FIRST US BANCSHARES, INC. - Quarter Report: 2019 June (Form 10-Q)

 

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

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: 0-14549

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First US Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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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)

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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 August 6, 2019
Common Stock, $0.01 par value	6,306,161 shares

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FIRST US BANCSHARES, INC. AND SUBSIDIARIES

 

		PAGE
	PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
Interim Condensed Consolidated Balance Sheets at June 30, 2019 (Unaudited) and December 31, 2018		4
Interim Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)		5
Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)		6
Interim Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)		7
Interim Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited)		8
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)		9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	40
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	51
ITEM 4.	CONTROLS AND PROCEDURES	51
	PART II. OTHER INFORMATION	52
ITEM 1.	LEGAL PROCEEDINGS	52
ITEM 1A.	RISK FACTORS	52
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	52
ITEM 5.	OTHER INFORMATION	52
ITEM 6.	EXHIBITS	53
Signature Page		54

 

 

 

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		June 30,				December 31,
		2019				2018
		(Unaudited)
ASSETS
Cash and due from banks		$	10,895			$	9,796
Interest-bearing deposits in banks			33,964				39,803
Total cash and cash equivalents			44,859				49,599
Federal funds sold			15,081				8,354
Investment securities available-for-sale, at fair value			117,961				132,487
Investment securities held-to-maturity, at amortized cost			18,688				21,462
Federal Home Loan Bank stock, at cost			713				703
Loans, net of allowance for loan and lease losses of $5,087 and $5,055, respectively			511,515				514,867
Premises and equipment, net of accumulated depreciation			29,491				27,643
Cash surrender value of bank-owned life insurance			15,391				15,237
Accrued interest receivable			2,476				2,816
Goodwill and core deposit intangible, net			9,056				9,312
Other real estate owned			1,258				1,505
Other assets			10,682				7,954
Total assets		$	777,171			$	791,939
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits		$	682,806			$	704,725
Accrued interest expense			526				424
Other liabilities			10,018				6,826
Short-term borrowings			73				527
Total liabilities			693,423				712,502
Shareholders’ equity:
Common stock, par value $0.01 per share, 10,000,000 shares authorized; 7,567,784 and 7,562,264 shares issued, respectively; 6,306,161 and 6,298,062 shares outstanding, respectively			75				75
Surplus			13,646				13,496
Accumulated other comprehensive loss, net of tax			(338	)			(2,377	)
Retained earnings			90,737				88,668
Less treasury stock: 1,261,623 and 1,264,202 shares at cost, respectively			(20,372	)			(20,414	)
Noncontrolling interest			—				(11	)
Total shareholders’ equity			83,748				79,437
Total liabilities and shareholders’ equity		$	777,171			$	791,939

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		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2019				2018				2019				2018
		(Unaudited)								(Unaudited)
Interest income:
Interest and fees on loans		$	9,833			$	7,331			$	19,506			$	14,420
Interest on investment securities			1,090				1,059				2,230				2,089
Total interest income			10,923				8,390				21,736				16,509
Interest expense:
Interest on deposits			1,690				798				3,330				1,499
Interest on borrowings			—				90				—				194
Total interest expense			1,690				888				3,330				1,693
Net interest income			9,233				7,502				18,406				14,816
Provision for loan and lease losses			715				702				1,115				1,360
Net interest income after provision for loan and lease losses			8,518				6,800				17,291				13,456
Non-interest income:
Service and other charges on deposit accounts			443				444				903				911
Credit insurance income			108				100				251				318
Mortgage fees from secondary market			186				144				289				261
Other income, net			554				444				1,113				782
Total non-interest income			1,291				1,132				2,556				2,272
Non-interest expense:
Salaries and employee benefits			5,195				4,533				10,183				9,100
Net occupancy and equipment			1,046				873				2,135				1,762
Computer services			333				317				684				609
Fees for professional services			321				266				563				539
Other expense			1,609				1,503				3,392				2,783
Total non-interest expense			8,504				7,492				16,957				14,793
Income before income taxes			1,305				440				2,890				935
Provision for income taxes			300				81				651				162
Net income		$	1,005			$	359			$	2,239			$	773
Basic net income per share		$	0.16			$	0.06			$	0.35			$	0.13
Diluted net income per share		$	0.15			$	0.06			$	0.33			$	0.12
Dividends per share		$	0.02			$	0.02			$	0.04			$	0.04

