter of 2024, easing to 4.1% in September 2024, while the U.S. economy, as measured by gross domestic product, expanded at an annualized pace of 2.8% in the third quarter of 2024. U.S. Treasury rates decreased substantially during the third quarter of 2024, with short term rates generally decreasing in greater magnitude than long term rates causing a flattening of the treasury curve. While benchmark interest rates eased during the third quarter of 2024, competitive pressures in the banking industry remained elevated, particularly with respect to deposit pricing. In addition, geopolitical uncertainty on the world stage, as well as political uncertainty with respect to the U.S. election cycle, persisted through the quarter. 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 inflationary pressure, higher interest rates, and a fiercely competitive environment could put downward pressure on the Company’s financial position and results of operations. 42 EXECUTIVE OVERVIEW The Company earned net income of $2.2 million, or $0.36 per diluted common share, during the three months ended September 30, 2024, compared to $2.1 million, or $0.33 per diluted common share, for the three months ended September 30, 2023. For the nine months ended September 30, 2024, net income totaled $6.5 million, or $1.04 per diluted common share, compared to $6.2 million, or $0.97 per diluted common share, for the nine months ended September 30, 2023. Summarized condensed consolidated statements of operations are included below for the three and nine months ended September 30, 2024 and 2023. Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2024 2023 2024 2023 (Dollars in Thousands, Except Per Share Data) Interest income $ 15,017 $ 13,902 $ 43,840 $ 38,861 Interest expense 5,832 4,419 16,439 10,621 Net interest income 9,185 9,483 27,401 28,240 Provision for credit losses 152 184 152 753 Net interest income after provision for credit losses 9,033 9,299 27,249 27,487 Non-interest income 901 837 2,601 2,465 Non-interest expense 6,990 7,319 21,409 21,740 Income before income taxes 2,944 2,817 8,441 8,212 Provision for income taxes 722 704 1,985 2,004 Net income $ 2,222 $ 2,113 $ 6,456 $ 6,208 Basic net income per share $ 0.38 $ 0.35 $ 1.10 $ 1.04 Diluted net income per share $ 0.36 $ 0.33 $ 1.04 $ 0.97 Dividends per share $ 0.05 $ 0.05 $ 0.15 $ 0.15 The discussion that follows summarizes the most significant activity that drove changes in the Company’s operating results during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. Net Interest Income and Margin Net interest income decreased by $0.8 million, or 3.0%, comparing the nine months ended September 30, 2024 to the nine months ended September 30, 2023. In general, net interest margin has declined amid the higher interest rate environment that has persisted since 2022, as interest-bearing liabilities repriced at faster rates than interest-bearing assets. For the nine months ended September 30, 2024, net interest income totaled $27.4 million, compared to $28.2 million during the nine months ended September 30, 2023. Net interest margin totaled 3.65% for the nine months ended September 30, 2024, compared to 3.93% for the nine months ended September 30, 2023. Provision for Credit Losses For the nine months ended September 30, 2024, the provision for credit losses totaled $0.2 million, compared to $0.8 million for the nine months ended September 30, 2023. The decrease in the provision for credit losses comparing the first nine months of 2024 to the corresponding period of 2023 was due primarily to decreases in loan volume, as well as adjustments in economic forecasts that impact the calculation of the allowance for credit losses ("ACL") on loans and leases. As of September 30, 2024, the Company’s ACL on loans and leases as a percentage of total loans was 1.26%, compared to 1.28% as of December 31, 2023. Non-interest Income Non-interest income remained relatively consistent, totaling $2.6 million and $2.5 million for the nine months ended September 30, 2024 and 2023, respectively. 