First US Bancshares(FUSB) - 2019 Q4 - Annual Report

PART I Business First US Bancshares is a regulated bank holding company operating in commercial banking, consumer finance, and credit reinsurance - First US Bancshares, Inc. operates as a bank holding company with its main subsidiary being First US Bank, which provides general commercial banking services through 20 full-service offices and two loan production offices across Alabama, Tennessee, and Virginia[14][15] - The company has two key non-bank subsidiaries: Acceptance Loan Company, Inc. (ALC), a consumer finance company operating in 11 states, and FUSB Reinsurance, Inc., which underwrites credit insurance for the Bank's and ALC's customers[18][19][20] - On August 31, 2018, the company completed the acquisition of The Peoples Bank (TPB) for approximately $24.8 million, adding $166.5 million in assets and resulting in $7.4 million of goodwill[17] - The company is extensively regulated by the Federal Reserve, FDIC, and the Alabama State Banking Department (ASBD), imposing restrictions on activities, investments, capital adequacy, and dividend payments[24] Risk Factors The company faces material risks from credit losses, economic conditions, interest rate fluctuations, and operational threats - The company is exposed to credit risk, where loan losses could exceed the allowance, a risk heightened by the upcoming Current Expected Credit Loss (CECL) model implementation[64][65] - Business operations are sensitive to economic conditions, with the report highlighting the emerging risk of COVID-19 potentially disrupting economic activity and loan repayments[66][67][68] - The company faces significant interest rate risk and uncertainty from the planned discontinuation of LIBOR after 2021, which may require costly implementation of substitute indices[79][82][85] - Operational risks include potential failures of information systems, cybersecurity threats, and reliance on third-party vendors for data processing[90][91][92] Unresolved Staff Comments The company reports no unresolved comments from SEC staff - None[109] Properties The company owns most of its office properties, which are deemed adequate for current operations - The Bank owns all of its offices without encumbrances, except for its leased locations in Knoxville and Powell, Tennessee, while its subsidiary ALC owns one office and leases others[110] Legal Proceedings The company is involved in ordinary course litigation not expected to have a material adverse effect - The company is party to ordinary course litigation, which management believes will not have a material adverse effect on its consolidated financial statements[111] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[112] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (FUSB) trades on Nasdaq, with dividends declared and shares repurchased in 2019 - Bancshares' common stock is listed on the Nasdaq Capital Market under the symbol "FUSB"[115] - Total dividends declared were $0.09 per common share in 2019 and $0.08 per common share in 2018[116] Issuer Purchases of Equity Securities (Q4 2019) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Programs | Maximum Shares that May Yet Be Purchased Under the Programs | | :--- | :--- | :--- | :--- | :--- | | October 1-31, 2019 | — | $ — | — | 158,103 | | November 1-30, 2019 | 48,833 | $ 10.39 | 48,833 | 109,270 | | December 1-31, 2019 | 15,705 | $ 10.82 | 15,705 | 93,565 | | Total | 64,538 | $ 10.50 | 64,538 | 93,565 | Selected Financial Data Five-year financial data shows significant asset growth, recovering net income, and improving asset quality Selected Financial Highlights (2015-2019) | Metric (in thousands, except per share) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $4,566 | $2,490 | $(411) | $1,224 | $2,595 | | Diluted net income (loss) per share | $0.67 | $0.37 | $(0.07) | $0.19 | $0.41 | | Total assets | $788,738 | $791,939 | $625,581 | $606,892 | $575,782 | | Loans, net | $545,243 | $514,867 | $346,121 | $322,772 | $255,432 | | Total deposits | $683,662 | $704,725 | $517,079 | $497,556 | $479,258 | | Total shareholders' equity | $84,748 | $79,437 | $76,208 | $76,241 | $77,030 | | Return on average assets | 0.58% | 0.36% | (0.07)% | 0.21% | 0.46% | | Return on average equity | 5.51% | 3.26% | (0.52)% | 1.56% | 3.41% | | Nonperforming assets as % of total assets | 0.61% | 0.54% | 0.95% | 1.20% | 1.59% | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income rose to $4.6 million in 2019, driven by the TPB acquisition and organic loan growth Consolidated Results of Operations (2019 vs. 2018) | Metric (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net interest income | $36,942 | $32,788 | | Provision for loan losses | $2,714 | $2,622 | | Non-interest income | $5,366 | $5,610 | | Non-interest expense | $33,782 | $32,385 | | Net income | $4,566 | $2,490 | - The improvement in 2019 earnings was primarily driven by additional earning assets and efficiencies gained from the August 2018 acquisition of The Peoples Bank (TPB), as well as organic loan growth[141] - Net loans increased by $30.3 million (5.9%) to $545.2 million at year-end 2019, reflecting growth in both the Bank's commercial lending and ALC's indirect sales portfolio[141][151] - The company's effective tax rate decreased to 21.4% in 2019 from 26.6% in 2018, mainly because certain non-deductible expenses related to the TPB acquisition were not incurred in 2019[149] Results of Operations Net interest income grew 12.7% from higher loan volume, while non-interest income and expenses were impacted by the TPB acquisition - Net interest income increased by $4.2 million (12.7%) in 2019, primarily due to a $113.2 million increase in average interest-earning assets, largely from the TPB acquisition[145][163] - Non-interest income decreased by $0.2 million, mainly because of a non-recurring $1.0 million gain on the settlement of derivative contracts in 2018[147][173] - Non-interest expense increased by $1.4 million, primarily reflecting a full year of operating expenses from the acquired TPB operations, partially offset by $1.6 million in non-recurring acquisition expenses from 2018[148][174] Balance Sheet Analysis Assets stood at $788.7 million, with loan growth funded by reduced securities and a strategic decrease in