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		Common Stock Shares Outstanding				Common Stock				Surplus				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Treasury Stock, at Cost				Non- controlling Interest				Total Shareholders’ Equity
Balance, March 31, 2018			6,087,264			$	73			$	10,867			$	(1,955	)		$	86,965			$	(20,414	)		$	(11	)		$	75,525
Net income			—				—				—				—				359				—				—				359
Net change in fair value of securities available-for-sale, net of tax			—				—				—				(298	)			—				—				—				(298	)
Net change in fair value of derivative instruments, net of tax			—				—				—				66				—				—				—				66
Dividends declared: $.02 per share			—				—				—				—				(121	)			—				—				(121	)
Impact of stock-based compensation plans, net			5,000				—				103				—				—				—				—				103
Balance, June 30, 2018			6,092,264			$	73			$	10,970			$	(2,187	)		$	87,203			$	(20,414	)		$	(11	)		$	75,634
Balance, March 31, 2019			6,303,582			$	75			$	13,589			$	(1,536	)		$	89,859			$	(20,414	)		$	—			$	81,573
Net income			—				—				—				—				1,005				—				—				1,005
Net change in fair value of securities available-for-sale, net of tax			—				—				—				1,198				—				—				—				1,198
Dividends declared: $.02 per share			—				—				—				—				(127	)			—				—				(127	)
Impact of stock-based compensation plans, net			—				—				99				—				—				—				—				99
Reissuance of treasury stock as compensation			2,579				—				(42	)			—				—				42				—				—
Balance, June 30, 2019			6,306,161			$	75			$	13,646			$	(338	)		$	90,737			$	(20,372	)		$	—			$	83,748

		Common Stock Shares Outstanding				Common Stock				Surplus				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Treasury Stock, at Cost				Non- controlling Interest				Total Shareholders’ Equity
Balance, January 1, 2018			6,081,744			$	73			$	10,755			$	(868	)		$	86,673			$	(20,414	)		$	(11	)		$	76,208
Net income			—				—				—				—				773				—				—				773
Net change in fair value of securities available-for-sale, net of tax			—				—				—				(1,719	)			—				—				—				(1,719	)
Net change in fair value of derivative instruments, net of tax			—				—				—				400				—				—				—				400
Dividends declared: $.02 per share			—				—				—				—				(243	)			—				—				(243	)
Impact of stock-based compensation plans, net			10,520				—				215				—				—				—				—				215
Balance, June 30, 2018			6,092,264			$	73			$	10,970			$	(2,187	)		$	87,203			$	(20,414	)		$	(11	)		$	75,634
Balance, January 1, 2019			6,298,062			$	75			$	13,496			$	(2,377	)		$	88,668			$	(20,414	)		$	(11	)		$	79,437
Net income			—				—				—				—				2,239				—				—				2,239
Net change in fair value of securities available-for-sale, net of tax			—				—				—				2,039				—				—				—				2,039
Dividends declared: $.02 per share			—				—				—				—				(253	)			—				—				(253	)
Impact of stock-based compensation plans, net			5,520				—				192				—				—				—				—				192
Reissuance of treasury stock as compensation			2,579				—				(42	)			—				—				42				—				—
Discontinuation of partnership consolidation			—				—				—				—				83				—				11				94
Balance, June 30, 2019			6,306,161			$	75			$	13,646			$	(338	)		$	90,737			$	(20,372	)		$	—			$	83,748