43 Non-interest Expense For the nine months ended September 30, 2024, non-interest expense totaled $21.4 million, compared to $21.7 million for the nine months ended September 30, 2023. Salaries and benefits expense decreased during the first nine months of 2024 compared to the corresponding period of 2023, primarily due to lower staff levels resulting from strategic initiatives implemented by the Company in prior years. In addition, other expenses were lower during the nine months ended September 30, 2024 compared to the corresponding period of 2023, due primarily to the recovery of check fraud losses and reduced collection expenses. These reductions in non-interest expense during the first nine months of 2024 were partially offset by increases associated with occupancy and professional services expenses. Total Assets As of September 30, 2024, the Company’s assets totaled $1,100.2 million, compared to $1,072.9 million as of December 31, 2023, an increase of 2.5%. Loans Total loans decreased by $18.5 million, or 2.2%, as of September 30, 2024, compared to December 31, 2023. The decrease was primarily driven by payoffs of construction loans and, to a lesser extent, reductions in the consumer indirect and commercial and industrial ("C&I") loan categories. These reductions were partially offset by growth in commercial real estate (non-farm, non-residential) and multi-family residential loans. While the Company experienced a reduction in loan volume during the first nine months of 2024, average loan balances remained higher than average loan balances during the corresponding period of 2023. For the nine months ended September 30, 2024, average total loans were $821.0 million, compared to $795.0 million during the nine months ended September 30, 2023. Asset Quality Nonperforming assets, including loans in non-accrual status and OREO, totaled $6.6 million as of September 30, 2024, compared to $3.0 million as of December 31, 2023. The increase in nonperforming assets resulted from two loans (from the C&I and 1-4 family residential categories) that moved into non-accrual status during the third quarter of 2024. As a percentage of total assets, nonperforming assets totaled 0.60% as of September 30, 2024, compared to 0.28% as of December 31, 2023. Annualized net charge-offs as a percentage of average loans during the nine months ended September 30, 2024 totaled 0.10%, compared to 0.12% during the corresponding period of 2023. Deposit Growth Deposits totaled $981.1 million as of September 30, 2024, compared to $950.2 million as of December 31, 2023. The increase since December 31, 2023 was due primarily to increased interest-bearing time deposits and interest-bearing demand deposits, partially offset by decreased money market and savings accounts. Core deposits, which exclude time deposits of $250 thousand or more and all wholesale brokered deposits, totaled $833.5 million, or 85.0% of total deposits, as of September 30, 2024, compared to $819.5 million, or 86.2% of total deposits, as of December 31, 2023. Deployment of Funds As of September 30, 2024, the Company held cash, federal funds sold and securities purchased under reverse repurchase agreements totaling $97.8 million, or 8.9% 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 $145.0 million as of September 30, 2024, compared to $136.7 million as of December 31, 2023. During the nine months ended September 30, 2024, $27.5 million was invested in taxable U.S. agency-sponsored bonds, resulting in improved yields in the investment portfolio. As of September 30, 2024, the expected average life of securities in the investment portfolio was 4.1 years, compared to 3.9 years as of December 31, 2023. Shareholders’ Equity Shareholders’ equity increased by $7.9 million, or 8.7%, as of September 30, 2024, compared to December 31, 2023. The increase in shareholders’ equity during the nine months ended September 30, 2024 resulted primarily from earnings, net of dividends paid and repurchases of shares of the Company's common stock. In addition, shareholders' equity was positively impacted during the nine months ended September 30, 2024 by reductions in the Company's accumulated other comprehensive loss resulting from changes in market interest rates, as well as the maturity of lower yielding investment securities. 