brokered deposits - The investment securities portfolio decreased from $153.9 million in 2018 to $108.4 million in 2019 as management redeployed maturing securities to fund loan growth[154][180] - Net loans grew to $545.2 million from $514.9 million, with the allowance for loan and lease losses increasing to 1.05% of gross loans, up from 0.97% in 2018[151][152] - Total deposits decreased to $683.7 million from $704.7 million, primarily due to a managed reduction of $25.9 million in brokered deposits to lower interest expense[156][195] - Shareholders' equity rose to $84.7 million from $79.4 million, benefiting from net income and a decrease in accumulated other comprehensive loss[200][202] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulations showing sensitivity to rate changes - The company's primary market risk is interest rate risk, managed using financial simulation models to measure potential impacts on net interest income and equity value[216][217] Cumulative Change in Net Interest Income Forecast (pre-tax) | Rate Scenario | 1 Year | 2 Years | 5 Years | | :--- | :--- | :--- | :--- | | +2% | $399k | $994k | $10,610k | | +1% | $409k | $989k | $6,676k | | -1% | ($1,512k) | ($3,952k) | ($15,497k) | | -2% | ($2,664k) | ($7,085k) | ($27,378k) | Net Change in Market Value of Equity Forecast | Rate Scenario | Net Change (in thousands) | | :--- | :--- | | +2% | ($2,828) | | +1% | $443 | | -1% | ($7,877) | | -2% | ($14,053) | Financial Statements and Supplementary Data This section contains the audited consolidated financial statements and management's report on internal controls - Management assessed its internal control over financial reporting as effective as of December 31, 2019, based on the COSO framework[226][227] - The independent registered public accounting firm, Carr, Riggs & Ingram, LLC, issued an unqualified opinion, stating that the consolidated financial statements present fairly in conformity with U.S. GAAP[230] Consolidated Financial Statements The financial statements detail the company's financial position, with total assets of $788.7 million and net income of $4.6 million for 2019 Consolidated Balance Sheet Highlights (as of Dec 31) | Account (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total cash and cash equivalents | $57,030 | $49,599 | | Loans, net of allowance | $545,243 | $514,867 | | Total assets | $788,738 | $791,939 | | Total deposits | $683,662 | $704,725 | | Total liabilities | $703,990 | $712,502 | | Total shareholders' equity | $84,748 | $79,437 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net interest income | $36,942 | $32,788 | | Provision for loan and lease losses | $2,714 | $2,622 | | Non-interest income | $5,366 | $5,610 | | Non-interest expense | $33,782 | $32,385 | | Net income | $4,566 | $2,490 | Notes to Consolidated Financial Statements The notes detail accounting policies, the TPB acquisition, loan portfolio quality, and the Bank's "well-capitalized" status - The company adopted ASU 2016-02 (Leases) on January 1, 2019, resulting in the recognition of a right-of-use asset of $3.5 million and a lease liability of $3.6 million[284] - The implementation of ASU 2016-13 (CECL) has been delayed and is now effective for fiscal years beginning after December 15, 2022[290] - As of December 31, 2019, the Bank's capital ratios, including a Common Equity Tier 1 ratio of 12.78%, exceeded the levels required to be considered "well-capitalized"[393] - The company uses derivative instruments (interest rate swaps) for hedging purposes, holding five forward interest rate swap contracts as of December 31, 2019[212][402] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[456] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2019 - Based on an evaluation as of December 31, 2019, management concluded that the company's disclosure controls and procedures are effective at the reasonable assurance level[458] - No changes in internal control over financial reporting occurred during the quarter ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, these controls[459] Other Information The company reports no other information for this item - None[461] PART III Directors, Executive Officers and Corporate Governance This information is incorporated by reference from the 2020 proxy statement - The required information for this item is incorporated by reference from the company's definitive proxy statement for the 2020 Annual Meeting of Shareholders[465] Executive Compensation This information is incorporated by reference from the 2020 proxy statement - The required information for this item is incorporated by reference from the company's definitive proxy statement for the 2020 Annual Meeting of Shareholders[466] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details on equity compensation plans are provided, with other ownership information incorporated by reference Securities Authorized for Issuance under Equity Compensation Plans (as of Dec 31, 2019) | Plan Category | Number of securities to be issued upon exercise (a) | Weighted-average exercise price of outstanding options (b) | Number of securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by shareholders | 566,508 | $9.75 | 551,438 | | Equity compensation plans not approved by shareholders | — | — | — | | Total | 566,508 | $9.75 | 551,438 | - Other information required by this item is incorporated by reference from the company's definitive proxy statement for the 2020 Annual Meeting of Shareholders[470] Certain Relationships and Related Transactions, and Director Independence This information is incorporated by reference from the 2020 proxy statement - The required information for this item is incorporated by reference from the company's definitive proxy statement for the 2020 Annual Meeting of Shareholders[471] Principal Accountant Fees and Services This information is incorporated by reference from the 2020 proxy statement - The required information for this item is incorporated by reference from the company's definitive proxy statement for the 2020 Annual Meeting of Shareholders[472] PART IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and all exhibits filed with the Form 10-K - This item lists the consolidated financial statements and all exhibits filed with the Annual Report on Form 10-K[474][475]