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		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2019				2018				2019				2018
		(Unaudited)								(Unaudited)
Net income		$	1,005			$	359			$	2,239			$	773
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available-for-sale arising during period, net of tax expense (benefit) of $402, $(74), $686 and $(547), respectively			1,205				(222	)			2,056				(1,640	)
Reclassification adjustment for net gains on securities available-for-sale realized in net income, net of tax of $2, $26, $5 and $26, respectively			(7	)			(76	)			(17	)			(79	)
Unrealized holding gains arising during the period on effective cash flow hedge derivatives, net of tax expense of $0, $22, $0 and $134, respectively			—				66				—				400
Other comprehensive income (loss)			1,198				(232	)			2,039				(1,319	)
Total comprehensive income (loss)		$	2,203			$	127			$	4,278			$	(546	)

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		Six Months Ended
		June 30,
		2019				2018
		(Unaudited)
Cash flows from operating activities:
Net income		$	2,239			$	773
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			796				704
Provision for loan and lease losses			1,115				1,360
Deferred income tax provision			624				154
Net gain on sale and prepayment of investment securities			(22	)			(105	)
Stock-based compensation expense			192				215
Net amortization of securities			306				424
Amortization of intangible assets			256				—
Net loss on premises and equipment and other real estate			245				293
Changes in assets and liabilities:
Decrease in accrued interest receivable			340				98
Increase in other assets			(4,079	)			(77	)
Increase in accrued interest expense			102				63
Increase (decrease) in other liabilities			3,192				(155	)
Net cash provided by operating activities			5,306				3,747
Cash flows from investing activities:
Net increase in federal funds sold			(6,727	)			—
Purchases of investment securities, available-for-sale			(2,784	)			(15,224	)
Proceeds from sales of investment securities, available-for-sale			—				4,221
Proceeds from maturities and prepayments of investment securities, available-for-sale			19,787				20,899
Proceeds from maturities and prepayments of investment securities, held-to-maturity			2,733				1,903
Net (increase) decrease in Federal Home Loan Bank stock			(10	)			196
Proceeds from the sale of premises and equipment and other real estate			768				1,915
Net (increase) decrease in loans			1,455				(11,146	)
Purchases of premises and equipment			(2,642	)			(715	)
Net cash provided by investing activities			12,580				2,049
Cash flows from financing activities:
Net increase (decrease) in deposits			(21,919	)			14,349
Net decrease in short-term borrowings			(454	)			(5,228	)
Dividends paid			(253	)			(243	)
Net cash provided by (used in) financing activities			(22,626	)			8,878
Net increase (decrease) in cash and cash equivalents			(4,740	)			14,674
Cash and cash equivalents, beginning of period			49,599				27,124
Cash and cash equivalents, end of period		$	44,859			$	41,798
Supplemental disclosures:
Cash paid for:
Interest		$	3,228			$	1,630
Income taxes			151				137
Non-cash transactions:
Assets acquired in settlement of loans			782				378
Reissuance of treasury stock as compensation			42				—

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1.

GENERAL

 

The accompanying unaudited interim condensed consolidated financial statements include the accounts of First US Bancshares, Inc. (“Bancshares”) and its subsidiaries (collectively, the “Company”). Bancshares is the parent holding company of First US Bank (the “Bank”). The Bank operates a finance company subsidiary, Acceptance Loan Company, Inc. (“ALC”). Management has determined that the Bank and ALC comprise Bancshares’ two reportable operating segments. All significant intercompany transactions and accounts have been eliminated.

 

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, 2019. While certain information and footnote 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, 2018.

 

 

2.	BASIS OF PRESENTATION

 

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 Annual Report on Form 10-K as of and for the year ended December 31, 2018.

 

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 certain shares that have been accrued as of the balance sheet date as deferred compensation for members of Bancshares’ Board of Directors. 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 nonqualified stock option grants issued to employees and members of Bancshares’ Board of Directors pursuant to Bancshares’ 2013 Incentive Plan (as amended, the “2013 Incentive Plan”) previously approved by Bancshares’ shareholders. The following table reflects weighted average shares used to calculate basic and diluted net income per share for the periods presented.

 

 

 

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, settlement of derivative contracts or changes in the fair value of cash flow derivatives.

 

Accounting Policies Recently Adopted

 

Accounting Standards Update (“ASU”) 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU simplifies and expands the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies the application of Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging, through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the ASU provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period. ASU 2017-12 became effective for the Company on January 1, 2019. The adoption of ASU 2017-12 did not have a material impact on the Company’s consolidated financial statements.