44 Cash Dividends The Company declared cash dividends totaling $0.15 per share on its common stock during both the nine months ended September 30, 2024 and 2023. Share Repurchases During the nine months ended September 30, 2024, the Company repurchased 106,500 shares of its common stock at a weighted average price of $10.67 per share. The repurchases were completed under the Company’s previously announced share repurchase program. As of September 30, 2024, 352,813 shares remained available for repurchase under the program. Regulatory Capital During the nine months ended September 30, 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 September 30, 2024, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 11.45%. Its total capital ratio was 12.63%, and its Tier 1 leverage ratio was 9.49%. Liquidity As of September 30, 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. Banking Center Growth As part of the Company’s overall growth strategy, during the nine months ended September 30, 2024, the Company opened a new banking center in the Bearden area of Knoxville, Tennessee that replaced the Bank’s previously existing Knoxville-Bearden location. In addition, the Company commenced renovation of a banking center office in Daphne, Alabama that was purchased from another financial institution. This location is expected to serve as the Bank’s initial deposit gathering facility in the Daphne/Mobile area, and it is anticipated that the location will open to the public in 2025. 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, securities purchased under reverse repurchase agreements 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 and nine months ended September 30, 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. 45 Three Months Ended Three Months Ended September 30, 2024 September 30, 2023 Average Balance Interest Annualized Yield/ Rate % Average Balance Interest Annualized Yield/ Rate % ASSETS Interest-earning assets: Total loans (1) $ 821,444 $ 13,206 6.40 % $ 821,294 $ 12,584 6.08 % Taxable investment securities 143,802 1,117 3.09 % 123,290 682 2.19 % Tax-exempt investment securities 1,019 4 1.56 % 1,037 3 1.15 % Federal Home Loan Bank stock 825 16 7.72 % 1,001 21 8.32 % Federal funds sold and securities purchased under reverse repurchase agreements 5,285 71 5.34 % 1,069 14 5.20 % Interest-bearing deposits in banks 43,191 603 5.55 % 44,379 598 5.35 % Total interest-earning assets 1,015,566 15,017 5.88 % 992,070 13,902 5.56 % Noninterest-earning assets 64,632 61,235 Total $ 1,080,198 $ 1,053,305 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing deposits: Demand deposits $ 209,322 $ 566 1.08 % $ 206,540 $ 176 0.34 % Savings deposits 244,022 1,650 2.69 % 244,932 1,570 2.54 % Time deposits 355,819 3,493 3.91 % 323,824 2,476 3.03 % Total interest-bearing deposits 809,163 5,709 2.81 % 775,296 4,222 2.16 % Noninterest-bearing demand deposits 153,171 — — 161,381 — — Total deposits 962,334 5,709 2.36 % 936,677 4,222 1.79 % Borrowings 11,769 123 4.16 % 19,468 197 4.01 % Total funding costs 974,103 5,832 2.38 % 956,145 4,419 1.83 % Other noninterest-bearing liabilities 10,095 10,263 Shareholders’ equity 96,000 86,897 Total $ 1,080,198 $ 1,053,305 Net interest income (2) $ 9,185 $ 9,483 Net interest margin 3.60 % 3.79 % ( 1) For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. These loans averaged $3.4 million and $2.0 million for the three months ended September 30, 2024 and 2023, respectively. (2) Loan fees are included in interest amounts presented. Loan fees totaled $0.2 million and $0.1 million for the three months ended September 30, 2024 and 2023, respectively. 46 Nine Months Ended Nine Months Ended September 30, 2024 September 30, 2023 Average Balance Interest Annualized Yield/ Rate % Average Balance Interest Annualized Yield/ Rate % ASSETS Interest-earning assets: Total loans (1) $ 821,008 $ 38,989 6.34 % $ 795,033 $ 35,330 5.94 % Taxable investment securities 139,876 3,084 2.95 % 126,341 2,033 2.15 % Tax-exempt investment securities 1,022 10 1.31 % 1,048 10 1.28 % Federal Home Loan Bank stock 902 53 7.85 % 1,347 75 7.44 % Federal funds sold and securities purchased under reverse repurchase agreements 5,580 226 5.41 % 1,415 51 4.82 % Interest-bearing deposits in banks 35,748 1,478 5.52 % 35,437 1,362 5.14 % Total interest-earning assets 1,004,136 43,840 5.83 % 960,621 38,861 5.41 % Noninterest-earning assets 66,076 61,484 Total $ 1,070,212 $ 1,022,105 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing deposits: Demand deposits $ 204,805 $ 1,242 0.81 % $ 216,445 $ 557 0.34 % Savings deposits 250,528 5,161 2.75 % 221,293 3,279 1.98 % Time deposits 346,584 9,615 3.71 % 297,708 5,845 2.62 % Total interest-bearing deposits 801,917 16,018 2.67 % 735,446 9,681 1.76 % Noninterest-bearing demand