FIRST US BANCSHARES, INC. annual report, FY2014

Business context and reporting period

Filing identity: The filing is United Security Bancshares, Inc. (NASDAQ: USBI), for the fiscal year ended December 31, 2014—not a company identified as “First US Bancshares, Inc.” First US Bank is its banking subsidiary and changed its name from First United Security Bank on December 15, 2014. The filing describes a community bank operating in Alabama and a consumer finance subsidiary, Acceptance Loan Company (ALC), with offices in Alabama and southeast Mississippi.

Financial performance and condition

• Fourth-quarter 2014 net income was $720,000, or $0.12 diluted EPS, versus $955,000, or $0.16, in fourth-quarter 2013.
• Non-interest income was $5.09 million, up 4.6%; non-interest expense was $28.60 million, down 7.2%. Lower OREO and foreclosure costs were a principal source of expense reduction.
• Year-end assets were $572.61 million; net loans were $259.52 million, down from $300.93 million; investment securities were $234.09 million, up from $170.80 million.
• Deposits were $483.66 million, essentially flat year over year. Core deposits were $403.0 million, or 83.3% of deposits, versus $391.3 million, or 80.8%.
• Cash and cash equivalents were $34.17 million, compared with $47.72 million. Shareholders’ equity rose to $75.16 million from $70.10 million, or 13.1% of assets. The increase included net income and a $1.3 million after-tax increase in accumulated other comprehensive income.
• Year-end debt included $5.0 million of long-term FHLB advances and $436,000 of short-term borrowings. The Bank reported $166.8 million of remaining FHLB credit, subject to collateral, and $18.8 million of federal funds lines.
• Consolidated nonperforming assets were $14.31 million, or 2.50% of assets, versus $21.54 million, or 3.78%. The allowance for loan losses was $6.17 million, 2.32% of loans, versus $9.40 million, 3.03%. Net charge-offs declined to $3.15 million from $9.24 million.
• The Company and Bank were classified as well-capitalized. Year-end total risk-based capital ratios were 22.61% and 22.78%, respectively; Tier I leverage ratios were 11.75% and 11.85%.

Material changes versus the prior comparable period

• Net income fell 9.6%, and net interest income fell 6.3%, primarily because lower Bank loan volume and a lower ALC loan yield reduced interest income. Lower funding costs partly offset the decline.
• Bank net loans fell to $187.5 million from $233.5 million, reflecting weak local demand, substantial loan payoffs, and resolution of problem credits. ALC net loans increased to $72.0 million from $67.5 million as point-of-sale consumer lending expanded.
• Management shifted funds into securities as Bank loan balances contracted; securities interest income increased 36.7%. Most of the securities portfolio had longer contractual maturities, while management reported an estimated average life of 3.1 years.
• Asset quality improved: consolidated nonperforming assets declined, and the Bank reduced nonperforming assets to $11.7 million from $18.8 million. However, ALC had $1.7 million of loans past due 90 days or more that remained accruing.
• The Company declared dividends of $0.03 per share in 2014, versus none in 2013. A $0.01 dividend was declared in the third quarter and $0.02 in the fourth quarter.

Outlook, commentary, risks and unusual items

• No formal earnings or revenue guidance is provided. Management said local loan demand remained weak and competition high; quality loan growth would remain challenging. It warned that net interest income could face further pressure from competition, lower securities reinvestment yields, and limited scope for further funding-cost reductions.
• Management said liquidity was supported by deposits, a liquid securities portfolio, and access to FHLB advances, federal funds lines, and brokered deposits. Deposit competition, loan growth, and changing funding access remain relevant risks.
• Credit and collateral risks are material: 68.5% of loans were secured by real estate concentrated primarily in one U.S. region. The filing highlights local economic and real-estate conditions, the timber industry, borrower repayment, and OREO valuation as risk factors. ALC’s average loan yield was 22.52%, and its portfolio increasingly comprised consumer loans.
• Interest-rate sensitivity analysis indicated that a 2% rate increase was projected to reduce net interest income by $976,000 cumulatively over one year and $1.66 million over two years; a 1% decrease was projected to reduce it by $815,000 over one year and $2.11 million over two years. These are model estimates, not forecasts of actual results.
• Unusual or notable items included a $221,000 gain on dissolution of a limited partnership, approximately $400,000 of nonrecurring noncash tax adjustments, and $443,000 of stock-based compensation expense. The filing reports a $7.9 million net deferred tax asset with no valuation allowance, relying on management’s expectation of future taxable income.
• A borrower’s lawsuit alleges wrongful foreclosure and seeks unspecified damages. The Bank denies the allegations; a summary-judgment motion was under consideration, and management could not assess the likelihood or outcome. Other litigation was not expected by management to have a material adverse effect.
• The independent auditor gave an unqualified opinion on the consolidated financial statements. Management concluded internal control over financial reporting was effective; the auditor did not attest to that conclusion, consistent with the Company’s smaller-reporting-company status.

Important facts for investors to verify

• Confirm the intended issuer and security: the request names First US Bancshares, Inc., while the 10-K identifies United Security Bancshares, Inc. (USBI) as registrant.
• Review whether the reduction in Bank loans and net interest income can be offset by new, creditworthy lending and securities income, and assess the effect on future earnings.
• Examine loan concentration, criticized and impaired credits, ALC delinquency and charge-off trends, OREO dispositions, and the assumptions supporting the allowance for loan losses.
• Assess the deferred tax asset’s recoverability and the sensitivity of earnings to future taxable income, credit losses, and securities values.
• Check subsequent developments in the foreclosure litigation, liquidity and deposit trends, capital treatment under revised requirements effective in 2015, and the sustainability of dividends.