 

 

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the Financial Accounting Standards Board (“FASB”) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 requires organizations that lease assets (lessees) to recognize on the balance sheet the assets and liabilities for the rights and obligations created by the lease for all operating leases under current U.S. GAAP with a term of more than 12 months. ASU 2016-02 became effective for the Company on January 1, 2019. Refer to Note 13, Leases, for additional information regarding the adoption of ASU 2016-02. As a result of implementation of the standard, the Company recorded a right-of-use asset and lease liability. As of June 30, 2019, both the right-of-use asset and lease liability totaled approximately $3.8 million.

 

Pending Accounting Pronouncements

 

ASU 2018-15, “Intangibles-Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).” Issued in August 2018, ASU 2018-15 aims to reduce complexity in the accounting for costs of implementing a cloud computing service arrangement. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments of ASU 2018-15 require an entity to follow the guidance in FASB ASC Subtopic 350-40, “Intangibles-Goodwill and Other – Internal-Use Software,” in order to determine which implementation costs to capitalize as assets related to the service contract and which costs to expense. The amendments of ASU 2018-15 also require an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement (i.e., the noncancellable period of the arrangement plus periods covered by (1) an option to extend the arrangement if the entity is reasonably certain to exercise that option, (2) an option to terminate the arrangement if the entity is reasonably certain not to exercise the option and (3) an option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor). ASU 2018-15 also requires an entity to present the expense related to the capitalized implementation costs in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement, and to classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not currently have any material amount of implementation costs related to hosting arrangements that are service contracts, and the Company does not expect the adoption of ASU 2018-15 to have a material impact on the Company’s consolidated financial statements.

 

ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” Issued in August 2018, the amendments in this ASU remove disclosure requirements in ASC Topic 820 related to (1) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels and (3) the valuation processes for Level 3 fair value measurements. The ASU also modifies disclosure requirements such that (1) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date that restrictions from redemption might lapse, only if the investee has communicated the timing to the entity or announced the timing publicly, and (2) it is clear that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Additionally, this ASU adds disclosure requirements for public entities about (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments of ASU 2018-13 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

 

ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”  Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective prospectively for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. Management is currently evaluating the impact that this ASU will have on the Company’s consolidated financial statements.

 

ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance removes all current recognition thresholds and requires companies to recognize an allowance for lifetime expected credit losses. Credit losses will be immediately recognized through net income; the amount recognized will be based on the current estimate of contractual cash flows not expected to be collected over the financial asset’s contractual term. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities. The standard will add new disclosures related to factors that influenced management’s estimate, including current expected credit losses, the changes in those factors and reasons for the changes, as well as the method applied to revert to historical credit loss experience. As originally issued, ASU 2016-13 is effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019, with institutions required to apply the changes through a cumulative-effect adjustment to their retained earnings balance as of the beginning of the first reporting period in which the guidance is effective. In July 2019, the FASB proposed rules that would delay implementation of ASU 2016-13 by three years for certain small public lenders, which would include the Company. The proposal is currently undergoing a 30-day comment period. Management has been in the process of developing a revised model to calculate the allowance for loan and lease losses upon implementation of ASU 2016-13 in order to determine the impact on the Company’s consolidated financial statements and, at this time, expects to recognize a one-time cumulative effect adjustment to the allowance for loan and lease losses as of the beginning of the first reporting period in which the new standard is effective, although the magnitude of any such one-time adjustment is not yet known. In light of the recent FASB proposal, management will continue to monitor developments with respect to the implementation date of ASU 2016-13.

 

Revenue

 

On January 1, 2018, the Company implemented ASU 2014-09, Revenue from Contracts with Customers, codified at ASC Topic 606. The Company adopted ASC Topic 606 using the modified retrospective transition method. As of the implementation date, the Company had no uncompleted customer contracts and, as a result, no cumulative transition adjustment was made to the Company’s accumulated deficit during the year ended December 31, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC Topic 606, while prior period amounts continue to be reported under legacy U.S. GAAP.