deposits 151,317 — — 162,084 — — Total deposits 953,234 16,018 2.24 % 897,530 9,681 1.44 % Borrowings 13,710 421 4.10 % 29,375 940 4.28 % Total funding costs 966,944 16,439 2.27 % 926,905 10,621 1.53 % Other noninterest-bearing liabilities 9,816 9,722 Shareholders’ equity 93,452 85,478 Total $ 1,070,212 $ 1,022,105 Net interest income (2) $ 27,401 $ 28,240 Net interest margin 3.65 % 3.93 % (1) For the purpose of these computations, non-accruing loans are included in the average loan amounts outstanding. These loans averaged $2.7 million and $1.5 million for the nine months ended September 30, 2024 and 2023, respectively. (2) Loan fees are included in interest amounts presented. Loan fees totaled $0.5 million and $0.4 million for the nine months ended September 30, 2024 and 2023, respectively. 47 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 September 30, 2024 Nine Months Ended September 30, 2024 Compared to Compared to Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 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 $ 2 $ 620 $ 622 $ 1,154 $ 2,505 $ 3,659 Taxable investment securities 113 322 435 218 833 1,051 Tax-exempt investment securities — 1 1 — — — Federal Home Loan Bank stock (4 ) (1 ) (5 ) (25 ) 3 (22 ) Federal funds sold and securities purchased under reverse repurchase agreements 55 2 57 150 25 175 Interest-bearing deposits in banks (16 ) 21 5 12 104 116 Total interest-earning assets 150 965 1,115 1,509 3,470 4,979 Interest expense on: Demand deposits 2 388 390 (30 ) 715 685 Savings deposits (6 ) 86 80 433 1,449 1,882 Time deposits 245 772 1,017 960 2,810 3,770 Borrowings (78 ) 4 (74 ) (501 ) (18 ) (519 ) Total interest-bearing liabilities 163 1,250 1,413 862 4,956 5,818 Increase (decrease) in net interest income $ (13 ) $ (285 ) $ (298 ) $ 647 $ (1,486 ) $ (839 ) Interest income increased by $5.0 million, comparing the nine months ended September 30, 2024 to the nine months ended September 30, 2023. Of the increase, $3.5 million was attributable to higher average yields on interest-earning assets, while $1.5 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 generally persisted through the nine months ended September 30, 2024. The increase in interest income was offset by an increase in interest expense of $5.8 million, comparing the nine months ended September 30, 2024 to the nine months ended September 30, 2023. Of the increase, $4.9 million was attributable to the rise in market interest rates, while $0.9 million was attributable to growth in interest-bearing liabilities, primarily savings and time deposits. The rising interest rate environment has caused compression of the Company’s net interest margin in recent periods, as the cost of interest-bearing liabilities has generally increased at a faster pace than interest-earning assets. The Company’s net interest margin during the nine months ended September 30, 2024 totaled 3.65%, compared to 3.93% during the nine months ended September 30, 2023. During the third quarter of 2024, the higher interest rate environment began to ease with notable reductions in yields on U.S. treasury instruments, as well as a 50-basis point reduction in the federal funds rate. Should interest rate reductions continue to occur, both the Company’s interest-earning assets and interest-bearing liabilities will be impacted. However, the speed with which interest revenues and expenses reprice can vary significantly based on a number of factors, including, but not limited to, existing contractual terms and the competitive environment, as well as loan and deposit customer behavior and preferences. Management continues to focus efforts to both maximize earning asset growth and reduce interest expense; however, the results of these efforts cannot be fully predicted. In addition, should market interest rates increase or decrease at significant levels, especially in a short period of time, the Company’s net interest income could be negatively impacted. 