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Thomas S. Elley

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Interest Income – Interest and fees on loans increased by $736,000 during the nine months ended September 30, 2017, compared to the corresponding period of 2016. The increase resulted from increased average loan volume and was partially offset by a decrease of $157,000 in interest on investment securities as proceeds from the scheduled maturity of investments were redeployed into the loan portfolio.

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Loan Growth – Net loans increased $15.3 million, or 6.3% on an annualized basis, during the nine months ended September 30, 2017. Growth in the Company’s banking subsidiary, First US Bank (the “Bank”), totaled $11.5 million during the nine months ended September 30, 2017, while the Company’s finance company subsidiary, Acceptance Loan Company, Inc. (“ALC”), grew its loan portfolio by $3.8 million. The third quarter represented the most significant growth quarter of the first nine months of 2017, with total growth in net loans of $7.5 million, or 9.1% on an annualized basis. Growth in net loans at the Bank totaled $6.2 million, while ALC’s growth totaled $1.3 million during the quarter.

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Asset Quality Improvement – Non-performing assets, including loans in non-accrual status and other real estate owned (OREO), decreased to $5.8 million, or 0.94% of total assets, as of September 30, 2017, compared to $7.3 million, or 1.20% of total assets, as of December 31, 2016.

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Pre-provision net interest income totaled $7.1 million in the third quarter of 2017, compared to $7.2 million in the third quarter of 2016. The decrease was due primarily to the collection of interest associated with the previously mentioned judgment filed on a nonaccrual asset totaling approximately $100,000 in 2016 that was not repeated in 2017. Average loans totaled $331.2 million during the third quarter of 2017, compared to $312.5 million during the third quarter of 2016. Net yield on interest-earning assets was 5.11% for the third quarter of 2017, compared to 5.20% during the third quarter of 2016. For the nine months ended September 30, 2017, pre-provision net interest income totaled $21.1 million, compared to $20.8 million during the same period of 2016. Average loans totaled $327.3 million and $283.0 million during the nine months ended September 30, 2017 and 2016, respectively. Net yield on interest-earning assets was 5.08% during the first nine months of 2017, compared to 5.16% during the first nine months of 2016.

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The provision for loan losses was $373,000 for the third quarter of 2017, compared to $680,000 during the third quarter of 2016. The decrease resulted in large part from the resolution of an impaired loan relationship at the Bank during the third quarter of 2017. The resolution of this loan allowed the Bank’s reserve to be reduced by $130,000 during the quarter. For the nine months ended September 30, 2017, the provision for loan losses totaled $1.5 million, compared to $1.4 million for the nine months ended September 30, 2016. The Company’s allowance for loan losses as a percentage of loans was 1.40% as of September 30, 2017, compared to 1.48% as of December 31, 2016.

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Non-interest income totaled $1.2 million in the third quarter of 2017, compared to $1.6 million in the third quarter of 2016. For the nine months ended September 30, 2017, non-interest income totaled $3.3 million, compared to $4.0 million for the first nine months of the previous year. The decrease in non-interest income in both the three- and nine-month periods of 2017 resulted from reductions in gains on the sale and prepayment of investment securities at the Bank, as well as reductions in credit insurance revenues and other ancillary revenues at ALC. Additionally, approximately $150,000 in settlement amounts associated with the previously mentioned judgment on a nonaccrual asset was recognized as other income during the third quarter of 2016 and not repeated in 2017.

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Non-interest expense totaled $7.2 million in the third quarter of 2017, compared to $7.3 million in the third quarter of 2016. For the nine months ended September 30, 2017 and 2016, non-interest expense totaled $21.1 million and $21.7 million, respectively. The decrease in non-interest expense in both periods resulted primarily from reductions in regulatory assessments, insurance expense, occupancy and equipment expense, professional services fees and impairment charges associated with closed branches. These reductions were partially offset by increases in salaries and benefits expense, telephone and data communications expense and write-downs of OREO.

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Net loans totaled $338.0 million as of September 30, 2017, compared to $322.8 million as of December 31, 2016. The increase in net loans included increases of $11.5 million and $3.8 million at the Bank and ALC, respectively. The growth in loan volume was funded primarily through cash flows generated from the scheduled maturity of investment securities. Investment securities totaled $185.8 million as of September 30, 2017, compared to $207.8 million as of December 31, 2016. Investment securities serve to both enhance interest income and provide an additional source of liquidity available to fund loan growth and capital expenditures. Management has structured the investment portfolio to provide cash flows through interest earned and the maturity or payoff of securities in the portfolio on a monthly basis. In the current environment, the Company expects cash flows from the investment portfolio to continue to serve as a significant source of liquidity available for the funding of future loan growth.

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Premises and equipment increased by $7.9 million during the nine months ended September 30, 2017 due to capital expenditures associated with the construction of an office complex in the Birmingham, Alabama area. Initial construction of the office complex was completed during the third quarter, and the complex houses a new retail branch of the Bank that became operational during the same period. At the end of the third quarter, the Company and the Bank relocated their headquarters to the complex.

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Liabilities increased to $535.7 million as of September 30, 2017, compared to $530.7 million as of December 31, 2016. The increase resulted from an increase in deposits of $10.8 million, partially offset by decreases in short-term borrowings and long-term debt totaling $4.5 million. Deposits generated through the Bank’s branch system are considered the Company’s primary funding source to meet short- and long-term liquidity needs. Deposit levels fluctuate throughout the year based on seasonality, as well as specific circumstances impacting deposit customers. In addition to deposits, significant external sources of liquidity are available to the Bank, including access to funding through federal funds lines, Federal Home Loan Bank advances and brokered deposits.

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Shareholders’ equity increased to $78.9 million, or $12.98 per outstanding common share, as of September 30, 2017, compared to $76.2 million, or $12.62 per outstanding common share, as of December 31, 2016. The increase in shareholders’ equity resulted from continued growth in retained earnings and increases in other comprehensive income due to changes in the fair value of investment securities available-for-sale.

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The Company declared a cash dividend of $0.02 per share on its common stock in the third quarter of 2017. This amount is consistent with the Company’s quarterly dividend declarations for the first and second quarters of 2017 and each quarter of 2016.

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During the third quarter, the Bank continued to maintain capital ratios at higher levels than the ratios required to be considered a “well-capitalized” institution under applicable banking regulations. As of September 30, 2017, the Bank’s common equity Tier 1 capital and Tier 1 risk-based capital ratios were each 19.02%. Its total capital ratio was 20.24%, and its Tier 1 leverage ratio was 12.32%.