 

 

The majority of the Company’s revenue is generated through interest earned on financial instruments, including loans and investment securities, which falls outside the scope of ASC Topic 606. The Company also generates revenue from insurance- and lease-related contracts that fall outside the scope of ASC Topic 606.

 

All of the Company’s revenue that is subject to ASC Topic 606 is included in non-interest income; however, not all non-interest income is subject to ASC Topic 606. Revenue earned by the Company that is subject to ASC Topic 606 primarily consists of service and other charges on deposit accounts, mortgage fees from secondary market transactions at the Bank, ATM fee income and other non-interest income. Revenue generated from these sources for both of the six-month periods ended June 30, 2019 and 2018 was $1.6 million, and for both of the three-month periods ended June 30, 2019 and 2018 was $0.8 million. All sources of the Company’s revenue subject to ASC Topic 606 are transaction-based, and revenue is recognized at the time at which the transaction is executed, which is the same time at which the Company’s performance obligation is satisfied. The Company had no contract liabilities or unsatisfied performance obligations with customers as of June 30, 2019.

 

 

3.	ACQUISITION ACTIVITY

 

On August 31, 2018, the Company completed the acquisition of The Peoples Bank (“TPB”) and then merged TPB with and into the Bank. The acquisition of TPB provided the Company with an opportunity to enter the Knoxville, Tennessee market, as well as southwest Virginia, and was consistent with the Company’s strategy to expand in selected high-growth metropolitan markets. As of the acquisition date, TPB’s assets totaled $166.5 million, consisting primarily of pre-discounted gross loans totaling $156.8 million. Total deposits were $140.0 million. Purchase accounting adjustments were recorded as of the acquisition date, resulting in goodwill of $7.4 million. 

 

The acquisition of TPB was accounted for using the purchase method of accounting in accordance with ASC Topic 805, Business Combinations. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding the methods and assumptions to be used. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. No adjustments to fair value were recorded during the first or second quarters of 2019.

 

In accordance with the transaction agreement, the Company acquired 100% of the capital stock of TPB for the purchase price of $23.4 million calculated on the net book value of TPB as of December 31, 2017 and a mutually agreed upon multiple of 1.62, less certain mutually agreed upon deductions that are described in the transaction agreement, which reduced the purchase price by approximately $0.4 million. Approximately 90% of the purchase price was paid in cash, which totaled approximately $20.7 million, and approximately 10% was paid in the form of unregistered shares of the Company’s common stock, which consisted of 204,355 shares of Bancshares common stock. The aggregate purchase price was subject to adjustment following the closing date of the transaction based on determination of TPB’s final net book value as of the date of closing, which resulted in the payment by the Company of an additional cash amount of approximately $1.4 million.

 

A summary, at fair value, of the assets acquired and liabilities assumed in the TPB transaction, as of the acquisition date, is as follows:

 

FIRST US BANCSHARES, INC. AND SUBSIDIARIES

ASSETS ACQUIRED AND LIABILITIES ASSUMED FROM THE PEOPLES BANK

AUGUST 31, 2018

(Dollars in Thousands)

 

 

 

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.

 

Cash and cash equivalents — The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of the assets.

 

Investment securities — Prior to acquisition, the investment securities acquired were classified as available-for-sale and, accordingly, were recorded at fair value on a recurring basis. Fair value for most of the securities was based upon quoted prices of like or similar securities and determined using observable data including, among other things, dealer quotes, market spreads, cash flow, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus, prepayment speeds, credit information and the securities’ terms and conditions. 

 

Federal Home Loan Bank stock, at cost — Prior to acquisition, TPB maintained a required investment in the Federal Home Loan Bank (“FHLB”) of Atlanta, which was, in part, based on TPB’s amount of borrowings with the FHLB. The investment was carried at cost as it is not readily marketable, and, accordingly, there is no established market price for the investment. Upon acquisition, the Bank was able to absorb the investment into its own holdings of stock with the FHLB of Atlanta. The Bank has the ability to be reimbursed by the FHLB of Atlanta at cost for stock holdings as borrowings with the FHLB are paid down.  Accordingly, the carrying amount of the assets is considered a reasonable estimate of fair value. 

