FIRST US BANCSHARES, INC. annual report, FY2018

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First US Bancshares, Inc. — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. This is an annual report, with selected fourth-quarter data also disclosed. First US Bancshares operates First US Bank, consumer lender Acceptance Loan Company (ALC), and an insurance subsidiary.

Financial performance and condition

  • Earnings: Net income was $2.49 million, or $0.37 per diluted share, versus a net loss of $0.41 million, or $0.07 per diluted share, in 2017. Fourth-quarter 2018 net income was $1.48 million, compared with a $1.87 million loss in fourth-quarter 2017.
  • Revenue and margin: Net interest income rose 15.5% to $32.79 million; interest income was $37.14 million and interest expense was $4.35 million. Net yield on interest-earning assets increased to 5.27% from 5.08%. Non-interest income rose 18.8% to $5.54 million.
  • Expenses and credit costs: Non-interest expense increased 13.6% to $32.32 million, including $1.64 million of acquisition expenses. Loan-loss provision increased to $2.62 million from $1.99 million. Net charge-offs were 0.57% of average loans, versus 0.62%.
  • Balance sheet: Total assets increased 26.6% to $791.94 million. Net loans were $514.87 million, deposits $704.73 million, and investment securities $153.95 million. Shareholders’ equity was $79.44 million, or 10.0% of assets.
  • Credit quality: Nonperforming assets declined to $4.26 million, or 0.54% of assets, from $5.94 million, or 0.95%. The allowance was $5.06 million, 0.97% of gross loans; acquired Peoples Bank loans had no allowance recorded at acquisition, and the remaining purchase discount was $1.9 million at year-end.
  • Cash flow and liquidity: Operating cash flow was $8.06 million; investing cash flow was $2.70 million and financing cash flow was $11.71 million. Cash and cash equivalents increased by $22.48 million to $49.60 million. Management said liquidity was adequate for contractual needs over the next 12 months. Unused FHLB capacity was $282.2 million, subject to collateral, and unused federal funds lines were $72.2 million.
  • Debt and capital: Long-term debt was zero at year-end, compared with $10.0 million in 2017; short-term borrowings were $0.53 million, versus $15.59 million. The Bank was classified as well-capitalized, with a 12.62% common equity Tier 1 ratio, 13.53% total risk-based capital ratio, and 8.96% leverage ratio.

Material changes and unusual items

  • On August 31, 2018, the Company acquired and merged The Peoples Bank (TPB), expanding into Knoxville, Tennessee and southwest Virginia. TPB contributed $166.5 million of assets, including $156.8 million of gross loans, and $140.0 million of deposits at acquisition. Goodwill was $7.4 million at year-end. The transaction drove much of the increase in assets, loans, deposits, and net interest income.
  • Organic loan growth was 6.7% year over year. Net loans to deposits increased to 73.1% from 66.9%; core deposits fell to 90.0% of deposits from 94.6%. Brokered deposits increased, and the Company repaid $20 million of FHLB borrowings during 2018.
  • 2018 non-interest income included a $0.98 million pre-tax gain from settling two interest-rate swaps. The related hedged FHLB advances were paid down, and no derivative contracts remained at year-end. Acquisition-related expenses were approximately $1.6 million, including $0.7 million to terminate TPB’s core-processing contract.
  • The 2017 loss reflected a one-time, non-cash $2.47 million deferred-tax remeasurement charge following federal tax reform. The effective tax rate was 26.6% in 2018 versus 115.7% in 2017.
  • Operating cash flow increased to $8.06 million from $6.75 million. The filing reports $19.01 million net cash paid for the acquisition in investing activities.

Outlook, risks, and contingencies

  • Management expects loan growth to support net interest income, but gave no specific earnings, revenue, or growth guidance. It stated there were no specific target acquisitions under negotiation and generally seeks acquisitions expected to be earnings-accretive within two years or less.
  • Management expects continued deposit competition and rising deposit costs could pressure net interest income. Rate-sensitivity modeling showed a 200-basis-point increase could reduce cumulative pre-tax net interest income by $2.14 million over two years; modeled effects vary by horizon and scenario.
  • Credit risks include loan losses exceeding estimates, real-estate collateral exposure, and consumer-credit risk at ALC. Real-estate-secured loans represented 63.2% of the portfolio. Management identified economic conditions, interest rates, integration execution, cybersecurity, third-party providers, regulatory requirements, and the transition away from LIBOR as risks.
  • CECL, requiring lifetime expected credit-loss estimates, was scheduled to apply beginning in fiscal 2020; management was evaluating its impact. Management stated the Bank remained well-capitalized and that no known condition then threatened liquidity or capital.
  • The Company had $85.97 million in commitments to extend credit and $0.88 million in standby letters of credit and performance letters. Ordinary-course litigation was not expected by management to have a material adverse effect. The filing also reports $5.44 million of future operating-lease payments.
  • The Company declared dividends of $0.08 per share in both 2018 and 2017; future dividends are subject to earnings, capital, liquidity, and regulatory limits. The auditor issued an unqualified opinion on the financial statements. Management reported effective financial-reporting controls; the auditor did not provide an ICFR attestation.

Important facts for investors to verify

  1. Whether TPB integration, purchase-accounting estimates, and anticipated benefits support future earnings without further material costs or credit deterioration.
  2. How acquired-loan fair-value discounts and the allowance compare with subsequent loan performance, particularly given the lower reported allowance-to-loans ratio.
  3. Whether deposit growth remains stable and affordable, including the effect of brokered deposits and rising deposit rates on funding costs and margins.
  4. Whether ALC’s consumer-credit losses and the concentration in real-estate-secured lending remain consistent with management’s credit assumptions.
  5. The effects of interest-rate movements, CECL adoption, and any subsequent changes in capital, liquidity, or dividend capacity.