48 Provision for Credit Losses The Company recorded a provision for credit losses of $0.2 million during the nine months ended September 30, 2024, compared to a provision of $0.8 million during the nine months ended September 30, 2023. The decrease in the provision for credit losses comparing the first nine months of 2024 to the corresponding period of 2023 was due primarily to decreases in loan volume, as well as adjustments in economic forecasts that impact the calculation of the ACL on loans and leases. As of September 30, 2024, the Company’s ACL on loans and leases as a percentage of total loans was 1.26%, compared to 1.28% as of December 31, 2023. Net charge-offs totaled $0.6 million for both the nine months ended September 30, 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 sustained elevated 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 September 30, Nine Months Ended September 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change (Dollars in Thousands) (Dollars in Thousands) Service charges and other fees on deposit accounts $ 312 $ 302 $ 10 3.3 % $ 909 $ 869 $ 40 4.6 % Bank-owned life insurance 136 119 17 14.3 % 400 348 52 14.9 % Gain on sales of premises and equipment and other assets — 18 (18 ) (100.0 )% — 18 (18 ) (100.0 )% Lease income 260 241 19 7.9 % 770 707 63 8.9 % ATM fee income 90 93 (3 ) (3.2 )% 272 315 (43 ) (13.7 )% Other income 103 64 39 60.9 % 250 208 42 20.2 % Total non-interest income $ 901 $ 837 $ 64 7.6 % $ 2,601 $ 2,465 $ 136 5.5 % The Company’s non-interest income increased by $0.1 million comparing the nine months ended September 30, 2024 to the nine months ended September 30, 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 September 30, Nine Months Ended September 30, 2024 2023 $ Change % Change 2024 2023 $ Change % Change (Dollars in Thousands) (Dollars in Thousands) Salaries and employee benefits $ 3,837 $ 4,120 $ (283 ) (6.9 )% $ 11,815 $ 12,310 $ (495 ) (4.0 )% Net occupancy and equipment 958 897 61 6.8 % 2,806 2,625 181 6.9 % Computer services 449 464 (15 ) (3.2 )% 1,336 1,315 21 1.6 % Insurance expense and assessments 348 423 (75 ) (17.7 )% 1,153 1,156 (3 ) (0.3 )% Fees for professional services 299 331 (32 ) (9.7 )% 1,004 735 269 36.6 % Postage, stationery and supplies 106 151 (45 ) (29.8 )% 420 472 (52 ) (11.0 )% Telephone/data communications 197 128 69 53.9 % 582 479 103 21.5 % Collection and recoveries 47 71 (24 ) (33.8 )% 107 252 (145 ) (57.5 )% Directors fees 81 94 (13 ) (13.8 )% 262 284 (22 ) (7.7 )% Software amortization 62 86 (24 ) (27.9 )% 239 313 (74 ) (23.6 )% Other real estate/foreclosure expense, net 31 9 22 244.4 % 92 30 62 206.7 % Other expense 575 545 30 5.5 % 1,593 1,769 (176 ) (9.9 )% Total non-interest expense $ 6,990 $ 7,319 $ (329 ) (4.5 )% $ 21,409 $ 21,740 $ (331 ) (1.5 )% Non-interest expense totaled $21.4 million and $21.7 million during the nine months ended September 30, 2024 and 2023, respectively. Salaries and benefits expense decreased during the first nine months of 2024 compared to the corresponding period of 2023, primarily due to lower staff levels resulting from strategic initiatives implemented by the Company in prior years. In addition, other expenses were lower during the nine months ended September 30, 2024 compared to the corresponding period of 2023, due primarily to the recovery of check fraud losses and reduced collection expenses. These reductions in non-interest expense during the first nine months of 2024 were partially offset by increases associated with occupancy and professional services expenses. 49 Provision for Income Taxes The provision for income taxes was $2.0 million for both the nine months ended September 30, 2024 and 2023, and the Company’s effective tax rate was 23.5% and 24.4%, 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 4.1 years and 3.9 years as of September 30, 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 September 30, 2024, available-for-sale securities totaled $144.3 million, or 99.5% 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 September 30, 2024, held-to-maturity securities totaled $0.8 million, or 0.5% 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. Net unrealized losses in the available-for-sale portfolio totaled $4.7 million as of September 30, 2024, compared to $9.3 million as of December 31, 2023. Net unrealized losses within the available-for-sale portfolio were recognized, net of tax, in accumulated other comprehensive loss. As of September 30, 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. During the nine months ended September 30, 2024, the Company purchased $27.5 million in taxable U.S. agency-sponsored securities that are included in the available-for-sale portfolio. The purchased securities offset $23.6 million in proceeds received by the Company associated with maturities and prepayments in the portfolio. In the higher interest rate environment, the securities purchased have served to increase the Company’s yield on taxable investment securities. For the nine months ended September 30, 2024, the yield on taxable investment securities totaled 2.95%, compared to 2.15% for the nine months ended September 30, 2023. 