 

Loans — Fair values for performing loans were determined based on a discounted cash flow methodology that aggregated model inputs and loan information into selected pools and calculated the loan level cash flows used to value the pools. The model calculated the contractual cash flows and expected cash flows, and then discounted the expected cash flows to present value in order to determine fair value. The assumptions used to estimate the fair value of the loans included unpaid principal balance, maturity date, coupon, prepayment speed, expected credit losses and discount rates. The fair value adjustment, also described as the discount on the purchased loans, for the performing loans is being accreted into income over the lives of the loans. Purchased credit impaired (“PCI”) loans were valued using the cost recovery method. The Company did not recognize any accretable yield, or income expected to be collected, associated with the PCI loans. The table below summarizes the carrying amounts and fair value adjustments of the loans acquired from TPB as of the acquisition date.

 

 

 

Allowance for loan losses — In accordance with U.S. GAAP, the acquired loans were adjusted to fair value, and the pre-acquisition allowance for loan losses on TPB’s balance sheet was reversed.

 

Premises and equipment — The fair values of acquired land and buildings were determined based on independent appraisals performed by a third-party appraiser. The fair value adjustment represents the difference between fair value and the carrying value at the date of acquisition. For furniture and fixtures, carrying value was considered to be a reasonable estimate of fair value.

 

Other real estate owned — These assets are presented at the estimated net realizable value that management expects to receive when the properties are sold, net of related costs of disposal.

 

Other assets — The fair value adjustment was due primarily to changes in deferred tax assets related to the transaction, as well as adjustment of certain prepaid assets associated with TPB’s core processing vendor. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.

 

Core deposit intangible — This intangible asset represents the value of the relationships that TPB had with its deposit customers. The fair value of the core deposit intangible was estimated using a discounted cash flow methodology that gave consideration to expected customer attrition rates, cost of the deposit base and the net maintenance cost attributable to customer deposits.

 

Deposits — The fair values used for the demand and savings deposits that comprise the transaction accounts acquired equal the amount payable on demand at the acquisition date. The fair value of certificates of deposit was determined using a discounted cash flow methodology whereby an estimate of the present value of contractual payments over the remaining life of the time deposit was determined. Future cash flows were discounted using market interest rates estimated based on the median offering rates of peer institutions at the time of the acquisition.

 

Short-term borrowings — TPB’s short-term borrowings were comprised of daily renewable FHLB advances.  Based on the short-term nature of the borrowings, the carrying amount of the liability was determined to be a reasonable approximation of fair value.

 

Other liabilities — The carrying amount of these other liabilities was deemed to be a reasonable estimate of fair value.

 

 

 

4.	INVESTMENT SECURITIES

 

Details of investment securities available-for-sale and held-to-maturity as of June 30, 2019 and December 31, 2018 were as follows:

 

 

 

 

 

The scheduled maturities of investment securities available-for-sale and held-to-maturity as of June 30, 2019 are presented in the following table:

 

 

 

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 table reflects gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2019 and December 31, 2018.

 

 

 

 

 

Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation. Consideration is given to: (i) the length of time and the extent to which fair value has been less than cost; (ii) the financial condition and near-term prospects of the issuer; (iii) whether the Company intends to sell the securities; and (iv) whether it is more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases.

 

 

As of June 30, 2019, 137 debt securities had been in a loss position for more than 12 months, and 5 debt securities had been in a loss position for less than 12 months. As of December 31, 2018, 153 debt securities had been in a loss position for more than 12 months, and 21 debt securities had been in a loss position for less than 12 months. As of both June 30, 2019 and December 31, 2018, the losses for all 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. Most of the securities in an unrealized loss position are residential or commercial mortgage-backed securities that are either direct obligations of the U.S. government or government-sponsored entities and, accordingly, have little associated credit risk. Further, the Company has the current intent and ability to retain its investments in the issuers for a period of time that management believes to be sufficient to allow for any anticipated recovery in fair value. Therefore, the Company did not recognize any other-than-temporary impairments as of June 30, 2019 or December 31, 2018.

