First US Bancshares, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing also presents unaudited quarterly results, including fourth-quarter 2021. First US Bancshares is an Alabama-focused bank holding company operating First US Bank, alongside finance subsidiary ALC and an insurance subsidiary.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income | $37.0 million | $35.8 million |
| Provision for loan losses | $2.0 million | $2.9 million |
| Non-interest income | $3.5 million | $5.0 million |
| Non-interest expense | $32.8 million | $34.3 million |
| Net income | $4.5 million; diluted EPS $0.66 | $2.7 million; diluted EPS $0.40 |
| Net interest margin | 4.23% | 4.69% |
| Net cash from operating activities | $9.8 million | $6.1 million |
- Total assets were $958.3 million, up from $890.5 million. Net loans were $700.0 million; total deposits were $838.1 million.
- Cash and cash equivalents ended the year at $61.2 million, down from $94.4 million. Investing activities used $108.3 million, primarily reflecting loan growth and securities purchases; financing activities provided $65.3 million, including deposit growth and subordinated-note proceeds.
- Loans grew $61.7 million; indirect consumer lending increased $64.4 million. Loans-to-deposits were 83.5%, versus 81.6%.
- Shareholders’ equity was $90.1 million, or 9.4% of assets. The Bank was well-capitalized: CET1 and Tier 1 risk-based ratios were 11.36%, total capital was 12.44%, and Tier 1 leverage was 9.17%.
- Borrowings included $10.0 million of short-term FHLB advances and $10.7 million carrying value of new long-term subordinated notes. Management cited $237.0 million of remaining FHLB capacity, subject to collateral, and $46.0 million of unused federal funds lines.
- Asset quality: nonperforming assets were $4.2 million, or 0.43% of assets; allowance for loan losses was $8.3 million, or 1.17% of loans; net charge-offs were 0.16% of average loans.
Material changes versus 2020
- Net income rose to $4.5 million, supported by lower loan-loss provision, lower funding costs, and reduced operating expenses. Net interest income increased $1.2 million as interest expense fell $1.7 million, partly offset by a $0.5 million decrease in interest income.
- Despite higher net interest income, margin contracted 46 basis points as asset yields fell faster than funding costs. Non-interest income declined $1.5 million, including lower mortgage fees, deposit charges, securities gains, and credit-insurance revenue.
- Expenses declined $1.5 million. Salaries and benefits fell $1.4 million, in part after workforce reductions; year-end FTEs were 175 versus 270.
- ALC stopped originating new business and closed its 20 lending branches in September 2021; its remaining portfolio is being collected, with management expecting most loans to pay off by end-2023. The Bank also closed four branches. The restructuring generated $0.9 million of 2021 charges, with about $0.1 million of additional charges expected, mainly in first-quarter 2022.
- Deposits rose $55.9 million for the year, but fell $8.7 million in the fourth quarter—the first quarterly decline since early 2020. The securities portfolio increased to $134.3 million from $91.4 million.
Outlook, commentary, and risks
- No quantified earnings or growth guidance was provided. Management expects cost savings from the ALC and branch actions to continue, while ALC loan runoff will also reduce interest income. Management intends to focus growth on other lending portfolios, including commercial and indirect consumer loans.
- Management’s rate-risk modeling indicates that net interest income and margin generally benefit from rising rates and weaken if rates fall. The filing anticipated Federal Reserve rate increases in 2022 but cautioned that rate movements, economic effects, loan demand, and borrower condition could make the outcome uncertain.
- COVID-19-related loan deferments fell to $0.4 million from $8.1 million at year-end 2020. Management’s designated higher-risk hotel/motel and dine-in restaurant loans were $11.4 million, or 1.3% of the portfolio. Pandemic effects, supply-chain disruption, and geopolitical and economic uncertainty remain risks.
- Credit concentration and execution risks include growth in indirect consumer lending, real estate exposure, and runoff of ALC’s historically higher-loss consumer portfolio. The allowance estimate was identified as a critical audit matter because it depends on subjective qualitative assumptions.
- Approximately $90.6 million of outstanding loans, plus certain other instruments, had LIBOR-related features at year-end. The Company stopped originating new LIBOR-indexed loans by December 31, 2021; contract transition and potential disputes remain risks. The Company expects to implement CECL in 2023, but the impact is not yet known.
- The $11.0 million subordinated notes mature in 2031, bear 3.50% interest for five years, then reset quarterly to three-month SOFR plus 275 basis points, subject to note terms. Proceeds may support general purposes, growth, capital, or share repurchases; $5.0 million was contributed to Bank capital surplus.
- The Company paid $0.12 per share in dividends, as in 2020, and repurchased 45,748 shares at an average $11.47. Future dividends remain subject to earnings, capital, regulatory limits, and other constraints.
- Ordinary-course litigation was not expected by management to materially affect results. Commitments to extend credit totaled $164.2 million; standby performance letters of credit totaled $0.6 million. The auditor issued an unqualified opinion on the financial statements; management assessed internal control over financial reporting as effective, without an auditor attestation.
Investor verification priorities
- Verify the sustainability of earnings improvement against the 46-basis-point margin decline, reduced non-interest income, and planned ALC loan runoff.
- Assess credit performance and reserve adequacy, particularly for the rapidly growing indirect portfolio, real estate concentrations, ALC runoff, and remaining COVID-sensitive borrowers.
- Confirm deposit stability after the fourth-quarter decline, including uninsured deposits of $156.9 million and reliance on available wholesale funding capacity.
- Review the impact of rate changes on securities fair values, net interest income, and the subordinated notes’ post-five-year floating rate.
- Track delivery of ALC and branch-closure savings against remaining restructuring charges and revenue attrition, and monitor the LIBOR transition and CECL implementation.