First US Bancshares, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. First US Bancshares operates First US Bank, serving primarily Alabama, Tennessee and Virginia, and conducts indirect consumer lending in multiple states.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $36.9 million | $37.0 million |
| Net interest margin | 4.07% | 4.23% |
| Provision for loan losses | $3.3 million | $2.0 million |
| Non-interest income | $3.5 million | $3.5 million |
| Non-interest expense | $28.1 million | $32.8 million |
| Net income | $6.9 million | $4.5 million |
| Diluted earnings per share | $1.06 | $0.66 |
| Operating cash flow | $12.5 million | $9.8 million |
- Fourth-quarter 2022 net income was $2.2 million, or $0.35 diluted EPS; fourth-quarter 2021 net income was $1.7 million, or $0.25 diluted EPS.
- Total assets were $994.7 million, up 3.8%; loans, net of allowance, were $764.5 million, up from $700.0 million. Total deposits were $870.0 million, up from $838.1 million.
- Cash and cash equivalents declined to $30.2 million from $61.2 million. Cash flow was $12.5 million from operations, negative $80.2 million from investing, and positive $36.6 million from financing; cash declined $31.1 million overall.
- Year-end short-term borrowings were $20.0 million, versus $10.0 million; long-term borrowings were $10.7 million, principally subordinated notes. The notes have a $11.0 million principal amount, mature in 2031, and carry a 3.50% fixed rate for five years before resetting to a variable rate.
- Bank capital ratios: CET1 and Tier 1 risk-based capital 11.07%, total risk-based capital 12.19%, and Tier 1 leverage 9.39%. The Bank was classified as well-capitalized.
- The allowance for loan losses was $9.4 million, or 1.22% of loans. Nonperforming assets were $2.3 million, or 0.24% of total assets. Net charge-offs rose to $2.2 million, or 0.30% of average loans.
Material changes versus 2021
- Net income rose 54% as non-interest expense fell $4.7 million, principally following the cessation of new business and closure of 20 ALC lending branches in 2021. ALC expense fell to $1.8 million from $6.6 million.
- Net interest income was nearly flat: lower ALC loan income and $1.3 million higher interest expense were largely offset by income growth from other Bank earning assets. Net interest margin nevertheless declined 16 basis points.
- Loan balances increased 9.0%, with growth in indirect consumer, residential, commercial real estate and C&I loans. ALC loans continued to run off; remaining ALC loans were $20.2 million, versus $40.8 million.
- Credit costs increased: provision expense rose to $3.3 million from $2.0 million, and net charge-offs rose to $2.2 million from $1.2 million. ALC accounted for $1.9 million of 2022 net charge-offs.
- Rising rates drove substantial unrealized losses on available-for-sale securities. The portfolio had $11.1 million of gross unrealized losses at year-end; accumulated other comprehensive loss was $7.2 million, compared with $0.3 million in 2021. Management reported no other-than-temporary impairment.
- Shareholders’ equity declined to $85.1 million from $90.1 million, reflecting securities valuation effects and $4.5 million of share repurchases. Dividends increased to $0.14 per share from $0.12.
Outlook, commentary, risks and unusual items
- Management expects ALC’s runoff to reduce its interest income, while also lowering expenses and, over time, credit-loss provisions. It expects to focus growth on other Bank lending activities and operational efficiency. The filing provides no specific earnings or revenue guidance.
- Management’s rate-sensitivity modeling indicated that net interest income and margin could benefit from rate increases up to 200 basis points from December 31, 2022 levels; larger increases, or falling rates, could reduce them. These are model estimates, not guidance.
- Effective January 1, 2023, the Company adopted CECL and recorded an approximately $2.4 million increase to loan loss reserves directly through retained earnings, not 2023 earnings.
- After year-end, the Company terminated four interest rate swaps and recorded $2.2 million in deferred gains to be accreted to net interest income over the swaps’ remaining original terms.
- In 2022, the Company sold $8.6 million of securities at an $83,000 net loss, intending to reinvest in higher-yielding assets. ALC restructuring charges were $155,000, down from $904,000 in 2021. OREO sales generated net gains of approximately $359,000.
- Management cited inflation, rapidly rising rates, deposit competition, economic uncertainty and borrower credit deterioration as risks. Other principal risks include interest-rate sensitivity, securities valuation, consumer and commercial credit losses, funding access, cybersecurity and third-party service disruptions, regulatory costs, and the LIBOR transition. Approximately $66.5 million of loans had direct or indirect LIBOR exposure at year-end.
- Management said liquidity was adequate and cited core deposits, securities, unused FHLB capacity of $246.8 million (subject to collateral), and $45.0 million of unused correspondent-bank lines. Core deposits were 89.4% of deposits, down from 92.5%; brokered CDs increased to $62.5 million from $32.0 million.
- The auditor issued an unqualified opinion on the financial statements. The allowance for loan losses was identified as a critical audit matter. Management concluded internal control over financial reporting was effective; the auditor did not provide an internal-control attestation. Ordinary-course litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether loan growth—particularly indirect consumer lending—and credit performance remain sound as rates, inflation and borrower costs evolve.
- Whether ALC runoff achieves planned expense and credit-loss reductions without an outsized decline in interest income.
- Deposit stability and funding costs, including reliance on brokered CDs and short-term borrowings, and the availability of collateral-supported borrowing capacity.
- The impact of unrealized securities losses on capital and liquidity, and whether the Company can hold securities until recovery without needing to sell.
- Actual CECL allowance effects and the performance of the post-year-end swap terminations and LIBOR contract transition.
- Regulatory limits on Bank-to-parent dividends, and the sustainability of the dividend and share repurchase program.