 

Investment securities with a carrying value of $57.3 million and $46.7 million as of June 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and for other purposes.

 

 

5.	LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Portfolio Segments

 

The Company has divided the loan portfolio into nine portfolio segments, each with different risk characteristics described as follows:

 

Construction, land development and other land loans – Commercial construction, land and land development loans include the development of residential housing projects, loans for the development of commercial and industrial use property and loans for the purchase and improvement of raw land. 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.

 

Other real estate loans – Other real estate loans are loans primarily for agricultural production, secured by mortgages on farmland.

 

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.

 

Consumer loans – 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 ALC has an established relationship through its branch network to provide financing for the retail products sold if applicable underwriting standards are met.

 

Indirect sales – This portfolio segment includes loans secured by collateral that is purchased by consumers at retail stores with whom ALC has an established, centrally-managed relationship to provide financing for the retail products sold if applicable underwriting standards are met.

 

 

As of June 30, 2019 and December 31, 2018, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:

 

 

 

⁽¹⁾ Includes equipment financing leases.

 

The Company makes commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 61.0% and 63.2% of the portfolio was concentrated in loans secured by real estate as of June 30, 2019 and December 31, 2018, respectively.

 

Loans with a carrying value of $36.9 million and $27.0 million were pledged as collateral to secure FHLB borrowings as of June 30, 2019 and December 31, 2018, 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 as of June 30, 2019 and December 31, 2018 were $0.9 million and $0.8 million, respectively. During the six months ended June 30, 2019, there were $0.1 million of new loans to these parties, and repayments by active related parties were $5 thousand. During the year ended December 31, 2018, there were $0.5 million of new loans to these parties, and repayments by active related parties were $0.2 million.

 

 

Acquired Loans

 

The Company acquired loans through the TPB acquisition completed on August 31, 2018. At acquisition, certain acquired loans evidenced deterioration of credit quality since origination and it was probable that all contractually-required payments would not be collected.

 

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. PCI loans are accounted for under ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. On the date of acquisition, the outstanding principal balance and carrying value of PCI loans accounted for under ASC Topic 310-30 were $2.9 million and $2.8 million, respectively.

 

The carrying amount of PCI loans, which is included within loans on the balance sheet, is set forth in the table below as of June 30, 2019 and December 31, 2018:

 

 

During both the six months ended June 30, 2019 and the year ended December 31, 2018, the Company did not recognize any accretable yield, or income expected to be collected, associated with these loans. Additionally, the Company did not increase or reverse the allowance for loan losses related to the remaining PCI loans.

 

 

Allowance for Loan Losses

 

The following tables present changes in the allowance for loan losses during the six months ended June 30, 2019 and the year ended December 31, 2018 and the related loan balances by loan portfolio segment and loan type as of June 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Indicators

 

The Bank utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, each loan is 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 Bank 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 Bank’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank 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.

 

●

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 Bank 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.

 

At ALC, because the loan portfolio is 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.

 

The tables below illustrate the carrying amount of loans by credit quality indicator as of June 30, 2019:

 

 

The above amounts include purchased credit impaired loans. As of June 30, 2019, $0.2 million of purchased credit impaired loans were rated “Substandard.”

 

 

 

The tables below illustrate the carrying amount of loans by credit quality indicator as of December 31, 2018:

 

 

The above amounts include purchased credit impaired loans. As of December 31, 2018, $0.5 million of purchased credit impaired loans were rated “Substandard.”

 

 

The following tables provide an aging analysis of past due loans by class as of June 30, 2019:

 

 

The above amounts include purchased credit impaired loans. As of June 30, 2019, $7 thousand of purchased credit impaired loans were 90 or more days past due.

 

 

 

The following tables provide an aging analysis of past due loans by class as of December 31, 2018:

 

 

The above amounts include purchased credit impaired loans. As of December 31, 2018, $0.3 million of purchased credit impaired loans were 90 or more days past due.