50 Loans and Leases The Company’s total loan portfolio decreased by $18.5 million, or 2.2%, as of September 30, 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 September 30, 2024: Quarter Ended 2024 2023 September 30, June 30, March 31, December 31, September 30, (Dollars in Thousands) Real estate loans: Construction, land development and other land loans $ 53,098 $ 72,183 $ 102,282 $ 88,140 $ 90,051 Secured by 1-4 family residential properties 70,067 70,272 74,361 76,200 83,876 Secured by multi-family residential properties 100,627 97,527 62,145 62,397 56,506 Secured by non-farm, non-residential properties 224,611 218,386 212,465 213,586 199,116 Commercial and industrial loans 44,872 46,249 57,112 60,515 59,369 Consumer loans: Direct 5,018 5,272 5,590 5,938 6,544 Branch retail 6,233 6,879 7,794 8,670 9,648 Indirect 298,782 302,358 301,192 306,345 310,190 Total loans 803,308 819,126 822,941 821,791 815,300 Allowance for credit losses on loans and leases 10,116 10,227 10,436 10,507 11,380 Net loans $ 793,192 $ 808,899 $ 812,505 $ 811,284 $ 803,920 As of September 30, 2024 and December 31, 2023, the composition of the non-farm, non-residential loan portfolio was as follows: September 30, 2024 December 31, 2023 Owner Occupied Non-Owner Occupied Total Owner Occupied Non-Owner Occupied Total (Dollars in Thousands) Office $ 12,639 $ 37,326 $ 49,965 $ 14,686 $ 30,693 $ 45,379 Retail single credit tenant — 41,798 41,798 — 43,113 43,113 Industrial 6,128 45,581 51,709 12,480 35,265 47,745 Storage 793 14,940 15,733 831 15,254 16,085 Retail services 15,195 — 15,195 16,016 — 16,016 Retail with anchor 3,091 13,725 16,816 376 11,953 12,329 Retail without anchor — — — 3,166 8,010 11,176 Nursing homes 8,362 — 8,362 — — — Hospitality — — — 501 5,346 5,847 Other 12,630 12,403 25,033 10,552 5,344 15,896 Total loans $ 58,838 $ 165,773 $ 224,611 $ 58,608 $ 154,978 $ 213,586 As of September 30, 2024 and December 31, 2023, the composition of the construction, land development, and other land loans loan portfolio was as follows: September 30, 2024 December 31, 2023 Owner Occupied Non-Owner Occupied Total Owner Occupied Non-Owner Occupied Total (Dollars in Thousands) Apartments $ — $ 49,365 $ 49,365 $ — $ 66,789 $ 66,789 Senior housing — — — 8,362 — 8,362 Medical office — — — — 6,584 6,584 Farmland 3,076 — 3,076 3,174 — 3,174 Residential — — — 1,152 — 1,152 Retail without anchor — — — 763 — 763 Other 205 452 657 725 591 1,316 Total loans $ 3,281 $ 49,817 $ 53,098 $ 14,176 $ 73,964 $ 88,140 51 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 September 30, 2024: Quarter Ended 2024 2023 September 30, June 30, March 31, December 31, September 30, (Dollars in Thousands) Balance at beginning of period $ 10,227 $ 10,436 $ 10,507 $ 11,380 $ 11,536 Charge-offs: Real estate loans: Construction, land development and other land loans — — — — — Secured by 1-4 family residential properties — — (2 ) (1 ) (41 ) Secured by multi-family residential properties — — — — — Secured by non-farm, non-residential properties — — — — — Commercial and industrial loans (16 ) (97 ) — — — Consumer loans: Direct (25 ) (6 ) (22 ) (50 ) (106 ) Branch retail (19 ) (16 ) (22 ) (86 ) (93 ) Indirect (351 ) (297 ) (344 ) (432 ) (199 ) Total charge-offs (411 ) (416 ) (390 ) (569 ) (439 ) Recoveries: Real estate loans: Construction, land development and other land loans — 20 — — — Secured by 1-4 family residential properties 11 12 23 14 16 Secured by multi-family residential properties — — — — — Secured by non-farm, non-residential properties — — — — — Commercial and industrial loans — — — — — Consumer loans: Direct 71 78 100 122 151 Branch retail 32 39 54 48 49 Indirect 46 58 30 9 7 Total recoveries 160 207 207 193 223 Net charge-offs (251 ) (209 ) (183 ) (376 ) (216 ) Provision for credit losses 140 — 112 (497 ) 60 Ending balance $ 10,116 $ 10,227 $ 10,436 $ 10,507 $ 11,380 Ending balance as a percentage of loans 1.26 % 1.25 % 1.27 % 1.28 % 1.40 % Net charge-offs as a percentage of average loans 0.12 % 0.10 % 0.09 % 0.19 % 0.10 % 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 September 30, 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. 