First US Bancshares, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; comparisons are primarily with 2016. First US Bancshares is an Alabama-focused bank holding company operating First US Bank, consumer lender Acceptance Loan Company (ALC), and an insurance reinsurance subsidiary. The Bank had 16 branches; ALC had 21 offices in Alabama and southeast Mississippi.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets, year-end | $625.6 million | $606.9 million |
| Interest income | $31.1 million | $30.2 million |
| Net interest income | $28.4 million | $27.9 million |
| Net yield on interest-earning assets | 5.08% | 5.16% |
| Provision for loan losses | $2.0 million | $3.2 million |
| Income before income taxes | $2.6 million | $1.4 million |
| Net income (loss) | $(0.4) million | $1.2 million |
| Operating cash flow | $6.8 million | $8.2 million |
| Net loans, year-end | $346.1 million | $322.8 million |
| Deposits, year-end | $517.1 million | $497.6 million |
| Shareholders’ equity, year-end | $76.2 million | $76.2 million |
All dollar amounts above are U.S. dollars. The filing reports cash flow from investing activities of $(22.6) million and financing activities of $19.5 million in 2017. Cash and cash equivalents ended the year at $27.1 million, with an additional $15.0 million in federal funds sold. Short-term borrowings were $15.6 million and long-term debt was $10.0 million. The company reported approximately $25.0 million of FHLB advances, $159.3 million of remaining FHLB capacity subject to collateral, and $18.8 million of unused federal funds lines.
Asset quality improved: nonperforming assets were $5.9 million, or 0.95% of assets, versus $7.3 million, or 1.20%, in 2016. Net charge-offs were 0.62% of average loans versus 0.72%. The allowance for loan losses was $4.8 million, or 1.36% of loans, compared with $4.9 million, or 1.48%. The Bank was classified as well-capitalized; its year-end total risk-based capital ratio was 19.60% and Tier 1 leverage ratio was 11.89%.
Material changes versus 2016
- Net loans grew 7.2% to $346.1 million, driven by $17.4 million of Bank commercial loan growth and $5.9 million of ALC consumer loan growth. Deposits increased 3.9%.
- Net interest income rose 1.8%, supported by loan growth, while funding costs increased and net yield on interest-earning assets eased from 5.16% to 5.08%.
- Loan-loss provision declined to $2.0 million from $3.2 million, reflecting lower ALC charge-offs and resolution of an impaired Bank relationship.
- Non-interest income fell 10.3% to $4.7 million, mainly because gains on investment-security sales declined to $0.2 million from $0.7 million. Non-interest expense was essentially flat at $28.4 million.
- Investment securities declined to $180.2 million from $207.8 million as cash flows and sales were redeployed to loans. Premises and equipment rose to $26.4 million, including the new Birmingham office complex.
Outlook, commentary, risks and unusual items
- Tax reform drove the reported loss. The December 2017 federal tax-rate reduction required a $2.5 million non-cash charge to remeasure deferred tax assets and liabilities. Reported net loss was $0.4 million, or $(0.06) per diluted share. Excluding this one-time charge, management presented non-GAAP adjusted net income of $2.1 million, or $0.32 per diluted share; this measure is not GAAP.
- Management expects a lower effective tax rate from 2018, but noted it may vary with tax-exempt investments and other recurring factors. No specific earnings or growth guidance was provided. Management expects quality loan growth to support net interest income, while warning of competition for sound loans, lower reinvestment yields and limited scope to reduce funding costs.
- The company opened and moved its headquarters to Pump House Plaza in Birmingham in 2017. Capital additions to premises and equipment were about $8.9 million; annual depreciation attributable to the complex is expected to be about $0.4 million. About 29% of usable space was occupied by the company at year-end; recovery of costs depends partly on leasing remaining space.
- Key exposures include credit losses, real-estate collateral values and geographic concentration: 54% of loans were secured by real estate concentrated primarily in one U.S. region. Other cited risks include interest-rate and securities valuation changes, deposit competition, regulatory costs, cybersecurity and third-party systems, and adverse local economic or severe-weather events.
- CECL was expected to apply beginning in fiscal 2020, with possible earlier adoption; management anticipated an increase in the allowance and was evaluating the impact. The company said ordinary-course litigation was not expected to materially affect its financial statements.
Most important facts for investors to verify
- Reconcile the $2.5 million tax-remeasurement charge, reported loss and non-GAAP adjusted earnings, including the calculation of adjusted per-share figures.
- Review loan growth and underwriting quality by segment, particularly commercial real estate exposure and ALC’s consumer and indirect-lending portfolios.
- Assess whether declining nonperforming assets and charge-offs persist, and whether the 1.36% allowance remains adequate as loans grow.
- Monitor deposit retention and pricing, borrowing levels, liquidity capacity and sensitivity to rising rates; check the assumptions behind management’s interest-rate simulations.
- Track lease-up, occupancy costs and expected returns from the Birmingham office complex, and review the timing and effect of CECL adoption.