 

 

 

The following table provides an analysis of non-accruing loans by class as of June 30, 2019 and December 31, 2018:

 

 

As of June 30, 2019 and December 31, 2018, purchased credit impaired loans comprised $0.2 million and $0.5 million of nonaccrual loans, respectively.

 

Impaired Loans

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the related loan agreement. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the liquidation of the collateral at the Bank. All loans of $0.5 million or more that have a credit quality risk grade of seven or above are identified for impairment analysis. At management’s discretion, additional loans may be impaired based on homogeneous factors such as changes in the nature and volume of the portfolio, portfolio quality, adequacy of the underlying collateral value, loan concentrations, historical charge-off trends and economic conditions that may affect the borrower’s ability to pay. At ALC, all loans of $50 thousand or more that are 90 days or more past due are identified for impairment analysis. As of both June 30, 2019 and December 31, 2018, there were $0.2 million of impaired loans with no related allowance recorded at ALC. Impaired loans, or portions thereof, are charged off when deemed uncollectable.

 

 

As of June 30, 2019, the carrying amount of impaired loans at the Bank and ALC consisted of the following:

 

 

The above amounts include purchased credit impaired loans. As of June 30, 2019, purchased credit impaired loans comprised $0.2 million of impaired loans without a related allowance recorded.

 

 

As of December 31, 2018, the carrying amount of impaired loans at the Bank and ALC consisted of the following:  

 

 

The above amounts include purchased credit impaired loans. As of December 31, 2018, purchased credit impaired loans comprised $0.5 million of impaired loans without a related allowance recorded.

 

The average net investment in impaired loans and interest income recognized and received on impaired loans during the six months ended June 30, 2019 and the year ended December 31, 2018 were as follows:

 

 

 

 

Loans on which the accrual of interest has been discontinued amounted to $1.5 million and $2.8 million as of June 30, 2019 and December 31, 2018, respectively. If interest on those loans had been accrued, there would have been $10 thousand and $44 thousand of interest accrued for the periods ended June 30, 2019 and December 31, 2018, respectively. Interest income related to these loans for the six months ended June 30, 2019 and the year ended December 31, 2018 was $8 thousand and $27 thousand, respectively.

 

Troubled Debt Restructurings

 

Troubled debt restructurings include loans with respect to which concessions have been granted to borrowers that generally would not have otherwise been considered had the borrowers not been experiencing financial difficulty. The concessions granted may include payment schedule modifications, interest rate reductions, maturity date extensions, modifications of note structure, principal balance reductions or some combination of these concessions. There were no loans modified with concessions granted during the six-month period ended June 30, 2019 or the year ended December 31, 2018. Restructured loans may involve loans remaining on non-accrual, moving to non-accrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Non-accrual restructured loans are included with all other non-accrual loans. In addition, all accruing restructured loans are reported as troubled debt restructurings. Generally, restructured loans remain on non-accrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, then the loan remains on non-accrual. As of June 30, 2019 and December 31, 2018, the Company had $22 thousand and $65 thousand of non-accruing loans that were previously restructured and that remained on non-accrual status. For both the six months ended June 30, 2019 and the year ended December 31, 2018, the Company had no loans that were restored to accrual status based on a sustained period of repayment performance.

 

The following table provides, as of June 30, 2019 and December 31, 2018, the number of loans remaining in each loan category that the Bank had previously modified in a troubled debt restructuring, as well as the pre- and post-modification principal balance as of each date.

 

 

As of June 30, 2019 and December 31, 2018, no loans that previously had been modified in a troubled debt restructuring had defaulted subsequent to modification.

 

Restructured loan modifications primarily included maturity date extensions and payment schedule modifications. There were no modifications to principal balances of the loans that were restructured. Accordingly, there was no impact on the Company’s allowance for loan losses resulting from the modifications.

 

All loans with a principal balance of $0.5 million or more that have been modified in a troubled debt restructuring are considered impaired and evaluated individually for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, are considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses attributable to such restructured loans of $2 thousand as of both June 30, 2019 and December 31, 2018.