52 Nonperforming Assets Nonperforming assets at the end of the five most recent quarters as of September 30, 2024 were as follows: Quarter Ended 2024 2023 September 30, June 30, March 31, December 31, September 30, (Dollars in Thousands) Non-accrual loans $ 6,051 $ 2,337 $ 2,393 $ 2,400 $ 2,432 Other real estate owned 538 542 572 602 617 Total $ 6,589 $ 2,879 $ 2,965 $ 3,002 $ 3,049 Nonperforming assets as a percentage of total assets 0.60 % 0.27 % 0.28 % 0.28 % 0.29 % The increase in nonperforming assets comparing September 30, 2024 to previous quarter-end dates in the table above resulted from two loans (from the C&I and 1-4 family residential categories) that moved into non-accrual status during the third quarter of 2024. 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 September 30, 2024 and December 31, 2023: As of and for the Nine Months Ended As of and for the Year Ended September 30, 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 $ 336 0.63 % -0.03 % $ 565 0.64 % — Secured by 1-4 family residential properties 464 0.66 % -0.08 % 591 0.78 % 0.05 % Secured by multi-family residential properties 676 0.67 % — 415 0.66 % — Secured by non-farm, non-residential properties 1,747 0.78 % — 1,425 0.67 % — Commercial and industrial loans 742 1.65 % 0.27 % 513 0.85 % — Consumer loans: Direct 51 1.03 % -4.34 % 64 1.06 % -0.06 % Branch retail 77 1.24 % -1.08 % 436 5.03 % 1.82 % Indirect 6,023 2.02 % 0.38 % 6,498 2.12 % 0.31 % Total $ 10,116 1.26 % 0.10 % $ 10,507 1.28 % 0.14 % Deposits Total deposits increased to $981.1 million as of September 30, 2024, from $950.2 million as of December 31, 2023, an increase of 3.3%. 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 $833.5 million, or 85.0% of total deposits, as of September 30, 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. 53 Other Interest-Bearing Liabilities Other interest-bearing liabilities that are used by the Company as an alternative source of funds consist of federal funds purchased, securities sold under agreements to repurchase, FHLB advances, and subordinated debt. As of September 30, 2024, other interest-bearing liabilities totaled 1.3% of total interest-bearing liabilities, compared to 2.5% as of December 31, 2023. Shareholders’ Equity As of September 30, 2024, shareholders’ equity totaled $98.5 million, or 9.0% 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 nine months ended September 30, 2024 resulted primarily from earnings, net of dividends paid and repurchases of shares of the Company's common stock. In addition, shareholders' equity was positively impacted during the nine months ended September 30, 2024 by reductions in the Company's accumulated other comprehensive loss resulting from changes in market interest rates, as well as the maturity of lower yielding investment securities. During both the nine months ended September 30, 2024 and 2023, the Company declared dividends totaling $0.15 per common share, or approximately $0.9 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. In addition, during the nine months ended September 30, 2024, the Company completed the repurchase of 106,500 shares of its common stock at a weighted average price of $10.67 per share. The repurchases were completed under the Company’s previously announced share repurchase program. As of September 30, 2024, 352,813 shares remained available for repurchase under the program. No shares were repurchased by the Company during the nine months ended September 30, 2023. 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 and securities purchased under reverse repurchase agreements, (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 $246.9 million as of September 30, 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 $29.5 million and $12.9 million of the investment portfolio as of September 30, 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 4.1 years and 3.9 years as of September 30, 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 zero and $10.0 million of outstanding borrowings under FHLB advances as of September 30, 2024 and December 31, 2023, respectively. The Company's use of FHLB advances varies depending on fluctuations in deposits and other funding sources, as well as their use in interest rate hedging strategies. 