First US Bancshares, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 18, 2020. The company operates First US Bank, a commercial bank, and Acceptance Loan Company (ALC), a consumer finance business, primarily in the southeastern United States. Figures below are consolidated and in U.S. dollars.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Interest income | $43.6 million | $37.1 million |
| Net interest income | $36.9 million | $32.8 million |
| Provision for loan losses | $2.7 million | $2.6 million |
| Non-interest income | $5.4 million | $5.6 million |
| Non-interest expense | $33.8 million | $32.4 million |
| Income before taxes | $5.8 million | $3.4 million |
| Net income | $4.6 million | $2.5 million |
| Diluted earnings per share | $0.67 | $0.37 |
| Net interest margin | 5.18% | 5.27% |
- Net income increased about 83% year over year. Return on average assets was 0.58% (0.36% in 2018); return on average equity was 5.51% (3.26%).
- Year-end assets were $788.7 million, down from $791.9 million. Net loans were $545.2 million, up 5.9%; deposits were $683.7 million, down 3.0%. The loan-to-deposit ratio rose to 79.8% from 73.1%.
- Allowance for loan and lease losses was $5.8 million, or 1.05% of gross loans, versus $5.1 million, or 0.97%. Net charge-offs improved to 0.38% of average loans from 0.57%, while nonperforming assets increased to $4.8 million (0.61% of assets) from $4.3 million (0.54%).
- Cash and cash equivalents ended at $57.0 million, versus $49.6 million. Cash from operations was $11.3 million, compared with $8.1 million; investing activities provided $9.7 million and financing activities used $13.6 million. Net cash increased $7.4 million, versus $22.5 million in 2018.
- Year-end short-term borrowings were $10.0 million, all reported as short-term; no long-term debt was outstanding. Shareholders’ equity was $84.7 million, or 10.7% of assets. The Bank’s CET1 and total risk-based capital ratios were 12.78% and 13.77%, respectively; it was classified as well-capitalized.
- The company declared dividends of $0.09 per share for 2019, up from $0.08, and repurchased 148,738 shares for approximately $1.5 million.
Material changes and drivers
- Higher net interest income reflected growth in average loans, including a full year of The Peoples Bank (TPB), acquired in August 2018, and organic lending. Average loans increased to $527.3 million from $414.1 million.
- Net interest margin slipped 9 basis points as the 28-basis-point rise in the average cost of interest-bearing liabilities exceeded the 14-basis-point improvement in yields on earning assets. ALC’s mix shift toward lower-yielding, higher-credit-quality indirect loans also weighed on yield.
- Non-interest income declined 4.3%, primarily because 2018 included a $1.0 million derivative settlement gain. This was partly offset by a full year of lease income from office space at the Birmingham headquarters.
- Non-interest expense rose 4.3%, largely reflecting a full year of TPB operations; 2018 included $1.6 million in acquisition expenses. The effective tax rate fell to 21.4% from 26.6%, principally because certain non-deductible acquisition costs did not recur.
- Investment securities declined to $108.4 million from $153.9 million as maturities and sales exceeded purchases and funds were redirected toward loans and cash. Management allowed $25.9 million of net brokered deposits to mature without renewal; core deposits increased slightly.
Outlook, risks and notable items
- No specific earnings, revenue, or growth guidance is provided. Management said quality loan growth could support net interest income, while noting competition for both sound loans and deposits and continued interest-rate risk management needs.
- The filing discusses COVID-19 and the sharp March 2020 Federal Reserve rate cuts as significant emerging uncertainties. Management could not predict the pandemic’s financial or operational effects and said prolonged low rates could pressure net interest income, margins, and profitability. These developments occurred after the 2019 reporting year.
- Key risks include borrower credit deterioration, real-estate collateral values, economic weakness in the company’s markets, funding and deposit competition, interest-rate movements, transition from LIBOR, cybersecurity and third-party systems, and regulatory requirements. Management believes liquidity is adequate for contractual obligations and commitments over the next 12 months.
- As of year-end, unused FHLB credit was $211.5 million, subject to available collateral, and unused federal funds lines were $61.7 million. Commitments to extend credit totaled $97.0 million; these commitments are conditional and do not necessarily represent expected cash outflows.
- Effective January 1, 2020, the company transferred $45.5 million of ALC indirect loans to the Bank. CECL adoption for the company was delayed until fiscal years beginning after December 15, 2022; management had not determined the resulting allowance adjustment.
- The 2019 financial statements received an unqualified independent audit opinion. Management reported effective internal control over financial reporting; the auditor did not provide an internal-control attestation.
Investor verification priorities
- Assess whether year-over-year earnings growth is sustainable after accounting for TPB’s acquisition contribution, recurring costs, and the absence of the 2018 derivative gain.
- Track net interest margin, funding costs, deposit mix and balances, and the sensitivity of earnings to the 2020 rate environment.
- Review the rise in non-accrual loans and nonperforming assets, real-estate loan concentrations, allowance adequacy, and ALC consumer-loan charge-offs.
- Confirm the impact of COVID-19 on borrowers, credit quality, loan demand, liquidity, and the $45.5 million portfolio transfer; these effects were not quantified in the filing.
- Monitor CECL implementation and any eventual transition adjustment, alongside capital, dividend, and share-repurchase capacity.