FIRST US BANCSHARES, INC. annual report, FY2016

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First US Bancshares, Inc. — FY 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016; comparisons are primarily with FY 2015. The company, formerly United Security Bancshares, changed its name and ticker to First US Bancshares, Inc. and FUSB in October 2016. It operates First US Bank, consumer lender Acceptance Loan Company (ALC), and an insurance subsidiary, serving Alabama and parts of southeast Mississippi.

Financial performance and condition

  • Earnings: Net income was $1.224 million, or $0.19 per diluted share, versus $2.595 million and $0.41 in 2015. Pretax income was $1.393 million. FY 2016 return on average assets was 0.21% and return on average equity was 1.56%.
  • Interest income and margin: Interest income was $30.155 million; net interest income rose 1.0% to $27.884 million. Net yield on interest-earning assets declined to 5.16% from 5.36%. Net interest income after loan-loss provision fell to $24.687 million from $27.392 million.
  • Other income and expenses: Non-interest income increased 14.8% to $5.201 million, including $0.659 million of realized securities gains. Non-interest expense was nearly flat at $28.495 million; computer services expense rose $0.416 million, primarily for technology and security upgrades.
  • Credit costs and asset quality: The loan-loss provision increased to $3.197 million from $0.216 million, reflecting significant loan growth and reserve needs. Net charge-offs declined to $2.121 million from $2.603 million (0.72% of average loans versus 1.07%). Nonperforming assets fell 20.4% to $7.275 million, or 1.20% of assets; past-due loans were 1.33% of total loans. The allowance was $4.856 million, 1.48% of loans.
  • Balance sheet: Total assets were $606.9 million, up from $575.8 million. Net loans were $322.8 million, up $67.3 million (26.4%); investment securities declined to $207.8 million from $231.2 million as funds were redeployed toward lending. Deposits rose 3.8% to $497.6 million, with core deposits of $461.8 million, or 92.8% of deposits.
  • Debt, liquidity and capital: Short-term borrowings were $10.1 million and long-term debt $15.0 million, compared with $7.4 million and $5.0 million, respectively, in 2015. Cash and cash equivalents were $23.5 million, down from $44.1 million. The company reported $155.0 million of unused FHLB capacity, subject to collateral, and $18.8 million of unused federal funds lines. Shareholders’ equity was $76.2 million, or 12.6% of assets. The Bank was well capitalized: CET1 and Tier 1 risk-based ratios were 19.01%, total risk-based capital 20.26%, and Tier 1 leverage 12.27%.
  • Cash flow: Operating cash flow was $8.181 million; investing activities used $59.303 million, largely reflecting net loan growth and capital spending; financing activities provided $30.580 million. Cash and cash equivalents decreased $20.542 million during the year.

Changes, outlook and notable matters

  • Profit declined despite modest net interest income growth, chiefly because the loan-loss provision rose substantially. Higher lending volumes—primarily at the Bank—were accompanied by lower yields, reflecting the low-rate environment and stricter credit standards.
  • Management identifies continued quality loan growth and core deposit growth as priorities. It expects loan growth, if achieved within credit standards, to support net interest income, but notes competition for quality loans, lower reinvestment yields, and limited scope to reduce funding costs as pressures. No specific earnings or growth guidance is provided.
  • The Bank began construction of an approximately 40,000-square-foot Birmingham-area office complex, expected to be completed in 2017. About 25% is intended for Bank use and the remainder for commercial tenants. At year-end, $4.2 million had been incurred; $7.1 million remained contractually committed, with an additional estimated $2.2 million of other project costs. Management estimates about $0.5 million of annual depreciation once placed in service and expects lease revenue to offset much of the ongoing cost, but gives no assurance of full leasing.
  • The Bank closed five branches in 2016 and recorded approximately $0.1 million of related impairment expense. Management began building a mortgage division in late 2016; no mortgages had yet been originated or sold through it at year-end. A new Birmingham branch and office complex were expected to open in 2017.
  • Unrealized securities losses shifted accumulated other comprehensive income to a $1.277 million loss from a $0.536 million gain, principally due to interest-rate movements. Management concluded the securities were not other-than-temporarily impaired and said it had the intent and ability to hold them for recovery.
  • Quarterly results included a fourth-quarter net loss of $105,000, compared with fourth-quarter 2015 net income of $441,000. The fourth-quarter 2016 loan-loss provision was $1.814 million.
  • Risks include credit and collateral-value exposure, geographic and real-estate concentration, interest-rate and securities-market risk, deposit competition and liquidity access, regulatory/compliance costs, cybersecurity and third-party system risk. The company reported ordinary-course litigation that management and counsel did not expect to materially affect results. Commitments to extend credit were $41.267 million; standby letters of credit were $0.183 million.
  • The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded internal control over financial reporting was effective; the auditor did not provide an internal-control attestation because the company is a smaller reporting company.

Important facts for investors to verify

  • Whether rapid loan growth can be sustained within underwriting standards, and whether the allowance adequately covers losses as the portfolio seasons.
  • ALC’s consumer credit performance: it had $94.9 million in loans, a reported average yield of 20.53%, and continued material charge-offs; confirm trends in delinquencies, losses, and indirect retail lending.
  • Whether the Birmingham project remains within budget and schedule, and the pace and economics of leasing the unused space.
  • Funding composition and liquidity, including growth in borrowings, large time deposits and brokered deposits, and availability of collateral for FHLB capacity.
  • Interest-rate exposure and securities valuation: management’s simulation shows a one-percentage-point rate decline reducing modeled net interest income by $1.010 million over one year; review assumptions and actual subsequent results.
  • Future dividend capacity and the impact of securities-related accumulated other comprehensive losses on equity and regulatory capital.