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 $10.9 million and $10.8 million as of September 30, 2024 and December 31, 2023, respectively. The Company had up to $294.8 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 September 30, 2024 and December 31, 2023, respectively. In addition, the Company had $48.0 million in unused established federal funds lines as of both September 30, 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 54 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 $165.2 and $161.7 million in borrowing capacity with the FRB’s discount window as of September 30, 2024 and December 31, 2023, respectively. 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 September 30, 2024 and December 31, 2023. September 30, 2024 December 31, 2023 (Dollars in Thousands) (Unaudited) (Unaudited) Liquidity from cash, federal funds sold and securities purchased under reverse repurchase agreements: Cash and cash equivalents $ 82,309 $ 50,279 Federal funds sold and securities purchased under reverse repurchase agreements 15,524 9,475 Total liquidity from cash, federal funds sold and securities purchased under reverse repurchase agreements 97,833 59,754 Liquidity from pledgable investment securities: Investment securities available-for sale, at fair value 144,275 135,565 Investment securities held-to-maturity, at amortized cost 769 1,104 Less: securities pledged (39,585 ) (41,375 ) Less: estimated collateral value discounts (9,930 ) (11,129 ) Liquidity from pledgable investment securities 95,529 84,165 Liquidity from unused lendable collateral (loans) at FHLB 24,771 21,696 Liquidity from unused lendable collateral (loans and securities) at FRB 165,157 161,729 Unsecured lines of credit with banks 48,000 48,000 Total readily available liquidity $ 431,290 $ 375,344 The table above calculates readily available liquidity by combining cash and cash equivalents, federal funds sold, securities purchased under reverse repurchase agreements 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 September 30, 2024 and December 31, 2023, the Company's total remaining credit availability with the FHLB was $294.8 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 September 30, 2024, the Company had approximately 30 thousand deposit accounts with an average balance of approximately $30.4 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 $233.4 million, or 23.8% of total deposits, as of September 30, 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. 55 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 September 30, 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% 14 13 +2% 26 25 +3% 39 37 -1% (16 ) (17 ) -2% (34 ) (38 ) -3% (53 ) (60 ) Cumulative Change in Net Interest Income from Level Interest Rate Forecast (dollars in thousands, pre-tax): 1 Year 2 Years +1% $ 1,500 $ 2,896 +2% 2,917 5,574 +3% 4,300 8,235 -1% (1,758 ) (3,739 ) -2% (3,724 ) (8,338 ) -3% (5,834 ) (13,310 ) 56 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 September 30, 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 September 30, 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 September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 57 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 third 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) July 1 – July 31 972 $ 9.55 — 382,313 August 1 – August 31 8,534 $ 10.45 8,500 373,813 September 1 – September 30 21,063 $ 10.98 21,000 352,813 Total 30,569 $ 10.79 29,500 352,813 (1) Includes 1,069 shares that were purchased in open-market transactions by an independent trustee for Bancshares’ 401(k) Plan during the third quarter of 2024. (2) 29,500 shares were repurchased during the third 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 September 30, 2024, Bancshares was authorized to repurchase up to 352,813 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). 58 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 July 24, 2024 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 000-14549), filed on July 24, 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 September 30, 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 September 30, 2024, formatted in Inline XBRL. ________________ *Filed herewith 59 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: November 8, 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) 60